Change We Can't Believe In...Or Afford: Why the Timing is Wrong to Reduce the Estate Tax on the Wealthiest Americans

Abstract

At the end of the year 2008 the United States was in the midst of an economic storm. The country started going through its worst financial state since the Great Depression. Historically, transfer taxes were instated specifically to raise revenue during the country’s financial time of need. The temporary repeal during the 2010 tax year occurred during a time when the country was experiencing an economic storm, a time when the country could least afford to forego the additional revenue. Consequently, the timing of the temporary repeal was in direct contradiction to the original purpose of the estate tax.

While there is extensive literature on whether or not there should be an estate tax and using the estate tax to curtail wealth concentration, there is little discussion as to how tax policy has made the estate tax less effective as revenue generator and what reform should be made to reverse that phenomenon. Therefore, this paper proposes three specific methods to reforming the tax system to restore the estate tax as an effective supplemental revenue generator.

First, an appropriate estate tax applicable exclusion amount and accompanying appropriate tax rates should be implemented. Specifically, the estate tax applicable exclusion amount should be reduced and the estate tax maximum rate should be increased based on the economic temperature of the country and curtailed when fiscal needs subside. Second, the gift tax applicable exclusion amount should be reduced and the accompanying rate should be reduced enough to provide a better incentive for the wealthy to make lifetime gifts.

Finally, the currently unlimited estate tax charitable bequest deduction should be modified. Specifically, the charitable bequest deduction should be revised to model the charitable contribution limitation deduction set forth under the income tax rules and regulations. As such, the general rule should set the charitable bequest deduction limitation at fifty percent of the adjusted gross estate which is consistent with the charitable contribution deduction limitation for income taxation.

Implementing these modifications would create a system that would foster the multiple purposes of the transfer tax system: generating revenue, curtailing wealth concentration, and incentivizing charitable giving such that harmony would be restored between these objectives without having to sacrifice the economic recovery of the country. By placing limitations on the charitable bequest deduction and reducing the applicable exclusion amount while raising the top marginal rate for the estate tax, revenue may well increase.

Keywords: estate, tax, taxation, estate tax, tax policy, gift tax, charitable bequest deduction

JEL Classification: D31, K34, H20, H24