Leveling the playing field between inherited income and income from work through an inheritance tax

A ballpoint pen and a mobile phone rest on top of a last will and testament document that is part of the estate planning process.  This image is photographed using a very shallow depth of field.
Editor's note:

The report below is a chapter from the book, “Tackling the tax code: Efficient and equitable ways to raise revenue.” Read the full book here.

The Problem

The core objectives of tax policymaking should be to raise revenue in an efficient and equitable manner. Current taxation of estates and gifts (and nontaxation of inheritances) fails to meet these goals, perpetuating high levels of economic inequality and impeding intergenerational mobility. The current system also provides an intense incentive to delay realization of capital gains until death. These shortcomings distort capital markets, encourage nonproductive estate tax planning, and limit the effectiveness of the overall tax code.

The Proposal

Batchelder proposes to reform the way we tax inheritances by taxing inherited income through income and payroll taxes. She suggests three lifetime exemption levels—$2.5 million, $1 million, and $500,000—to ensure that the proposal only taxes individuals receiving the largest inheritances. Batchelder’s proposal would raise between $337 billion and $1.4 trillion over the next ten years. The proposal would limit tax avoidance through reforms to the rules governing the timing and valuation of transfers through trusts and other devices.

The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this article. Neither is currently an officer, director, or board member of any organization with a financial or political interest in this article.