TABLE 19.-ESTIMATED CHANGES IN EFFECTIVE RATES OF TRANSFER TAX UNDER THE PROPOSED PROGRAM, BY SIZE OF GROSS TRANSFERS DURING LIFE AND AT DEATH; MARRIED TRANSFERORS 1

1 The estimates in this table relate to the cases of married taxpayers survived by their spouses.
To facilitate a comparison of the proposed program with present law, tax liabilities are evaluated
at the time of the taxpayer's death and relate only to the transfers made by him during his life and
at his death.

2 These estimates reflect the full force of all the proposals. During the transition which has
been recommended for reducing transfer tax rates, the indicated increases would nevertheless
be smaller, the indicated decreases larger, due to the exclusion of all prior lifetime gifts from
the unified transfer tax base and the design designation of date of enactment as the basis
date for valuing appreciation of property transferred at death.

These estimates represent the saving to decedents who have utilized the unlimited marital deduction in order to maximize the wealth holdings of their surviving spouses, averaged among all married decedents. The saving in this column is achieved at the death of the 1st spouse, and since it is implicit in this wealth devolution pattern that the 2 spouses regard the family wealth as a unitary estate for their joint and common support, the subsequent increase in transfer tax which occurs on the death of the 2d spouse is shown separately as a future effect of the proposed program. 4Less than 0.05 percent.

TABLE 20.-ESTIMATED CHANGES IN EFFECTIVE RATES OF TRANSFER TAX UNDER THE PROPOSED PROGRAM BY SIZE OF GROSS TRANSFERS DURING LIFE AND AT DEATH; NON-MARRIED

IV-C. THE CASE FOR AND DIMENSION OF TAX
REFORM: DEATH AND GIFT TAXES

I. DESCRIPTION OF PRESENT LAW

ESTATE TAX

The Federal estate tax is levied upon the transfer of property at death. In the normal case, the rate of tax is not affected by the amount of the transfers already made by the decedent during his lifetime. The tax is levied upon the total value of all the property in a decedent's gross estate. The gross estate includes, in general, the property owned by a decedent at the time of his death, plus certain property transferred during his life in which he retained an interest at the time of his death, and property transferred in contemplation of death. The tax is imposed upon the taxable estate; that is, the gross estate less allowable deductions and exemptions. The estate tax is progressive, because the tax rates increase as the size of the taxable estate becomes larger.

An estate tax return must be filed by the estate of every U.S. citizen or resident whose gross estate at the date of death exceeds $60,000. In general, the return (and any tax payable) are due within 15 months of the date of death, although an extension of time may be granted. If the estate consists largely of an interest in a farm or closely held business, the estate may elect to pay the tax attributable to that farm or business interest over a period of up to 10 years.

The executor or administrator of an estate may elect to value the property in the estate either as of the date of the decedent's death, or as of the "alternate valuation date" which is 1 year after death. However, the property sold prior to the alternate valuation date is valued at its sales price. The alternate valuation date provides relief to an estate which contains property that declines in value during the year subsequent to the date of death.

The deductions and exemptions allowed for estate tax purposes include an exemption in the amount of $60,000, and deductions for funeral expenses, administration expenses, claims against the estate, mortgages or indebtedness where the full value of the mortgaged or encumbered property is included in the gross estate, certain State and foreign taxes, losses, charitable transfers, and certain bequests to a surviving spouse. The $60,000 estate tax exemption insures that no one leaving an estate of $60,000 or less will be subject to estate taxation. In addition, if a decedent has taken full advantage of the availability of the marital deduction, no tax is due unless the estate exceeds $120,000. There are no percentage limitations on the charitable contribution deduction for estate tax purposes. However, the amount of the charitable contribution deduction may not exceed the value at which the donated property is included in the gross estate.

A marital deduction is allowed for property passing to the decedent's surviving spouse. This deduction is limited to 50 percent of the "adjusted gross estate," which is defined, in general, as the gross estate minus the allowable deductions (and after elimination of any community property included in the gross estate). The deduction for

charitable transfers and the $60,000 exemption are not required to be taken into account in computing the adjusted gross estate.

Four credits are allowed against the estate tax liability. The most important of these is the credit for State death taxes. The maximum credit allowable for State death taxes is expressed as a percentage of the decedent's taxable estate in excess of $40,000. The effect of this credit is to permit the States to obtain substantial death tax revenues which would otherwise be collected by the Federal Government, without increasing the total death tax burden on their citizens.

