**PRESENT LAW AND BACKGROUND**

**RELATING TO ESTATE AND GIFT TAXES**

Scheduled for a Public Hearing

Before the

HOUSE COMMITTEE ON WAYS AND MEANS

on January 28, 1998

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

January 27, 1998

JCX-2-98

----

**CONTENTS**

INTRODUCTION	

	I.	PRESENT LAW AND LEGISLATIVE HISTORY		

- Present Law		 Legislative History
	II.	BACKGROUND AND ANALYSIS		
- Background Data Relating to Estate and Gift Taxation	 	Comparison of Transfer Taxation in the United States and Other Countries			Economic Issues Related to Transfer Taxation	
**INTRODUCTION**
	The House Committee on Ways and Means has scheduled a public hearing on estate andgift taxes on January 28, 1998.  This document,(1) prepared by the staff of the Joint Committee onTaxation, provides a description of present law and legislative history and background data andanalysis on estate and gift taxes.(2)
	Part I of the document is a description of present law and legislative history.  Part IIprovides background data on Federal estate and gift taxes, a comparison of transfer taxation in theUnited States and other countries, and an analysis of economic issues related to transfer taxation.
**I.  PRESENT LAW AND LEGISLATIVE HISTORY**
**A.  Present Law**
**Application of the estate and gift tax**
	A gift tax is imposed on lifetime transfers and an estate tax is imposed on transfers atdeath. Since 1976, the gift tax and the estate tax have been unified so that a single graduated rateschedule applies to cumulative taxable transfers made by a taxpayer during his or her lifetime andat death.(3) Under this rate schedule, the unified estate and gift tax rates begin at 18 percent on thefirst $10,000 in cumulative taxable transfers(4) and reach 55 percent on cumulative taxable transfersover $3 million (sec. 2001(c)). In addition, a 5-percent surtax is imposed upon cumulative taxabletransfers between $10 million and the amount necessary to phase out the benefits of the graduatedrates and the unified credit (sec. 2001(c)(2)).(5)
	The amount of gift tax payable for any calendar year generally is determined bymultiplying the applicable tax rate (from the unified rate schedule) by the cumulative lifetimetaxable transfers made by the taxpayer and then subtracting any gift taxes payable for prior taxableperiods. This amount is reduced by any available unified credit (and other applicable credits) todetermine the gift tax liability for the taxable period.
	The amount of estate tax payable generally is determined by multiplying the applicable taxrate (from the unified rate schedule) by the cumulative post-1976 taxable transfers made by thetaxpayer during his lifetime or at death and then subtracting any gift taxes payable for priorcalendar years (after 1976). This amount is reduced by any available unified credit (and otherapplicable credits) to determine the estate tax liability.
	A marital deduction generally is permitted for the value of property transferred betweenspouses.
**Unified credit**
	A unified credit is available with respect to taxable transfers by gift (sec. 2505) and atdeath (sec. 2010).  From 1987 to 1997, the unified credit amount was $192,800, which effectivelyexempted a total of $600,000 in cumulative taxable transfers from the estate and gift tax.  TheTaxpayer Relief Act of 1997 increased the effective exemption to $625,000 in 1998, $650,000 in1999, $675,000 in 2000 and 2001, $700,000 in 2002 and 2003, $850,000 in 2004, $950,000 in2005, and $1 million in 2006 and thereafter.
**Annual exclusion for gifts**
	A taxpayer may exclude $10,000 of gifts made to any one donee during a calendar year(sec. 2503).  For gifts made after 1998, the $10,000 exclusion will be increased annually forinflation occurring after 1997.  This annual exclusion does not apply to gifts of future interests(e.g., reversions or remainders). Prior to 1982, the annual exclusion was $3,000.
**Valuation**
	Generally, for Federal transfer tax purposes, the value of property is its fair market value,i.e., the price at which the property would change hands between a willing buyer and a willingseller, neither being under any compulsion to buy or sell and both having reasonable knowledge ofrelevant facts. Fair market value is determined as of either (1) the time of the decedent's death, or(2) the "alternate" valuation date of six months after the decedent's death (sec. 2032).
	Under Code section 2032A, an executor may elect for estate tax purposes to value certain"qualified real property" used in farming or another qualifying closely-held trade or business at itscurrent use value, rather than its highest and best use value. Currently, the maximum reduction inthe value of such real property resulting from an election under Code section 2032A is $750,000. For decedents dying after 1998, the $750,000 maximum reduction in value will be indexedannually for inflation occurring after 1997.
	An estate may qualify for current use valuation if: (1) the decedent was a citizen orresident of the United States at the time of death; (2) the value of the farm or closely held businessassets in the decedent's estate, including both real and personal property (but reduced by debtsattributable to the real and personal property) is at least 50 percent of the decedent's gross estate(reduced by mortgages and other secured debts); (3) at least 25 percent of the adjusted value ofthe gross estate is qualified farm or closely held business real property;(6) (4) the real propertyqualifying for current use valuation passes to a qualified heir;(7) (5) such real property was ownedby the decedent or a member of the decedent's family and used or held for use as a farm or closelyheld business ("a qualified use") for 5 of the last 8 years prior to the decedent's death; and (6)there was material participation in the operation of the farm or closely held business by thedecedent or a member of the decedent's family in 5 years out of the 8 years immediately precedingthe decedent's death.(8)  If, after an election is made to specially value property at its current usevalue, the heir who acquired the real property ceases to use it in its qualified use within 10 years(15 years for individuals dying before 1982) of the decedent's death, an additional estate tax isimposed in order to "recapture" the benefit of the special use valuation.
**Qualified family-owned business interests**
	An executor may elect to exclude certain qualified "family-owned business interests" fromthe estate if such interests comprise more than 50 percent of a decedent's estate and certain otherrequirements are met (sec. 2033A).  The exclusion for family-owned business interests may betaken only to the extent that the exclusion for family-owned business interests, plus the amounteffectively exempted by the unified credit, does not exceed $1.3 million.
	A qualified family-owned business interest is defined as any interest in a trade or business(regardless of the form in which it is held) with a principal place of business in the United States ifone family owns at least 50 percent of the trade or business, two families own 70 percent, or threefamilies own 90 percent, as long as the decedent's family owns at least 30 percent of the trade orbusiness.  An interest in a trade or business does not qualify if any interest in the business (or arelated entity) was publicly-traded at any time within three years of the decedent's death.  Aninterest in a trade or business also does not qualify if more than 35 percent of the adjustedordinary gross income of the business for the year of the decedent's death was personal holdingcompany income (as defined in sec. 543).  In the case of a trade or business that owns an interestin another trade or business (i.e., "tiered entities"), special look-through rules  apply.  The valueof a trade or business qualifying as a family-owned business interest is reduced to the extent thebusiness holds passive assets or excess cash or marketable securities.
	To qualify for the exclusion, the decedent (or a member of the decedent's family) musthave owned and materially participated in the trade or business for at least five of the eight yearspreceding the decedent's date of death.  In addition, each qualified heir (or a member of thequalified heir's family) is required to materially participate in the trade or business for at least fiveyears of each eight-year period ending within ten years following the decedent's death.
	The benefit of the exclusion for qualified family-owned business interests is subject torecapture if, within 10 years of the decedent's death and before the qualified heir's death, one ofthe following "recapture events" occurs: (1) the qualified heir ceases to meet the materialparticipation requirements; (2) the qualified heir disposes of any portion of his or her interest inthe family-owned business, other than by a disposition to a member of the qualified heir's family orthrough a qualified conservation contribution; (3) the principal place of business of the trade orbusiness ceases to be located in the United States; or (4) the qualified heir loses U.S. citizenship.
	The portion of the reduction in estate taxes that is recaptured depends upon the number ofyears that the qualified heir (or members of the qualified heir's family) materially participated inthe trade or business between the date of the decedent's death and the date of the recapture event. If the qualified heir (or his or her family members) materially participated in the trade or businessafter the decedent's death for less than six years, 100 percent of the reduction in estate taxesattributable to that heir's interest is recaptured; if the participation was for at least six years butless than seven years, 80 percent of the reduction in estate taxes is recaptured; if the participationwas for at least seven years but less than eight years, 60 percent is recaptured; if the participationwas for at least eight years but less than nine years, 40 percent is recaptured; and if theparticipation was for at least nine years but less than ten years, 20 percent of the reduction inestates taxes is recaptured.  In general, there is no requirement that the qualified heir (or membersof his or her family) continue to hold or participate in the trade or business more than 10 yearsafter the decedent's death.  As under section 2032A, however, the 10-year recapture period maybe extended for a period of up to two years if the qualified heir does not begin to use the propertyfor a period of up to two years after the decedent's death.
