The Future of Transfer Taxation: Repeal, Restructuring and Refinement, or Replacement

Taxation of gratuitous transfers is a venerable component of the federal tax system. We have had an estate tax,(1) which includes within its base certain lifetime dispositions testamentary in nature, since 1916. Taxation of gifts(2) has been a significant component since 1932.(3) With a tentative beginning in 1976,(4) aborted retroactively and replaced with a substitute in 1986,(5) the estate and gift tax system is now supplemented with a system for taxing generation-skipping transfers (GST).(6) As a result of reforms enacted in 1976,(7) and later enactments, the system is now largely unified and is, at least in a formal sense, coherent. However, the transfer tax system remains deficient in a number of ways. The adequacy of the system can be measured in terms of whether it accomplishes its objectives. Under this measure, the system, apart from raising comparatively insignificant revenue, is a failure. Its adequacy can also be measured in terms of the traditional tests of a good tax system, which employ standards of efficiency, fairness, and neutrality. Under this measure, the system also fails. Concededly, no tax system can be expected to be perfect. The extent to which imperfections can be reasonably tolerated and accepted is in part a function of the revenues produced by the system. The imperfections within a system are costs which should be borne only if the revenues generated are adequate to warrant the costs. The current system is too costly. It can be improved. However, the improvements possible in relation to revenues likely to be generated from transfer taxation under the existing system, if implemented, are unlikely to make the costs of the system acceptable. The fundamental problem under the present system lies in its focus on the transferor, the donor, or decedent who is transferring accumulated wealth. The tax is imposed on the transferor and is measured by the type and value of wealth transferred, and the extent of imposition is determined by reference to the circumstances of the transferor and by exclusions and exemptions accorded the transferor. Such a system inherently invites manipulation and avoidance by the transferor and penalizes those who are unwary or who fail to pursue avoidance measures. The system's inherent invitation to manipulate and its penalties for failure to do so cause it to be unfair, inefficient, and nonneutral.Whether accumulated wealth is a proper subject of taxation is a matter over which economists disagree(8) and is essentially a political question. Assuming that wealth transfer or receipt is a proper base for the imposition of tax, the question of how much revenue should be derived from such base is also a political question. However, the question of whether a particular system for taxing accumulated wealth is useful and worthwhile, though not devoid of political significance, is essentially a practical and utilitarian matter. This essay suggests that as a practical and utilitarian matter, the present estate, gift, and generation-skipping tax system should be abandoned.(9) It acknowledges that the present system can be improved. It suggests, however, that the improvements possible are not sufficient to warrant retention of the old system. It suggests that if wealth is to be taxed upon transfer, two models which focus on the transferee rather than the transferor, are likely to offer more acceptable methods of accomplishing that task. One of these models is an accessions tax. The other treats the receipt of gifts and bequests as taxable income to the recipient. This essay first assesses the adequacy of the existing system in relation to its apparent objectives, and then examines the system under the policy measures of fairness, efficiency, and neutrality.(10) It concludes with a consideration of alternative models for taxing the receipt of wealth.II. GOALS OF THE TRANSFER TAX SYSTEMSeveral goals have, from time to time, been ascribed to the transfer tax system. One that has been articulated from time to time, particularly during the 1930s, is the breaking up or reducing of concentrations of wealth. …