Occupy the Tax Code: Using the Estate Tax to Reduce Inequality and Spur Economic Growth

36 Pages Posted: 14 Jan 2013 Last revised: 31 Oct 2013

Paul L. Caron

Pepperdine University - School of Law

James R. Repetti

Boston College - Law School

Date Written: January 13, 2013

Abstract

Inequality has been increasing in the United States. We should care about this increase because inequality contributes to a variety of adverse social consequences that persist across generations. There is also substantial empirical evidence that inequality has a long-term negative impact on economic growth.

For many decades, federal tax policy has played an important role in reducing inequality, although the impact of federal taxes on inequality has waxed and waned depending on the focus of elected officials. We argue that the estate tax is a particularly apt vehicle to reduce inequality because inheritances are a major source of wealth among the rich, and studies suggest that inherited wealth has a more deleterious impact on economic growth than inequality caused by self-made wealth. Although there are loopholes in the estate tax, it is still effective in moderating the amount of wealth that is passed within a family from generation to generation.

The major criticism about the estate tax — that it discourages savings — is inaccurate. Standard tax theory cannot predict the impact of the estate tax on savings and the empirical evidence is mixed. Moreover, the estate tax has a less harmful impact on savings than the income tax for two reasons. First, the event that triggers estate tax liability — death — is ignored by taxpayers during the period of life in which they are likely to be most productive. Second, the expected value of the estate tax’s effective rate is quite low during the period of life in which most taxpayers create wealth.

This article was published as part of a symposium sponsored by the Pepperdine Law Review and Tax Analysts, Tax Advice for the Second Obama Administration, 40 Pepp. L. Rev. 1143-1440 (2013). The Introduction to the Symposium, 40 Pepp. L. Rev. 1143 (2013), together with the Table of Contents, is available at http://ssrn.com/abstract=2220496.

Keywords: tax, estate tax, inequality, income inequality, wealth inequality

JEL Classification: K34

Suggested Citation

Caron, Paul L. and Repetti, James R., Occupy the Tax Code: Using the Estate Tax to Reduce Inequality and Spur Economic Growth (January 13, 2013). Pepperdine Law Review, Vol. 40, p. 1255, 2013; Boston College Law School Legal Studies Research Paper No. 280; U of Cincinnati Public Law Research Paper No. 13-02. Available at SSRN: https://ssrn.com/abstract=2200270

Paul L. Caron (Contact Author)

Pepperdine University - School of Law ( email )

24255 Pacific Coast Highway
Malibu, CA 90263
United States
310.506.7521 (Phone)

James R. Repetti

Boston College - Law School ( email )

885 Centre Street
Newton, MA 02459-1163
United States
617-552-8550 (Phone)
617-552-2615 (Fax)

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