**Exclusion for land subject to permanent conservation easement**
	An executor may elect to exclude from the taxable estate 40 percent of the value of anyland subject to a qualified conservation easement, up to a maximum exclusion of $100,000 in1998, $200,000 in 1999, $300,000 in 2000, $400,000 in 2001, and $500,000 in 2002 andthereafter (sec. 2031(c)).  If the value of the conservation easement is less than 30 percent of thevalue of the land without the easement (reduced by the value of any retained development rights),then the exclusion percentage is reduced.
	A qualified conservation easement is one that meets the following requirements:  (1) theland is located within 25 miles of a metropolitan area (as defined by the Office of Managementand Budget) or a national park or wilderness area, or within 10 miles of an Urban National Forest(as designated by the Forest Service of the U.S. Department of Agriculture); (2) the land has beenowned by the decedent or a member of the decedent's family at all times during the three-yearperiod ending on the date of the decedent's death; and (3) a qualified conservation contribution(within the meaning of sec. 170(h)) of a qualified real property interest (as generally defined insec. 170(h)(2)(C)) was granted by the decedent or a member of his or her family.  For purposes ofthe provision, preservation of a historically important land area or a certified historic structuredoes not qualify as a conservation purpose.
	In order to qualify for the exclusion, a qualifying easement must have been granted by thedecedent, a member of the decedent's family, the executor of the decedent's estate, or the trusteeof a trust holding the land, no later than the date of the election.  To the extent that the value ofsuch land is excluded from the taxable estate, the basis of such land acquired at death is acarryover basis (i.e., the basis is not stepped-up to its fair market value at death).  Propertyfinanced with acquisition indebtedness is eligible for this provision only to the extent of the netequity in the property.  The exclusion from estate taxes does not extend to the value of anydevelopment rights retained by the decedent or donor.
**Generation-skipping transfer tax**
	A generation-skipping transfer tax ("GST tax") generally is imposed on transfers, eitherdirectly or through a trust or similar arrangement, to a "skip person" (i.e., a beneficiary in ageneration more than one generation below that of the transferor). Transfers subject to the GSTtax include direct skips, taxable terminations and taxable distributions.(9) The generation-skippingtransfer tax is imposed at a flat rate of 55 percent on cumulative generation-skipping transfers inexcess of $1 million. Because both the generation-skipping transfer tax and the estate or gift taxcan apply to the same transfer, the combined marginal tax rate on a generation-skipping transfercan reach nearly 80 percent.
**Installment payment of estate tax**
	In general, the estate tax is due within nine months of a decedent's death. Under Codesection 6166, an executor generally may elect to pay the Federal estate tax attributable to aninterest in a closely held business in installments over, at most, a 14-year period. If the election ismade, the estate pays only interest for the first four years, followed by up to 10 annualinstallments of principal and interest.  A special 2-percent interest rate applies to the amount ofdeferred estate tax attributable to the first $1,000,000 in taxable value of the closely-heldbusiness.  The interest rate applicable to the amount of estate tax attributable to the taxable valueof the closely held business in excess of $1,000,000 is equal to 45 percent of the rate applicable tounderpayments of tax under section 6621 (i.e., 45 percent of the Federal short-term rate plus 3percentage points).  Interest paid on estate taxes deferred under section 6166 is not deductible forestate or income tax purposes.
	To qualify for the installment payment election, the business must be an active trade orbusiness and the value of the decedent's interest in the closely held business must exceed 35percent of the decedent's adjusted gross estate. An interest in a closely held business includes: (1)any interest as a proprietor in a business carried on as a proprietorship; (2) any interest in apartnership carrying on a trade or business if the partnership has 15 or fewer partners, or if at least20 percent of the partnership's assets are included in determining the decedent's gross estate; or(3) stock in a corporation if the corporation has 15 or fewer shareholders, or if at least 20 percentof the value of the voting stock is included in determining the decedent's gross estate. In general,the installment payment election is available only if the estate directly owns an interest in a closelyheld active trade or business. Under a special rule, however, an executor may elect to lookthrough certain non-publicly traded holding companies that own stock in a closely held activetrade or business, but if the election is made, neither the five-year deferral (i.e., the provision thatrequires no principal payments until the fifth year) nor the special 2-percent rate applies.
	If the installment payment election is made, a special estate tax lien applies to any propertyon which tax is deferred for the installment payment period.
**State death tax credit(10)**
	A credit is allowed against the Federal estate tax for any estate, inheritance, legacy, orsuccession taxes actually paid to any State (or the District of Columbia) with respect to anyproperty included in the decedent's gross estate (sec. 2011).  The maximum amount of creditallowable for State death taxes is determined under a graduated rate table, based on the size of thedecedent's adjusted taxable estate.  Most States impose a "pick-up" or "make-up" estate taxequal to the difference between the maximum State death tax credit and any inheritance or othersuccession taxes the State imposes.  The effect of the "pick-up" tax is to ensure maximumrevenues for the State without increasing the total tax burden on the estates of its residents.
**B.  Legislative History**
**Federal death taxes before World War I**
	While States extensively used death taxes, Federal death taxes in this country, for most ofits history, were imposed primarily to finance wars or threat of war. The first Federal death taxwas imposed from 1797 until 1802 as a stamp tax on inventories of deceased persons, receipts oflegacies, shares of personal estate, probates of wills, and letters of administration to pay for thedevelopment of strong naval forces felt necessary because of strained trade relations withFrance.(11) Subsequent to the repeal of the stamp tax,(12) there were no death taxes imposed by theFederal Government until the Civil War when the Federal Government imposed an inheritance taxbetween 1862 and 1870.(13) In order to finance the Spanish-American War, the FederalGovernment imposed its first estate tax in 1898, which remained in effect until its repeal in 1902.(14)While prior death taxes were primarily imposed to finance warfare, President Theodore Rooseveltproposed, in 1906, a progressive tax on all lifetime gifts and death time bequests to limit theamount that one individual could transfer to another, although no legislation immediately resultedfrom such proposal.(15)
**Estate taxes from World War I through World War II**
Estate taxes to finance World War I
	The commencement of World War I caused revenues from tariffs to fall. The FederalGovernment in 1916(16) adopted a progressive estate tax on all property owned by the decedent athis or her death, certain lifetime transfers which were for inadequate consideration,(17)  transfers notintended to take effect until death,(18) and transfers made in contemplation of death.
	The 1916 estate tax provided an exemption (in the form of a deduction) of $50,000 withrates from 1 percent on the first $50,000 of transferred assets to 10 percent on transferred assetsin excess of $5 million. The next year, the revenue needs from the War resulted in increases inestate tax rates with a top rate of 25 percent on transfers in excess of $10 million.(19)
Estate and gift taxes between World Wars I and II
	In the Revenue Act of 1918, estate tax rates on transfers under $1 million were reduced,but the tax was extended to life insurance proceeds in excess of $40,000 that were receivable bythe estate or its executor and property subject to a general power of appointment.(20)
	In 1924, the estate tax was changed by: (1) increasing the maximum rate to 40 percent; (2)broadening property subject to the tax to include jointly owned property and property subject to apower retained by the decedent to alter, amend, or revoke the beneficial enjoyment of theproperty;(21) and (3) allowing a credit for State death taxes for up to 25 percent of the Federal tax.In addition, the first gift tax was imposed.
	In 1926, the gift tax was repealed and estate tax rates were reduced to a maximum rate of20 percent on transfers over $10 million. The exemption was increased from $50,000 to$100,000, and the credit for State death taxes was increased to 80 percent of the Federal tax.(22)
	In 1932, with the advent of the Depression which reduced revenues from other sourcesand the need for revenues for new Government projects, estate tax rates were increased with atop rate of 45 percent on transfers over $10 million.(23) The tax was made applicable to lifetimetransfers in which the transferor retained a life estate or the power to control who shall benefitfrom the property or income therefrom.(24) The exemption was reduced to $50,000, and the Federalgift tax was reimposed (at 75 percent of the estate tax rates) for cumulative lifetime gifts in excessof $5,000 per year.
