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Rethinking the Estate and Gift Tax: Overview

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Abstract

This paper surveys, integrates, and extends research on estate and gift taxes. The paper begins with information on features of U.S. transfer taxes, characteristics of recent estate tax returns, the evolution of transfer taxes, the role of such taxes in other countries, and theory and evidence concerning why people give intergenerational transfers. The next sections examine the incidence, equity, and efficiency of transfer taxes. Subsequent sections cover administrative issues and the effects on saving, labor supply, entrepreneurship, inter vivos gifts, charitable contributions, and capital gains realizations. The paper closes with a discussion of policy options and a short conclusion.

Opponents claim that the estate tax is imposed at a time—death—that is at best illogical and at worst morally repugnant. They argue that the tax impairs economic growth, destroys small businesses and family farms, encourages spendthrift behavior, generates huge compliance costs and leads to ingenious avoidance strategies. As an inefficient, inequitable, and complex levy, the “death tax” is thought to violate every norm of good tax policy.

Supporters find the criticisms to be overstated or wrong. They note that the tax is only levied on the estates of about 2 percet of Americans who die—and only on those with substantial estates. They believe that a highly progressive tax that patches loopholes, helps provide equality of opportunity, reduces the concentration of wealth, and encourages charitable giving can’t be all bad.

In light of these issues, the Office of Tax Policy Research at the University of Michigan Business School and the Brookings Institution convened a conference on May 4-5, 2000, attended by leading economists and lawyers. The conference revolved around ten papers that addressed particular features of the U.S. estate and gift tax. This volume brings together those papers and formal comments by discussants. The purpose of this introductory chapter is to help frame the estate tax debate, and to interpret and integrate existing research on the tax.

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