Credit against the estate tax is allowed for gift taxes paid by the decedent on transfers which were made by him during his lifetime, but which were included in his gross estate because the transfer was incomplete or because it was made in contemplation of death. The amount of this credit is limited to the amount of the gift tax paid with respect to the property included in the gross estate, or the estate tax paid with respect to such property, whichever is smaller.

In order to prevent the imposition of successive estate taxes on the same property within a brief period, a credit is also allowed for all or part of the estate tax paid with respect to property transferred to a particular decedent, or his estate, from another decedent within 10 years before, or within 2 years after the particular decedent's death. This credit is a vanishing one, since it is reduced by 20 percent for each full 2 years separating the dates of death of the two decedents.

Finally, a credit is allowed for foreign death taxes with respect to property situated in a foreign country which is subject to both United States and foreign estate taxes. The credit is limited to the lesser of the United States or the foreign tax attributable to such propery.

GIFT TAX

Gifts during life are a natural alternative to gifts at death, especially for wealthy individuals who can afford to give away a substantial part of their property during their lifetime without impairing their standard of living or making use of funds needed for emergencies. Consequently, the taxation of gifts during life is a natural companion to the taxation of gifts at death. For this reason, Congress developed a system of Federal gift taxes shortly after the introduction of the Federal estate tax system.

Like the estate tax, the Federal gift tax is imposed upon transfers of property from one person to another. The tax is a liability of the person making the gift and is based upon the value of the transferred property. Unlike a gift at death, the amount of a taxable lifetime gift does not include the tax on that gift.

The existing tax on lifetime gifts is cumulative, that is, the applicable tax bracket is determined by taking into account the sum of all taxable gifts made since enactment of the law in 1932. The tax to be paid in any 1 year is equal to (1) the tax on the aggregate of all taxable gifts made since 1932 less (2) the amount of tax on the aggregate gifts made up to the beginning of the current taxable year. In determining (1) and (2), gift tax rates in effect in the current taxable year are applied. Consequently, the tax is determined by applying the current tax rate which is applicable to the donor's bracket to the gifts made during the year.

In computing the amount of "taxable gifts" in any 1 year, the first $3,000 of gifts to each recipient may be excluded, if the donee receives a present interest in the donated property. This is the so-called "per donee" exclusion. Where a spouse agrees to treat gifts made by the other spouse as having been made one-half by each, a maximum annual exclusion of $6,000 per donee is available.

In addition to the annual "per donee" exclusion, there is a specific exemption of $30,000 of total lifetime gifts to all donees. This exemption may be claimed in full in a single year or, at the taxpayer's option, over a number of years until the full $30,000 exemption is exhausted A married person's specific exemption is increased to $60,000 if the other spouse agrees to treat gifts as having been made one-half by each.

Certain deductions are also allowed in computing the amount of taxable gifts. Gifts made to charitable organizations may be deducted in full. In addition, one-half of the value of gifts between a husband and wife may be made tax-free. This marital deduction corresponds roughly to that allowed for estate tax purposes.

II. GENERAL BACKGROUND

The estate and gift taxes comprise a significant element in the progressivity of the overall Federal tax system. Estate and gift taxes combined constitute only 2 percent of Federal tax receipts, but they play a much larger part in the progressivity structure of the tax system. Roughly, the progressivity element of the individual income tax can be defined as the revenue raised by that portion of the rate schedules in excess of 20 percent. In 1965 this element was $5 billion, while total estate and gift tax liability was $2.7 billion. Studies of the association of wealth and income indicate that estate and gift taxes are involved almost exclusively with families with annual income of over $20,000. Thus the estate and gift taxes are probably responsible for about onethird of the net progressivity in the U.S. tax system.1

However, an analysis of the estate and gift tax system which has developed over the past 45 years reveals many features of the system which run counter to the basic functions of that system.

These features have produced erratic results in the sense that the burden of estate and gift taxes is much heavier on some forms of wealth holdings and on some forms of transfers than on others. The principal problem, therefore, in the present estate and gift tax system is horizontal equity, that is, the unequal treatment of wealth holdings of comparable size as the result of different patterns of transfer of those holdings. The different patterns are the consequence of differing fam

1 At the lower end of the income scale the income tax is progressive due to the personal exemptions. A number of studies, however, suggest that tis progression in the income tax Just about offsets the regressivity of sales and property taxes, leaving the overall tax system as a whole roughly proportional up to income of $10,000-$20,000. We can thus think of the upper income progressivity as the net progressivity.

The extent of the net progressivity contributed by the corporate tax is not fully clear, since this depends mostly on the extent to which the tax is shifted.