	Estate and gift tax rates were increased in 1934 to top rates of 60 percent and 45 percent,respectively, on transfers in excess of $10 million and again in 1935 to top rates of 70 percent and52.5 percent, respectively, on transfers in excess of $50 million.(25) The exemption for both theestate and gift tax was reduced in 1935 to $40,000 each.(26)
	In 1940, a 10-percent surcharge was imposed on both income and estate and gift taxes, inlight of the need for additional revenue necessitated by the military build-up just prior to WorldWar II.(27) Estate and gift tax rates were increased in 1941, with a top estate tax rate of 77 percenton transfers in excess of $50 million.(28)
Estate and gift taxes during World War II
	In 1942, Congress again altered estate and gift taxes by: (1) setting the exemption fromthe estate tax at $60,000, the lifetime exemption from the gift tax at $30,000, and providing anannual gift tax exclusion of $3,000;(29) and (2) attempting to equate property in communityproperty States with property owned in non-community property States by providing that in bothcommunity property States and non-community States, each spouse would be taxed on theportion of jointly owned or community property that each spouse contributed to that property'sacquisition cost.(30)
**Estate and gift taxes after World War II**
Post-World War II through 1975
	The 1942 solution to the community property problem was viewed as complex. Congressprovided a different solution in 1948 for equating community property States and non-communityproperty States by providing the decedent or donor spouse a marital deduction for 50 percent ofthe property transferred to the other spouse and, thus, effectively allowing both spouses to betaxed on one-half of the property's value.(31)
	In 1954, the estate tax treatment of life insurance was changed to a rule that subjected lifeinsurance proceeds to estate tax if the proceeds were paid to the decedent's estate or executor orif the decedent retained "incidents of ownership" in the life insurance policy.(32)
	The Small Business Tax Revision Act of 1958(33) provided for payment of Federal estatetax on certain closely held businesses in installments over a 10-year period.(34)
Legislation from 1976 through 1980
	In the Tax Reform Act of 1976,(35) Congress substantially revised estate and gift taxes by:(1) providing for a single unified rate structure for cumulative lifetime and deathtime transfers;(36)(2) providing an exemption in the form of a credit (called the "unified credit") which exempted$175,625 of transfers from tax when fully phased-in; (3) revising and lowering the unified ratestructure such that the maximum rate of tax was 70 percent; (4) changing the income tax rulesapplicable to the disposition of inherited assets from a rule that only taxed post-death appreciation(i.e., the basis in the hands of the heir was "stepped-up" to its value on the date of the decedent'sdeath) to one that provided that the heir's basis generally would be the same as its basis to thedecedent (i.e., the decedent's basis in the property would "carryover" to be the basis to the heir);(5) providing a 100-percent marital deduction for the first $250,000 of property transferred to asurviving spouse; (6) changing the treatment of gifts made in contemplation of death from arebuttable presumption that gifts made within three years of death would be subject to estate taxto a rule that subjects all gifts made within three years of death to the estate tax;(37) (7) providingthat each spouse was rebuttably presumed to have contributed equally to the acquisition cost ofjointly held property; (8) providing that a farm or other real property used in a closely heldbusiness could be valued at its "current use value" instead of its "highest and best use" value, solong as the heirs continued to so use the property for 15 years after the decedent's death;(38) (9)providing a limited deduction for bequests to children with no living parents (the so-called"orphan's deduction"); (10) providing a new transfer tax on generation-skipping transfers basicallyequal to the additional estate or gift tax that the decedent's children would have paid if theproperty had passed directly to the children instead in a form where the children received only anincome interest or power to control the enjoyment of the property; (11) providing statutory rulesgoverning the disclaimer of gifts and bequests under which an unqualified, irrevocable refusal toaccept any benefits from the gift or bequest generally within 9 months of the creation of thetransferee's interest is not treated as a gift by the disclaiming individual;(39) and liberalized theprovision which permits installment payment of estate tax on closely-held business by providingthat only interest need be paid for the first four years after death and lengthening the period ofinstallment an additional four years to 14 years.
	In 1980, the "carryover basis" rule was retroactively repealed and replaced by the"stepped-up basis" rules that applied before the 1976 legislation.(40)
Legislation from 1981 through 1985
	The Economic Recovery Act of 1981 ("1981 Act")(41) made the following changes to theestate and gift taxes: (1) increased the unified credit such that, when fully phased-in in 1987, iteffectively exempted the first $600,000 of transfers from the unified estate and gift tax; (2)reduced the top unified estate and gift tax rate from 70 percent to 50 percent over a four-yearperiod (1982-1985); (3) provided for an unlimited deduction for transfers to spouses andpermitted such a deduction (the so-called "QTIP deduction") even where the donee spouse couldnot control disposition of the property after that spouse's death, so long as that spouse had anincome interest in that property and that property was subject to that spouse's estate and gift tax;(42)(4) increased the annual gift tax exemption from $3,000 per year per donee to $10,000 per yearper donee; (5) changed the presumption that each spouse equally provided for the acquisition costof jointly held property to an irrebuttable presumption; (6) modified the "current use" valuationrules by shortening to 10 years the period that heirs who inherit farms or other real property usedin a closely held business were required to so use the property, and by increasing the maximumreduction in the value of such property from $500,000 to $750,000; (7) repealed the so-called"orphan's deduction;" (8) delayed the effective date of the generation-skipping transfer tax, (9)further liberalized and simplified the rules which permit the installment payment of estate tax onclosely-held businesses.
	The Deficit Reduction Act of 1984: (1) delayed for three years the scheduled reduction ofthe maximum estate and gift tax rates (such that maximum rate remained at 55 percent until1988); (2) eliminated the exclusion for interests in qualified pension plans; (3) provided rules forthe gift tax treatment of below-market rate loans; and (4) extended the rules which permit theinstallment payment of estate taxes on closely-held businesses to certain holding companies.
1986 and subsequent legislation
	The Tax Reform Act of 1986(43) substantially revised the tax on generation-skippingtransfers by applying a single rate equal to the highest estate tax rate (i.e., 55 percent) to allgeneration-skipping transfers in excess of $1 million and by broadening the definition of ageneration-skipping transfer to include direct transfers from a grandparent to a grandchild (i.e.,"direct skips").(44)
	The Omnibus Budget Reconciliation Act of 1987 made the following modifications: (1)provided special rules for so-called "estate freeze transactions" under which the person whoengaged in such a transaction would be subject to estate tax on the value of such property; (2)provided a higher estate or gift tax rate on transfers in excess of $10 million to phase-out theunified credit and rate brackets lower than 55 percent; and (3) again delayed for five years thescheduled reduction in the estate and gift tax rates from 55 percent to 50 percent.
	The Omnibus Budget Reconciliation Act of 1990 replaced the special rules for estatefreeze transactions with a new set of rules that effectively subject to gift tax the full value ofinterests in property, unless retained interests in that property take certain specified forms.(45)
	The maximum estate, gift, and generation-skipping transfer tax rate dropped to 50 percentafter December 31, 1992, but the Omnibus Budget Reconciliation Act of 1993 restored the55-percent top rate retroactively to January 1, 1993, and made that top rate permanent.(46)  TheTaxpayer Relief Act of 1997(47) provided for gradual increases in the unified credit, new exclusionsfor qualified family-owned businesses and for certain land subject to permanent conservationeasements, and a number of other changes.
**Summary**
	Table 1 provides a summary of the annual gift tax exclusion, the exemption value of theunified credit, the threshold level of the highest statutory estate tax rate, and the highest statutoryestate tax rate for selected years, 1977-1997.
**Table 1.--Annual Gift Exclusion Amount, Exemption Value of Unified Credit for Taxable Transfers, Threshold Level of Highest Statutory Tax Rate, and Highest Statutory Tax Rate Applicable to Taxable Transfers, Selected Years, 1977-1997**
YearAnnual giftexclusion single/joint(dollars)Exemptionvalue of unified credit(dollars)Threshold of highest statutory tax rate(dollars)Highest statutory tax rate(percent)19773,000/6,000120,6675 million70198210,000/20,000120,6674 million65198310,000/20,000275,0003.5 million60198410,000/20,000325,0003 million55198510,000/20,000400,0003 million55198610,000/20,000500,0003 million55198710,000/20,000600,0003 million55198910,000/20,000600,0003 million551199110,000/20,000600,0003 million551199310,000/20,000600,0003 million551199510,000/20,000600,0003 million551199710,000/20,000600,0003 million551
Source:	Joint Committee on Taxation.
(1)	Since 1987 the benefits of the graduated rate structure have been phased out at a 5-percent rate for estatesbetween $10,000,000 and $21,040,000, creating an effective marginal tax rate of 60 percent for affectedestates.  After 1997, the $21,040,000 threshold will be increased as increases in the unified credit arephased in.
**II.  BACKGROUND AND ANALYSIS**
**A.  Background Data Relating to Estate and Gift Taxation
**Estates subject to the estate tax**

