Tax Puzzle: Lifetime Capital Taxation & Wealth Transfer Taxation

A somewhat “high brow” economic working paper has been making the rounds among estate planning attorneys, economists, financial planners, and policymakers in recent weeks. The article, viewable online in full, is entitled “Taxing More (Large) Family Bequests: Why, When, Where?”

While the paper is quite dense, the central themes are those often faced by current policymakers and affecting families as they plan their estate.

Essentially, the paper discusses a well-known taxation “puzzle.” Over the past few decades tax revenues from wealth transfers (i.e. estate taxes) have decreased. This is true both in the United States and elsewhere. At the same time, tax revenues based on lifetime gains have grown in recent years with no sign of stopping.

What is bringing about this change?

The article authors first discount some common arguments regarding a general “anti-tax” movements, the lobbying efforts of the wealthy, and similar claims. These arguments fail, they suggest, because they do not explain why tax revenues from lifetime wealth did not similarly decrease with wealth transfers. Put another way, those arguments may explain why global tax levels would have fallen but not necessarily why the one tax dropped and not the other.

Instead, the authors suggest that taxes on estates being passed from one generation to the next have decreased, in part, because of the unique role of the family in these issues. They argue that other scholars are have overlooked the fact that “the distinct character of inheritance taxation where family values, intergenerational links, and relationships to (one’s own) death play a crucial role” in policy determinations.

Pushing the idea further, the authors suggest that there is growing conflict between family values and social justice. Lifetime taxes speak to the idea of “social justice” with the wealthy asked to provide for the well-being of those with less means. Alternatively, inheritance taxes seem to impinge upon families and their ability to transfer property internally. In this conflict policymakers in recent years have protected the family and placed less emphasis on so-called “social justice.”

In the end, the authors suggest that the best solution is to actually increase the tax burden on the largest family inheritances while, at the same time, decreasing the tax burden on lifetime transfers to family members or charity. They summarize that this approach “is the only workable measure that endeavors to reconcile arguments of family values with principles of social justice, while also taking due consideration of the sharp increase in life expectancy in most developed countries.”

Naturally, all of these ideas are somewhat theoretical and philosophical. However, they do offer a good primer on many of the themes common in tax policy debates, including those that affect New York estate planning.

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