Leveling the Playing Field between Inherited Income and Income from Work through an Inheritance Tax

In Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue, 48-88 (Jay Shambaugh & Ryan Nunn eds, 2020

47 Pages Posted: 25 Feb 2020 Last revised: 17 Jun 2020

Date Written: January 28, 2020

Abstract

Despite our founding vision as a land of opportunity, the United States ranks at or near the bottom among high-income countries in economic equality and inter-generational mobility. Our tax code plays a key role. Inherited income is taxed at less than one-seventh the average tax rate on income from work and savings. This chapter proposes a major step toward leveling the playing field by requiring wealthy heirs to pay income and payroll taxes on inheritances they receive above a large lifetime exemption. As part of this shift, the proposal would repeal the current estate and gift taxes and would tax accrued gains (beyond a threshold) on transferred assets at the time of transfer. It would also substantially reform the rules governing family-owned businesses, personal residences, and the timing and valuation of transfers through trusts and similar vehicles. Relative to current law, the Urban-Brookings Tax Policy Center estimates the proposal would raise $337 billion over the next decade if the lifetime exemption was $2.5 million, and $917 billion if the lifetime exemption was $1 million.

The proposal would almost exclusively burden the most affluent and most privileged heirs in society, while the additional revenues could be used to invest in those who are not as fortunate. As a result, the proposal would soften inequalities, strengthen mobility, and more equitably allocate taxes on inheritances among heirs. It would also enhance efficiency and growth by curtailing unproductive tax planning, increasing work among heirs, and reducing distortions to labor markets and capital allocation. Furthermore, the proposal is likely to increase public support for taxing inherited income. While the burdens of estate and inheritance taxes both largely fall on heirs, inheritance taxes are more self-evidently “silver spoon taxes” and appear to be more politically resilient as a result.

Keywords: Wealth Transfer Tax, Inheritance Tax, Estate Tax, Wealth Transfers, Gifts, Bequests, Estates, Inheritances, Inter-generational Mobility, Heirs, Tax Policy, Carryover Basis, Stepped-Up Basis, Trusts

JEL Classification: H2, H21, H22, H24, D31, D62, D63, D64, K34

Suggested Citation

Batchelder, Lily L., Leveling the Playing Field between Inherited Income and Income from Work through an Inheritance Tax (January 28, 2020). In Tackling the Tax Code: Efficient and Equitable Ways to Raise Revenue, 48-88 (Jay Shambaugh & Ryan Nunn eds, 2020, Available at SSRN: https://ssrn.com/abstract=3526520

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)

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