	Table 2 details the percentage of decedents subject to the estate tax for selected yearssince 1935. The percentage of decedents liable for the estate tax grew throughout the postwar erareaching a peak in the mid-1970s. The substantial revision to the estate tax in the mid-1970s(48) andsubsequent further modifications in 1981 reduced the percentage of decedents liable for the estatetax to less than one percent in the late 1980s. Since that time, the percentage of decedents liablefor the estate tax has gradually increased.

**Table 2.--Number of Taxable Estate Tax Returns Filed as a Percentage of Adult Deaths, Selected Years, 1935-1995**
Taxable estate tax returns filed1YearDeathsNumberPercent of Deaths19351,172,2458,6550.7419401,237,186	12,9071.041945	1,239,71313,869	1.121950	1,304,343	 17,411	1.3319551,379,82625,143	1.821961	1,548,665 45,439	2.9319661,727,240 67,4042	3.9019701,796,940 93,4242	5.201973	1,867,689	120,7612	6.4719771,819,107	139,1152	7.651982	1,897,820 41,6202,3	2.1919831,945,913	  35,1482,3	1.811984	1,968,128  31,5072,3	1.601985	2,086,440  30,5182,3	1.4619862,105,361 23,7311.1319872,123,323 21,335	1.00		19882,167,999	 18,948	0.87	198942,150,466	  20,856	0.97	199042,148,463 23,2151.0819914	2,169,518 24,897	1.15	19924	2,175,61327,187	1.25	199342,268,55327,506	1.21	19944	2,278,994	31,918	1.40	19954	2,312,1805	  31,5641.371	Estate returns need not be filed in the year of the decedent's death.2	Not strictly comparable with pre-1966 data.  For later years, the estate tax after credits was the basis fordetermining taxable returns.  For prior years, the basis was the estate tax before credits.3	Although the filing requirement was for gross estates in excess of $225,000 for 1982 deaths, $275,000 for 1983deaths, and $325,000 for 1984 deaths, the data are limited to gross estates of $300,000 or more.4	Taxable estate data from 1989-1995 are from Internal Revenue Service, Statistics of Income.5	Preliminary.
Sources:	Joseph A. Pechman, Federal Tax Policy (Washington Brookings Institution), 1987; Internal RevenueService, Statistics of Income; and U.S. National Center for Health Statistics

	The increasing percentage of decedents liable for estate tax in the period from 1940through the mid-1970s and the similar increasing percentages since 1989 are the result of theinteraction of three factors: a fixed nominal exemption; the effect of price inflation on assetvalues; and real economic growth. The amount of wealth exempt from the Federal estate taxalways has been expressed at a fixed nominal value. If the general price level in the economy risesfrom one year to the next and asset values rise to reflect this inflation, the "nominal" value of eachindividual's wealth will increase. With a fixed nominal exemption, annual increases in the pricelevel will imply that more individuals will have a nominal wealth that exceeds the tax threshold.Alternatively stated, inflation diminishes the real, inflation-adjusted, value of wealth that isexempted by a nominal exemption. Thus, even if no one individual's real wealth increased, moreindividuals would be subject to the estate tax. This interaction between inflation and a fixednominal exemption largely explains the pattern in Table 2.(49) The fixed nominal exemption wasincreased effective for 1977 and again between 1982 and 1987. Prior to 1977 and subsequent to1987, the exemption was unchanged while the economy experienced general price inflation.

	However, even if the exemption were modified annually to reflect general price inflation,one would still expect to see the percentage of decedents liable for estate tax rise because of thethird factor, real growth. If the economy is experiencing real growth per capita, it must beaccumulating capital.(50) Accumulated capital is the tax base of the estate tax. Thus, real growth canlead to more individuals having real wealth above any given fixed real exempt amount.(51)

**Revenues from the estate, gift, and generation-skipping taxes**

	Table 3 provides summary statistics of the estate and gift tax for selected years.  Totalestate and gift receipts include taxes paid for estate, gift, and generation-skipping taxes as well aspayments made as the result of IRS audits.

