Equal Opportunity and Inheritance Taxation

TABLE OF CONTENTS I. INTRODUCTION 470 II. EQUALITY OF OPPORTUNITY AND EQUALITY OF RESOURCES 476 III. CONCEPTUALIZING AN EQUAL OPPORTUNITY INHERITANCE TAX 485 A. Equal Inheritance and "Leveling Up" 489 B. The Economic Consequences of Equal Inheritance 496 IV. DESIGNING AN EQUAL OPPORTUNITY INHERITANCE TAX 501 A. Relatives and Strangers 507 B. No Penalty on Generation-Skipping 516 C. Timing 521 1. Inheritance and the Life Cycle 523 2. Taxing Contingencies and Expectations 532 V. CONCLUSION 542 Equality of opportunity is understood to be one of the bedrock principles supporting the taxation of inheritance. The familiar idea is that inherited wealth offers an unjustified head start for some individuals at the expense of others. In political theory, this principle is closely identified with the branch of liberalism known as resource equality. But the resource equality ideal has not been fully translated into the legal literature. The major legal writings on inheritance taxation use the term "equal opportunity" quite generally and often blend equal opportunity with goals that are distinct, like wealth equalization. This Article revisits the topic of inheritance taxation to see whether a single-minded focus on equality of opportunity, interpreted as resource equality, can shed new light on questions of legal design. I conclude that the present estate tax and major proposals for inheritance taxation only weakly track the equal opportunity principle. A system of inheritance aimed at equality of opportunity would look radically different from current law and from classic proposals for reform. It is an open question whether an inheritance tax structured along these lines could be made politically attractive, and in this Article, I do not attempt that task. Instead, my aim is to show the surprising gap between both current law and major reform proposals, on the one hand, and equal opportunity, rigorously interpreted, on the other. I draw out four implications of equal opportunity for the design of inheritance taxation. First, the equal opportunity principle supports inheritance taxation in combination with a social inheritance, meaning a government expenditure program that would pay a universal, public inheritance. Second, in an equal opportunity regime, gifts and inheritance received from close relatives would be taxed, while those received from peers, spouses, friends, and strangers would be exempt. This counterintuitive rule would reverse the standard result, which is to tax inheritance from parents, children, and other close relatives at rates equal to or lower than those at which inheritance from others is taxed. Third, the equal opportunity view implies no penalty on so-called "generation-skipping transfers," which occur when a grandparent leaves her wealth to her grandchildren rather than to her children. Fourth and finally, equal opportunity suggests higher rates of taxation on gifts and bequests received by younger individuals than on those received by older individuals. I. INTRODUCTION Equality of opportunity is widely understood as one of the bedrock principles supporting the taxation of inheritance. The familiar idea is that every individual should begin life with a fair and equal share of society's resources and that inherited wealth offers an unjustified advantage for some over others. (1) In political theory, this ideal is closely identified with the branch of liberalism known as resource equality. Resource egalitarians tend to emphasize ex ante equality in the distribution of wealth (and other resources). In contrast, they do not necessarily condemn inequality in wealth (or other resources) arising from individuals' differential earning power or investment skill. …