What Should Society Expect from Heirs? A Proposal for a Comprehensive Inheritance Tax

113 Pages Posted: 28 Sep 2008 Last revised: 26 Jun 2017

Date Written: February 23, 2010


The upcoming one-year repeal of the federal estate tax in the U.S. creates an opportunity to reconsider the taxation of wealth transfers. This article argues that if inheritances are included in an optimal tax framework, existing evidence suggests that the ideal wealth transfer tax would be much higher than current law, and take the form of a comprehensive inheritance tax, which includes amounts inherited above an exemption in the tax base and subjects them to higher rates. Doing so accounts for the net efficiency benefits of taxing inheritances, and the direct and indirect information they provide about the heir's economic status.

The article then proposes seizing the political moment to replace the federal estate tax with a comprehensive inheritance tax that takes into account administrative and political constraints. This new tax would exempt from taxation roughly $2 million in lifetime gifts and bequests received. Inheritances received beyond this amount would be taxed at the heir's income tax rate plus 15 percentage points. The proposal would improve incentives and reduce complexity relative to the estate tax. More importantly, it would enhance the equity and transparency of the tax system. The paper's estimates suggest that the estate tax does a good job in aggregate of correcting for the undertaxation of heirs relative to those whose wealth is self-made, but that it does a poor job at an individual level. The proposal would allocate tax burdens more fairly amongst heirs. Ultimately, because its form more transparently embodies its effects, it could also reinvigorate public support for taxing inheritances at more socially-optimal levels in the first place.

Keywords: wealth transfer tax, inheritance tax, estate tax, wealth transfers, gifts, bequests, estates, intergenerational mobility, heirs, tax policy, optimal tax

JEL Classification: D31, D62, D63, D64, H21, H22, H23, H24, H31, K34

Suggested Citation

Batchelder, Lily L., What Should Society Expect from Heirs? A Proposal for a Comprehensive Inheritance Tax (February 23, 2010). 63 Tax Law Review 1 (2009)., NYU Law and Economics Research Paper No. 08-42, Available at SSRN: https://ssrn.com/abstract=1274466 or http://dx.doi.org/10.2139/ssrn.1274466

Lily L. Batchelder (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
212-992-8156 (Phone)

HOME PAGE: http://rb.gy/8nrm0t

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