**Table 3.--Revenue from the Estate, Gift, and Generation-Skipping Transfer Taxes, Selected Years, 1940-1997**
YearRevenues ($ millions)Percentage of totalFederal receipts1940	357	6.91945		6381.41950	698	1.91955	9241.41960	1,606	1.71965	2,716	2.31970	3,644	1.91975	4,611	1.71976	5,216	1.719777,327	2.119785,285	1.319795,411	1.21980	6,389	1.21981	6,7871.11982	7,9911.31983	6,053	1.01984	6,010	0.91985	6,422	0.91986	6,958	0.91987	7,493	0.91988	7,594	0.81990	11,500	1.121991	11,138	1.061992	11,143	1.021993	12,5771.091994	15,225	1.211995	15,0871.121996		17,1891.181997	19,8451.25Sources:	Joint Economic Committee, The Federal Tax System: Facts and Problems, 1964; Joseph A.Pechman, Federal Tax Policy (Washington: Brookings Institution), 1987; Internal RevenueService, Statistics of Income Bulletin, Fall 1996, and U.S. Office of Management and Budget,Budget of the United States Government Fiscal Year 1997, and prior years. 
	Since 1993, estate and gift receipts have been averaging double digit rates of growth.There are four possible reasons for the rapid growth in these receipts. First, because neither theamount of wealth exempt from the estate and gift tax or the tax rates are indexed, as explainedabove, an increasing number of persons are becoming subject to estate and gift taxes. Second, thetremendous increase in value in the stock market over the past three years will both increase thevalue of estates that would have already been taxable, and increase the number of estates that willbe taxable. For example, the Dow Jones Industrial Average ended 1993 at approximately 3750,and ended 1997 at approximately 8000. On average, one-third of the wealth in taxable estatesconsists of publicly traded stocks. Because the value of this component of wealth has more thandoubled during the past four years, one would expect brisk growth in estate tax receipts from thisalone. Third, while the overall population of the United States is growing at about a 1 percentannual rate, the number of persons aged 85 and older is growing at a rate of almost 3.5 percentannually. This also should increase the number of estate tax returns filed. Finally, the unlimitedmarital deduction included in the 1981 Act delayed the payment of estate tax, in most cases, untilthe surviving spouse died. On average, spouses survive their mates by about ten years. Therefore,during the decade of the 1990s, an increase in estate tax receipts is expected as the result offirst-spouse deaths during the 1980s that used the unlimited marital deduction.

	Table 4 shows the Joint Committee on Taxation staff present-law estimate of revenuesfrom the estate, gift, and generation-skipping taxes for fiscal years 1998-2007. These estimatesare based on the January 1998 baseline forecast for estate, gift, and generation-skipping taxessupplied by the Congressional Budget Office. Table 4 reports the Joint Committee on Taxationstaff estimates of annual taxable estates and calculates the percentage of all deaths that taxableestates will represent.

**Table 4.--Projections of Taxable Estates and Receipts from Estate, Gift, andGeneration-Skipping Transfer Taxes, 1998-2007**
YearExemption valueof unified creditNumber oftaxable estatesPercentof deathsReceipts($ billions)1998$625,00045,300	1.97	23.01999 650,00049,200	2.12	23.92000 675,000	49,3002.0924.82001 675,00053,700	2.2626.42002700,000	56,500	2.3527.72003700,000	60,9002.52	29.52004850,00050,400	2.0629.42005950,000	44,300	1.79	29.520061,000,00044,000	1.76	30.92007	1,000,00047,200	1.86	33.1Source: Joint Committee on Taxation staff calculations.
**B.  Comparison of Transfer Taxation in the**
**United States and Other Countries**

	Among developed countries, an inheritance tax is more common than the type ofestate tax that is imposed in the United States. An inheritance tax generally is imposed uponthe amount of wealth the transferee or donee receives rather than on the total wealth of thetransferor. That is, the funds the heir receives in a bequest determines the tax imposed. TheUnited States also imposes a generation-skipping tax in addition to any estate or gift taxliability on certain transfers to generations two or more younger than that of the transferee.This effectively raises the marginal tax rates on affected transfers. Countries that impose aninheritance tax do not have such a separate tax but may impose higher rates of inheritancetax on bequests that skip generations. Among developed countries, Australia and Canadaimpose neither an estate tax nor an inheritance tax.(52)

	Because the U.S. estate and gift tax exempts transfers between spouses, provides aneffective additional exemption of $625,000 (in 1998) through the unified credit, andexempts $10,000 of gifts per year per donee, the United States may have a larger exemption(a larger zero-rate tax bracket) than many other developed countries.(53) However, becausemost other countries have inheritance taxes, the total exemption depends upon the numberand type of beneficiaries. While the effective exemption may be larger, with the exception oftransfers to spouses which are untaxed, marginal tax rates on taxable transfers in the UnitedStates generally are greater than those in other countries. This is particularly the case whencomparing transfers to close relatives, who under many inheritance taxes face lowermarginal tax rates than do other beneficiaries. On the other hand, the highest marginal taxmay be applied at a greater level of wealth transfer than in other countries. It is oftendifficult to make comparisons between the U.S. estate tax and countries with inheritancetaxes because the applicable marginal tax rate depends on the pattern of gifts and bequests.

	It is difficult to assess the extent to which the practice of any of the foreign transfertaxes is comparable to the practice of transfer taxation in the United States. For example, inthe United States, transfers of real estate generally are valued at their full and fair marketvalue. In Japan, real estate is assessed at less than its fair market value. Land is assessed forinheritance tax purposes according to a valuation map known as Rosen Ka. The Rosen Kavalues range from 25 to 80 percent of fair market value.(54)  It is also unclear to what extenttransferors may be able to exploit legal loopholes under the various systems imposed byother countries. Again, using Japan as an example, prior to 1988, a transferor could reduceinheritance tax liability by adopting children to increase the number of legal heirs.(55)  Suchadoptees of convenience would receive nominal compensation for agreeing to be anadoptive child. The larger the number of children, the greater the total exemption forinheritance taxes in Japan, even if not all children receive a bequest. This legal loophole wassaid to be widely recognized and exploited by wealthy families.(56)

	Table 5 compares total revenue collected by OECD countries from estate,inheritance, and gift taxes to total tax revenue and to gross domestic product (GDP) toattempt to compare the economic significance of wealth transfer taxes in different countries.Among the OECD countries, Belgium, Denmark, France, Greece, and Japan collect moresuch revenue as a percentage of GDP than does the United States. Switzerland and theNetherlands collect modestly less revenue from such taxes as a percentage of GDP thandoes the United States. The remaining 15 countries collect substantially less revenue fromsuch taxes as a percentage of GDP than does the United States.

**Table 5.--Revenue from Estate, Inheritance and Gift Taxes as a Percentage of Total Tax Revenue and GDP in OECD Countries, 1992**
CountryPercentage oftotal tax revenuePercentage ofGDPAustralia0.0000.000Austria	0.1820.079Belgium	0.7350.334Canada	0.0020.001Denmark	0.5550.274Finland	0.4560.214France	0.9290.405Germany	0.2530.100Greece	1.0390.421Iceland	0.2160.072Ireland	0.3040.112Italy	0.1380.058Japan	2.0060.590Luxembourg	0.3200.155Netherlands	0.5260.247New Zealand	0.2920.105Norway	0.1910.089Portugal0.2520.083Spain0.3660.131Sweden	0.1660.083Switzerland	0.8540.264Turkey	0.1110.026 United Kingdom	0.5840.206United States	0.9070.267Note:	Data not directly comparable to data reported in Table 3.  The OECD attempts to collectstandardized data across member countries.  Therefore data in OECD reports for the United Statesmay not perfectly correspond to data as reported by OMB.
Source:	Organization  for Economic Cooperation and Development, Revenue Statistics of OECD Member Countries, 1965-1993 (Paris:  OECD), 1994.
	The United States is a wealthy country, with higher average household wealth thanmost of the countries surveyed. While exemption levels are higher in the United States thanmost other countries, a significant amount of accumulated wealth still may be subject toestate and gift taxation as compared to the other countries. The data in Table 5 do notreveal the extent to which estate, inheritance, and gift taxes fall across different individualswithin each country. In the United States, as reported in Table 2, above, of the 2.18 milliondeaths in 1992, only 27,187 or 1.25 percent of decedents, gave rise to any estate taxliability. Similar data were not available for the other countries in this survey.

