Inheritance Tax Laws

INHERITANCE TAX LAWS

INHERITANCE TAX LAWS. Two types of death duties are popularly called inheritance taxes. They are levied, essentially, as excise taxes on the right to transfer property at time of death. The primary death tax has been the federal estate tax, which is based on the net value of the deceased's estate. In addition, most states have imposed inheritance taxes, based on the value of the shares received by individual heirs.

The federal government adopted an estate tax in 1916.Prior to that, it had imposed an inheritance tax on three occasions: 1797–1802, 1862–1870, and 1898–1902. These acts were all initially adopted as emergency revenue measures. In addition, the income tax statute of 1894 taxed, as income, money and personal property received by inheritance, but this law was held unconstitutional. A federal gift tax was first enacted in 1924, repealed in 1926, and revived in 1932.This tax was designed to complement the estate tax by taxing transfers that would reduce the donor's taxable estate. In 1976, the estate and gift tax structures were combined into a single unified gift and estate tax system, which might be more accurately described as a wealth transfer tax.

Estate and gift tax rates have been designed to be progressive, with exemptions for the vast majority. The exemption was initially $50,000, and this fluctuated within a narrow band through 1976, when it was $60,000.At this point, estate taxes returns were filed following about 8 percent of adult deaths. By 1986, the exemption rose to $500,000 and only about 1 percent of adult deaths yielded estate taxes. From 1941 until 1976, the marginal tax rate started at 3 percent and climbed to 77 percent on estates exceeding $10,000,000.The top marginal rate was cut to 50 percent in 1981.The share of federal revenue from estate and gift taxes has generally fallen over time, averaging over 4 percent in 1941, 1.5 to 2 percent between 1945 and 1980, and a bit over 1 percent during the 1990s. Simultaneously, estate tax law has grown progressively more complicated, with provisions for marital deductions, generation-skipping transfers, the valuation of business assets, deductions for charitable contributions, conservation easements, credits for state death taxes, and tax deferral, among others.

Inheritance, estate, and gift taxes were originally seen as a method of breaking up large accumulations of wealth without harming the economy. Beginning in the late 1970s, however, empirical studies by economists across the political spectrum began to question the efficacy of these taxes, showing that they had little impact on the wealth distribution and suggesting that they created incentives for owners of capital to transfer resources away from their most productive uses. Analysis suggested that the estate tax increased the effective tax burden on capital income, thus discouraging saving, encouraging consumption, and reducing long-run economic growth. Economists estimated that the costs of complying with or avoiding these taxes were as large as the revenues raised by the tax and that they may actually result in net losses for the federal government. Others complained that these taxes unfairly hit those not adept at estate planning and required the breakup of family farms and businesses. Opponents caught the public's attention by labeling them "death taxes." In a 1982 referendum, Californians voted two to one to eliminate that state's inheritance taxes. Other states followed suit, as did Canada, Australia, and Israel. In 2001, President George W. Bush signed a bill that gradually increased exemptions (from $1 million to $3.5 million) and slightly reduced the top tax rate between 2002 and 2009, before completely eliminating the federal estate tax in 2010.However, the law reverts back to the initial levels in 2011, unless otherwise changed.

BIBLIOGRAPHY

Gale, William G., and Joel B. Slemrod. "Policy Watch: Death Watch for the Estate Tax?" Journal of Economic Perspectives 15, no.1 (2001): 205–218.

Joint Economic Committee Study, U.S. Congress. "The Economics of the Estate Tax." December 1998. http://www.house.gov/jec/fiscal/tx-grwth/estattax/estattax.pdf

Joulfaian, David. "A Quarter Century of Estate Tax Reforms." National Tax Journal 53, no.3 (September 2000): 343–360.

Pechman, Joseph. Federal Tax Policy. 5th ed. Washington, D.C.: Brookings Institution, 1987.

Robert Whaples

See also Income Tax Cases ; Taxation .