The Estate Tax Non-Gap: Why Repeal a 'Voluntary' Tax?

Abstract:     
Over thirty years ago, George Cooper wrote a seminal article arguing that the estate tax was largely voluntary. Although many academics subsequently embraced Cooper's thesis that the estate tax easily can be avoided through a modicum of planning, we argue that the voluntary tax metaphor crumbles under scrutiny. The unprecedented repeal efforts over the past twenty years belie the notion that the estate tax is easily avoided. Moreover, many of the techniques described by Cooper simply no longer provide significant estate tax savings. The techniques that do work to lower the tax burden on an estate often do so by reducing the actual economic value of assets transferred to heirs.

We argue that the voluntary tax metaphor has infected analysis of estate tax empirical data and computation of the estate tax "gap." We contend that commentators confuse the concept of the effective estate tax rate in examining the efficacy of the estate tax; when one correctly computes the effective estate rate, one finds a robust tax that takes a sizeable bite out of even the largest estates. Although calculations of the estate tax gap are difficult because of the lack of reliable data, we argue that studies reporting a large estate tax gap have ignored the personal liability imposed on executors for unpaid estate taxes and the comparatively high estate tax audit rate. These factors suggest that the true estate gap may be small, a view that is corroborated by the IRS' audit results and one empirical study. We conclude that the estate tax is clearly not voluntary and is apparently more efficient than commonly thought in taxing transfers it was designed to reach.

Keywords: Tax, Estate Tax, Tax Gap, Voluntary Tax, Estate Planning, Minority Discounts

JEL Classifications: K34

Accepted Paper Series