**C.  Economic Issues Related to Transfer Taxation
**Taxes on income versus taxes on wealth**

	Income taxes, payroll taxes, and excise and other consumption taxes generally taxeconomic activity as it occurs. Income and consumption represent ongoing, currenteconomic activity by the taxpayer.(57) Accumulated wealth, on the other hand, does notcorrespond to any ongoing, current economic activity.(58) Wealth depends upon previouseconomic activity either by the current wealth holder or other individuals. For example,current wealth can result from accumulated saving from income or from bequests received.

	Taxes on wealth are not directly comparable to taxes on income. Because wealth isthe accumulation of flows of saving over a period of years, taxes on wealth are not directlycomparable to taxes on income or consumption which may represent only current, ratherthan accumulated, economic activity. For example, assume that a taxpayer receives wageincome of $10,000 per year, saves all of this income, and the savings earn an annual returnof 5 percent. At the end of five years, the accumulated value of the taxpayer's investmentswould be $58,019. Assume that the wealth is transferred at the end of the fifth year. If a10-percent tax were imposed on wage income, one would conclude that a burden of $1,000was imposed annually. If a 10-percent tax were imposed on the transfer of wealth, onewould conclude that a burden of $5,801.90 was imposed at the end of the fifth year. If, afterpaying the wage tax, the taxpayer had invested the remaining $9,000 each year to earn 5percent, the taxpayer's holding would be $52,217.10 at the end of five years. This is thesame value that would remain under the wealth tax ($58,019.00 less $5,801.90). Thus, it ismisleading to say that the burden of the wage tax is $1,000 in each year while the burden ofthe transfer tax is $5,801.90 in the fifth year.

**Wealth taxes, saving, and investment**

	Taxes on accumulated wealth are taxes on the stock of capital held by the taxpayer.As a tax on capital, issues similar to those that arise in analyzing any tax on the income fromcapital arise. In particular, there is no economic consensus on the extent to which theincidence of taxes on the income from capital is borne by owners of capital in the form ofreduced returns or whether reduced returns cause investors to save less and provide lesscapital to workers, thereby reducing wages in the long run. A related issue is to what extentindividuals respond to increases (decreases) in the after-tax return to investments bydecreasing (increasing) their saving. Again there is no census in either the empirical ortheoretical economics literature regarding the responsiveness of saving to after-tax returnson investment.(59)

	Some economists believe that an individual's bequest motives are important tounderstanding saving behavior and aggregate capital accumulation. If estate and gift taxesalter the bequest motive, they may change the tax burdens of taxpayers other than thedecedent and his or her heirs. It is an open question whether the bequest motive is aneconomically important explanation of taxpayer saving behavior and level of the capitalstock. For example, theoretical analysis suggests that the bequest motive may account forbetween 15 and 70 percent of the United States' capital stock.(60) Others question theimportance of the bequest motive in national capital formation.(61) Nor has direct empiricalanalysis of the existence of a bequest motive led to a consensus.(62) Theoretically, it is anopen question whether estate and gift taxes encourage or discourage saving and there hasbeen no empirical analysis of this specific issue. By raising the cost, in terms of taxes, ofleaving a bequest, potential transferors may be discouraged from accumulating the assetsnecessary to make a bequest. On the other hand, some individuals purchase additional lifeinsurance in order to have sufficient funds to pay the estate tax without disposing of otherassets in their estate.

	Regardless of any potential effect on aggregate saving, the transfer tax system mayaffect the composition of investment. In particular, some observers note that the transfer taxsystem may impose special cash flow burdens on small or family-owned businesses. Theynote that if a family has a substantial proportion of its wealth invested in one enterprise, theneed to pay estate taxes may force heirs to liquidate all or part of the enterprise or toencumber the business with debt to meet the estate tax liability. If the business is sold, whilethe assets generally do not cease to exist and remain a productive part of the economy, theshare of business represented by small or family-owned businesses may be diminished by theestate tax. If the business borrows to meet estate tax liability, the business's cash flow maybe strained. There is some evidence that many businesses may be constrained by the capitalmarkets in the amount of funds they can borrow. If they are so constrained, they mayreduce the amount of investment they undertake, to the detriment of the economy at large.(63)Undercapitalization may be prevalent among small businesses. A recent study suggests thatreduction in estate taxes may have a positive effect on an entrepreneur's survival.(64)

	Others argue that potential deleterious effects on investment by small orfamily-owned businesses are limited.  As a result of the Taxpayer Relief Act of 1997, certainsmall businesses can obtain an effective exemption of up to $2.6 million per married couple,and other legitimate tax planning can further reduce the burden on such enterprises.  Somehave argued that estate tax returns report a small fraction of the value of decedents'estates.(65)

**Wealth taxes and labor supply**

	As people become wealthier, they generally choose to consume more leisure time.Some, therefore, suggest that, by reducing the potential wealth of heirs, transfer taxes mayhave an effect on labor supply. Over 100 years ago, Andrew Carnegie opined that "theparent who leaves his son enormous wealth generally deadens the talents and energies of theson, and tempts him to lead a less useful and less worthy life than he otherwise would..."(66)While in theory increases in wealth should reduce labor supply, empirically economists havenot found strong support for this proposition.(67)

**Wealth taxes, the distribution of wealth, and fairness**

	Some suggest that, in addition to their role in producing Federal revenue, thetransfer taxes may help prevent an increase in the distribution of wealth. There are relativelyfew analyses of the distribution of wealth holdings.(68) Conventional economic wisdom holdsthat the Great Depression of the 1930s and the second world war substantially reduced theconcentration of wealth in the United States, and that there has been no substantial changein the succeeding decades. Most analysts assign no role to tax policy in the reduction inwealth concentration which occurred between 1930 and 1945. Nor has any analyst beenable to quantify what role tax policy might have played since the second world war.(69)

	Others note that the income tax does not tax all sources of income. They suggestthat by serving as a "backstop" for income that escapes income taxation, the transfer taxesmay help promote overall fairness of the U.S. tax system. Others counter that to the extentthat much wealth was accumulated with after-(income)-tax dollars, as an across-the-boardtax on wealth, transfer taxes tax more than just those monies that may have escaped theincome tax. In addition, depending upon the incidence of such taxes, it is difficult to makean assessment regarding the transfer taxes' contribution to the overall U.S. tax system.

