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Federal transfer taxes serve two purposes they are

a source of revenue and they are a means of preventing undue concentrations of wealth. The debates preceding the various Acts reflected sharp differences in social, economic and political philosophies. In 1924 and 1926, Secretary of the Treasury Andrew Mellon sought repeal of the estate tax, arguing that death duties were within the exclusive domain of the states and that there was no social necessity for breaking up large fortunes. The Secretary also argued that the estate tax would lead to the destruction of capital and be harmful to the community.* After compromises, however, proponents of the tax prevailed.**

In 1934, the Senate Finance Committee, in proposing a top estate tax rate of 50 percent, stated that it "will tend to prevent undue concentrations of wealth". In 1935, during the Depression, when the rate was increased to 70 percent, President Roosevelt stated that "transmission from generation to generation of vast fortunes by will, inheritance or gift, is not consistent with the ideals of the American people".**

*

It is apparent that the question whether the purposes

for enactment of the federal transfer taxes have been achieved and are in fact "* * * consistent with the ideals of the American people", has been debated for years.

* Paul, Taxation in the United States pp. 134-138 (1954).

** The Revenue Act of 1926 repealed the gift tax; it was re

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These taxes, which in 1981 will produce slightly over 1% of total revenues (an estimated $7.2 billion), are not a major source of revenue.*

Inflation, however, will increase

the absolute amount of such taxes in the future, as under any progressive rate structure, and if income tax reductions are enacted which result in increased savings, estate and gift tax collections would increase still further.

Proponents of the transfer tax system argue that these taxes contribute importantly to the objective of raising Federal revenues by reference to ability-to-pay that in this respect

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The pro

they complement the intended effect of our income tax system. Further, while the income tax does not reach individuals to the extent they invest their savings in non-income producing property which is held until death, or in tax-exempt bonds, or tax shelters, the estate tax is imposed at progressive rates on the accumulation of assets during the course of a lifetime. ponents argue that the estate tax thereby helps to distribute the tax burden among all individuals, an important objective, according to such proponents, because our income tax system is a voluntary compliance, self-assessment system resting in part on public confidence in the tax system as a whole.

*

Pamphlet Setting Out Background and Description of Estate and Gift Tax Bills prepared by the Staff of the Joint Committee on Taxation (May 1, 1981).

The proponents also suggest that the fundamental pur

pose of limiting undue concentrations of wealth is as valid today as it was in 1916 and 1924 and that untaxed transfers of substantial wealth conflict with basic social values, principally equality of opportunity. They point out that throughout the world, in developed countries in which property is privately-owned, taxation of property at death is a common form of taxation.

Opponents of the transfer tax argue that it is a tax

on capital which adversely affects the incentive to save. They point out that it results in enormous complexity in the transfer of wealth from generation to generation, often causing lock-in effects, decreasing the mobility of capital, and imposing other inefficiencies and transaction costs. They point out that it is not properly justified as a back-stop to the income tax system because it imposes tax burdens on persons who accumulate their estates entirely out of fully tax-paid income to the same extent as those who have held non-income producing property, tax-exempt bonds, or tax shelters.

Such opponents argue that our transfer tax system has failed to break up concentrations of wealth; has failed to enhance equality of opportunity; and, as stated above, has been a disincentive to investment, productivity, and enterprise.

Against this background of argument, we suggest that the following considerations, among others, are certainly rele

vant:

1.

The purposes and effects of the federal transfer tax laws, as outlined above, must be carefully weighed in light of long term economic, social, and political objectives, and in light of revenue needs. The proper place for these laws in our tax system requires consideration of the appropriate level of rates, the degree of progessivity, and the amount of the exemption or the threshold at which a person's transfers of property during life and at death begin to be taxed. In other words, to the extent that the purposes and effects of these laws are valid, the segments of society which are to bear the burden of these transfer taxes must be determined consistent with the economic, social, and political objectives to be achieved.

2. Under existing economic conditions in the United. States, the impact, if any, of the estate tax on the propensity to save and upon the actual stock of savings must be considered. Repeal or reduction of the tax by reference to these considerations would, however, require a decision as to the most effective allocation of the estate tax revenues in question, both now and as they might increase in the future. Would the effect on savings be greater if these tax reductions took the form of reduced marginal income tax rates? What are the most important disincentives to saving?

3. If Congress determines that the fundamental purposes of the laws do not justify their existence, in whole or in part, in light of their perceived disadvantages, Congress must consider the implications of repeal.

a.

Current law provides a new income tax basis

for assets held at death.

Repeal of the estate tax

would remove a major justification for not imposing

a tax at death on unrealized capital gains. It is possible, then, that the estate tax would be replaced by another "death tax".

b. The present estate tax law permits a

limited credit for death taxes paid to the states.
Repeal may be replaced by higher state levies and
may lead to more competition among the states.
Some states could create "havens" from death taxes,
thereby encouraging a migration of older citizens
to those states, a phenomenon which occurs to a
lesser extent under the present system. *

C. Tax-free lifetime transfers may create opportunities for intra-family gifts to persons in lower tax brackets, resulting in an erosion of the income tax base, although it is arguable that imposition of federal death taxes has the same effect.**

⭑ It is instructive that the increase in the state death tax credit in 1926 from 25 percent to 80 percent had the support of those states which then had inheritance taxes but feared that their wealthy residents would move to states with no inheritance taxes. It was thought that the retention of the federal tax made it useless to move. Another effect of the increase in the credit was that it permitted the states to preempt for themselves revenues which would otherwise be pay

able to the federal government. Paul, Taxation in the United

States 139 (1954).

** Miller, The Federal Gift Tax: Rate Revision, 51 A.B.A.J 333 (April, 1965).

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