	Even if transfer taxes are believed to be borne by the owners of the assets, anadditional conceptual difficulty is whether the tax is borne by the generation of thetransferor or the generation of the transferee. The design of the gift tax illustrates thisconceptual difficulty. A tax is assessed on the transferor for taxable gifts. Assume, forexample, a mother makes a gift of $1 million to her son and incurs a gift tax liability of$500,000. From one perspective, the gift tax could be said to have reduced the mother'scurrent economic well-being by $500,000. However, it is possible that, in the absence of thegift tax, the mother would have given her son $1.5 million, so that the gift tax has reducedthe son's economic well-being by $500,000. It also is possible that the economic well-beingof both was reduced. Of course, distinctions between the donor and donee generations maynot be important to assessing the fairness of transfer taxes if both the donor and donee haveapproximately the same income.(70)

1.   This document may be cited as follows:  Joint Committee on Taxation, *Present Law andBackground Relating to Estate and Gift Taxes* (JCX-2-98), January 27, 1998.
2.   See also Joint Committee on Taxation, *Description and Analysis of Tax ProposalsRelating to Savings and Investment (Capital Gains, IRAs, and Estate and Gift Tax*) (JCS-5-97),March 18, 1997 (Part IV. Estate and Gift Taxation).
3.   Prior to 1976, separate tax rate schedules applied to the gift tax and the estate tax. 
4.   Due to the operation of the unified credit, the first $625,000 in cumulative taxabletransfers is effectively exempt from estate and gift tax. For transfers in excess of $625,000, estateand gift tax rates begin at 37 percent. 
5.   Thus, if a taxpayer has made cumulative taxable transfers in excess of this amount, his orher average transfer tax rate is 55 percent. 
6.   For purposes of the 50-percent and 25-percent tests, the value of the property isdetermined without regard to its current use value. 
7.   The term "qualified heir" means a member of the decedent's family, including his spouse,lineal descendants, parents, and aunts or uncles of the decedent and their descendants. 
8.   In the case of qualifying real property where the material participation requirement issatisfied, the real property which qualifies for current use valuation includes the farmhouse, orother residential buildings, and related improvements located on qualifying real property if suchbuildings are occupied on a regular basis by the owner or lessee of the real property (or byemployees of the owner or lessee) for the purpose of operating or maintaining the real property orthe business conducted on the property. Qualified real property also includes roads, buildings, andother structures and improvements functionally related to the qualified use. 
9.   For this purpose, a direct skip is any transfer subject to estate or gift tax of an interest inproperty to a skip person (e.g., a gift from grandparent to grandchild). A taxable termination is atermination (by death, lapse of time, release of power, or otherwise) of an interest in property heldin trust unless, immediately after such termination, a non-skip person has an interest in theproperty, or unless at no time after the termination may a distribution (including a distributionupon termination) be made from the trust to a skip person. A taxable distribution is a distributionfrom a trust to a skip person (other than a taxable termination or a direct skip). 
10.   The term "death taxes" is used to refer to taxes that are imposed at the time of thedeath of an individual. As used herein, the term includes taxes with other names. Such taxesinclude "inheritance taxes" and "estate taxes." An "inheritance tax" is a tax on the right to receiveproperty at death from an individual and generally is measured by the amount that a particularlegatee receives from the decedent. An "estate tax" is a tax on the right to transfer property atdeath and generally is measured by the total amount passing at the time of the decedent's death.Historically, inheritance taxes were imposed by States, while estate taxes were imposed by theFederal Government. 
11.   Act of July 6, 1797, 1 Stat. 527. 
12.   Act of June 30, 1802, 2 Stat. 148. 
13.   Act of July 1, 1862, 12 Stat. 432, 483; Act of July 15, 1870, 16 Stat. 256. 
14.   War Revenue Act of 1898, 30 Stat. 448, 464 (July 4, 1898). 
15.   See quotation in Paul, Randolph E., Taxation in the United States, p. 88 (Boston,1954). 
16.   Act of September 8, 1916, 39 Stat. 756. 
17.   This rule is contained in section 2043 of present law. 
18.   This rule is contained in section 2037 of present law. 
19.   Act of March 3, 1917, 39 Stat. 1000. 
20.   This rule is now contained in sections 2041 and 2514 of present law. 
21.   This rule is now contained in section 2038 of present law. 
22.   This rule is now contained in section 2011 of present law. The size of the credit has notchanged even though the Federal estate tax rates subsequently have been changed several times. 
23.   Revenue Act of 1932, 47 Stat. 169 (June 6, 1932). 
24.   This rule is now contained in section 2036(a) of present law. 
25.   Act of May 10, 1934, 48 Stat. 680. 
26.   Act of August 30, 1935, 49 Stat. 1014. 
27.   Revenue Act of 1940, 54 Stat. 516. 
28.   Act of September 20, 1941, 55 Stat. 687. 
29.   The $60,000 deathtime and the $30,000 lifetime exemptions remained at these levelsuntil the Tax Reform Act of 1976 when the estate and gift taxes where combined into a singleunified tax that could be reduced by a unified credit which replaces the two exemptions. 
30.   Act of October 21, 1942, 56 Stat. 798. 
31.   Revenue Act of 1948, 62 Stat. 110. 
32.   This rule is now contained in section 2042 of present law. 
33.   P.L. 85-566. 
34.   This rule has been subsequently modified, and is now contained in section 6166 ofpresent law. 
35.   P.L. 94-455. 
36.   These rules are contained in sections 2001 and 2501 of present law. 
37.   This rule is now contained in section 2035 of present law. 
38.   These rules are now contained in section 2032A of present law. 
39.   This rule is now contained in section 2518 of present law. 
40.   Crude Oil Windfall Profits Act of 1980 (P.L. 96-223). 
41.   P.L. 97-34. 
42.   This rule in now contained in section 2056 of present law. 
43.   P.L. 99-514.
44.   These rules are now contained in sections 2601 through 2654 of present law.
45.   These rules are contained in sections 2701 through 2704 of present law. 
46.   P.L. 103-66. 
47.   P.L. 105-34.
48.   See description of changes made to the estate tax in 1976 in Part I.B., above.
49.   The 1988 percentage of decedents liable for estate tax of 0.87 may overstate the nadirachieved by the increase in the unified credit to an exemption equivalent amount of $600,000.This is because the 1981 legislation also increased the marital exemption to an unlimitedexemption. (See Part I.B., above.) An increase in the marital exemption would be expected toreduce the percentage of decedents liable for the estate tax, both permanently and during atemporary period following the increase. The permanent effect results from some married coupleshaving neither spouse liable for estate tax. The temporary reduction in the percentage ofdecedents liable for estate tax arises as follows. A married couple may have sufficient assets to besubject to the estate tax. During the transition period in which husbands and wives first takeadvantage of the unlimited marital exemption, the number of decedents liable for estate tax falls asthe first spouse to die takes advantage of the expanded marital deduction, despite the fact that thesurviving spouse subsequently dies with a taxable estate. In the long run, the number of newcouples utilizing the unlimited marital deduction may be expected to approximately equal thenumber of surviving spouses becoming taxable after their decedent spouse had claimed theunlimited marital deduction.
50.   The following analysis assumes that the capital accumulated is physical or businessintangible capital. Real per capita GNP could grow if individuals accumulated more knowledgeand skills, or what economists call "human capital." Accumulation of human capitalunaccompanied by the accumulation of physical or business intangible capital would notnecessarily lead to increasing numbers of decedents becoming liable for estate tax. 
51.   This analysis assumes that the capital accumulation is held broadly. If the growth in thecapital stock were all due to a declining number of individuals doing the accumulating, then thedistribution of wealth would be becoming less equal and real growth could be accompanied by adeclining percentage of decedents being liable for estate tax. 
52.   For a survey of the transfer tax systems of 28 countries see Joint Committee onTaxation, ("JCT"), *Issues Presented by Proposals to Modify the Tax Treatment of Expatriation*(JCS-17-95), June 1, 1995, pp. C-1 through C-17. In Australia the transferee receiving assets withaccrued capital gains transferred at death retains the transferor's basis in the assets (carryoverbasis). In Canada, gains accrued on assets held by a taxpayer at the time of his or her death aretreated as realized and taxable as income to the taxpayer. Assets transferred to a spouse areuntaxed but retain the decedent spouse's basis (carryover basis). 
53.   JCT, *Issues Presented by Proposals to Modify the Tax Treatment of Expatriation*. 
54.   Thomas A. Barthold and Takatoshi Ito, "Bequest Taxes and Accumulation ofHousehold Wealth: U.S.-Japan Comparison," in Takatoshi Ito and Anne O. Kreuger (eds.), ThePolitical Economy of Tax Reform (Chicago: The University of Chicago Press), 1992, pp.250-251. 
55.   Adoption by another did not cause an adoptee to lose his or her legal right to be an heirof his or her biological parents. 
56.   Barthold and Ito, "Bequest Taxes and Accumulation of Household Wealth," p. 249. 
57.   Economists call income and consumption "flow" concepts. In simple terms, a flow canonly be measured by reference to a unit of time. Thus, one refers to a taxpayer's annual income ormonthly consumption expenditures. 
58.   Economists call wealth a "stock" concept. A stock of wealth, such as a bank account,may generate a flow of income, such as annual interest income. 
59.   For a more detailed discussion of the incidence of taxes on the income from capital andthe responsiveness of saving to after-tax rate of returns, see Joint Committee on Taxation,*Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens* (JCS-7-93),June 14, 1993, pp. 44-46. 
60.   See, Laurence J. Kotlikoff and Lawrence H. Summers, "The Role of IntergenerationalTransfers in Aggregate Capital Accumulation," Journal of Political Economy, 89, August, 1981.Also see, Laurence J. Kotlikoff, "Intergenerational Transfers and Savings," Journal of EconomicPerspectives, 2, Spring, 1988. For discussion of these issues in the context of wealth transfertaxes see, Henry J. Aaron and Alicia H. Munnell, "Reassessing the Role for Wealth TransferTaxes," National Tax Journal, 45, June, 1992. For recent attempts to calculate the share of theaggregate capital stock attributable to the bequest motive, see Barthold and Ito, "Bequest Taxesand Accumulation of Household Wealth," and William G. Gale and John Karl Scholz,"Intergenerational Transfers and the Accumulation of Wealth," Journal of Economic Perspectives,8, Fall 1994, pp. 145-160. Gale and Scholz estimate that 20 percent of the nation's capital stockcan be attributed to "intentional transfers" (including inter vivos transfers, life insurance, andtrusts) and another 30 percent can be attributed to bequests, whether planned or unplanned.
61.   Franco Modigliani, "The Role of Intergenerational Transfers and Life Cycle Saving inthe Accumulation of Wealth," The Journal of Economic Perspectives, 2, Spring, 1988. In thisarticle, Modigliani argues that 15 percent is more likely an upper bound. 
62.   See, B. Douglas Bernheim, "How Strong Are Bequest Motives? Evidence Based onEstimates of the Demand for Life Insurance and Annuities," Journal of Political Economy, 99,October 1991, pp. 899-927. Bernheim finds that social security annuity benefits raise lifeinsurance holdings and depress private annuity holdings among elderly individuals. He interpretsthis as evidence that elderly individuals choose to maintain a positive fraction of their resources inbequeathable forms. For an opposing finding, see Michael D. Hurd, "Savings of the Elderly andDesired Bequests," American Economic Review, 77, June 1987, pp. 298-312. Hurd concludesthat "any bequest motive is not an important determinant of consumption decisions and wealthholdings....Bequests seem to be simply the result of mortality risk combined with a very weakmarket for private annuities" (p. 308). 
63.   Steven M. Fazzari, R. Glenn Hubbard, and Bruce C. Petersen, "Financing Constraintsand Corporate Investment," Brookings Papers on Economic Activity, 1988, pp. 141-195. 
64.   Douglas Holtz-Eakin, David Joulfaian, and Harvey S. Rosen, "Sticking It Out:Entrepreneurial Survival and Liquidity Constraints," Journal of Political Economy, 102, February1994, pp. 53-75. Holtz-Eakin, Joulfaian, and Rosen study the effect of receipt of an inheritance onwhether an entrepreneur's business survives rather than whether an on-going business taxed as anasset in an individual's estate survives. They find that "the effect of inheritance on the probabilityof surviving as an entrepreneur is small but noticeable: a $150,000 inheritance raises theprobability of survival by about 1.3 percentage points," and "[i]f enterprises do survive,inheritances have a substantial impact o their performance: the $150,000 inheritance ... isassociated with a nearly 20 percent increase in an enterprise's receipts" (p.74).

	These results do not necessarily imply that the aggregate economy is made better off byreceipt of inheritances. Survival of the entrepreneur may not be the most highly valued investmentthat could be made with the funds received. 
65.   See George Cooper, A Voluntary Tax? New Perspectives on Sophisticated TaxAvoidance, (Washington, D.C.: The Brookings Institution), 1979. Also, see B. DouglasBernheim, "Does the Estate Tax Raise Revenue?" in Lawrence H. Summers (ed.), Tax Policy andthe Economy, 1, (Cambridge, Mass.: The MIT Press), 1987; and Alicia H. Munnell with NicoleErnsberger, "Wealth Transfer Taxation: The Relative Role for Estate and Income Taxes," NewEngland Economic Review, November/December 1988. These studies pre-date the enactment ofchapter 14 of the Internal Revenue Code. The purpose of chapter 14 is to improve reporting ofasset values in certain transfers. 
66.   Andrew Carnegie, "The Advantages of Poverty," in The Gospel of Wealth and OtherTimely Essays, Edward C. Kirkland (ed.), (Cambridge, MA: The Belknap Press of HarvardUniversity Press), 1962, reprint of Carnegie from 1891. 
67.   For a review of this issue, see John Pencavel, "Labor Supply of Men: A Survey," inOrley Ashenfelter and Richard Layard (eds.), Handbook of Labor Economics, vol. I, (New York,NY: North-Holland Publishing Co.) 1986. For a direct empirical test of what some refer to as the"Carnegie Conjecture," see Douglas Holtz-Eakin, David Joulfaian, and Harvey S. Rosen, "TheCarnegie Conjecture: Some Empirical Evidence," Quarterly Journal of Economics, 108, May1993, pp. 413-435. Holtz-Eakin, Joulfaian, and Rosen assess the labor force participation offamilies that receive an inheritance. They find that "the likelihood that a person decreases his orher participation in the labor force increases with the size of the inheritance received. Forexample, families with one or two earners who received inheritances above $150,000 [in1982-1985 constant dollars] were about three times more likely to reduce their labor forceparticipation to zero than families with inheritances below $25,000. Moreover, ...high inheritancefamilies experienced lower earnings growth than low inheritance families, which is consistent withthe notion that inheritance reduces hours of work" (pp.432-433).
68.   For some exceptions, see Martin H. David and Paul L. Menchik, "Changes in CohortWealth Over a Generation," Demography, 25, August 1988; Paul L. Menchik and Martin H.David, "The Effect of Income Distribution on Lifetime Savings and Bequests," AmericanEconomic Review, 73, September 1983; and Edward N. Wolff, "Estimate of Household WealthInequality in the U.S., 1962-1983," The Review of Income and Wealth, 33, September 1987. 
69.   See Michael K. Taussig, "Les inegalites de patrimoine aux Etats-Unis," in Kessler,Masson, Strauss-Khan (eds.) Accumulation et Repartition des Patrimoines. Taussig estimatesshares of wealth held by the top 0.5 percent of wealth holders in the United States for variousyears between 1922 and 1972. Wolf, in "Estimate of Household Wealth Inequality in the U.S.,1962-1983," does not attribute any movements in wealth contribution directly to tax policy, butrather to the changes in the relative values of housing and corporate stock.
70.   Researchers have found that the correlation of income between parents and children isless than perfect. For analysis of the correlation of income among family members acrossgenerations, see Gary R. Solon, "Intergenerational Income Mobility in the United States,"American Economic Review, 82, June 1992, and David J. Zimmerman, "Regression TowardMediocrity in Economic Stature," American Economic Review, 82, June 1992.****