Abstract

Excerpted From: Jonathan G. Blattmachr, How Wealth Transfer Taxes Might Reduce Racial Wealth Disparity in America, 20 Pittsburgh Tax Review 297 (Spring, 2023) (66 Footnotes) (Full Document)

This Article will discuss what seems to be the impact of estate, gift and generation-skipping taxes (collectively and commonly referred to as wealth transfer taxes) imposed by the United States (Federal) on the disparity of wealth in America. It describes, in general terms, how those taxes “work.” It also describes, again in general terms, the impact of taxes and alternative forms of funding governments. It describes some of the consequences of the taxes and their impact on human behavior. It discusses how three changes could substantially increase the receipts from wealth transfer taxes. The Article also discusses the potential of using a refundable estate tax credit to provide reparations to families of those who were enslaved in the United States. Such a credit might be politically more likely to be enacted because it would spread the cost of reparations over time, which, in turn, may make them more likely to reduce wealth disparity in America between Black and other Americans. The Article does not discuss other methods of raising revenue through other means, such as the sale of real property owned by the Federal government, or the use of other taxes that could generate revenue, such as by not permitting the so-called tax-free step-up in basis of assets owned at death, the income taxation of interest on certain “municipal bonds,” or the income taxation of certain life insurance proceeds, or the enactment of new taxes such as one on certain internet activities.

I. General Description of America's Wealth Transfer Taxes

The current estate tax system imposed by the Federal government of America started in 1916 and, it is understood, to raise funds for America's possible entry into the First World War. Rates have been as high as 77% and as low as 0% with essentially a flat rate today of 40%. It is a complicated system applying not just to the transfer of property at the death by a decedent but, in some cases, to property transferred well before death and even property that the decedent never owned. But it was not our country's first estate tax. The exemption from the tax also has varied widely from $60,000 per decedent in 1976 to about $13 million per decedent today. Some states also impose a death tax. Two related taxes are the gift tax, which imposes a tax on certain gratuitous transfers of property by an individual during lifetime (with exceptions and special rules), and the generation-skipping transfer (GST) tax, which imposes a tax on property transferred outright to a person younger than the transferor's children or in a trust (or trust equivalent) when the interest of trust beneficiary terminates in favor of a younger trust beneficiary (with exceptions and special rules). There are many differences among the estate, gift, and GST tax systems but they have similar rates and exemptions.

The low rates and large exemptions from the estate, gift, and GST taxes have significantly reduced the number of estates (or equivalent) that pay any such taxes and have significantly reduced the amount of such taxes imposed by the Federal government by the wealth transfer tax system.

As indicated above, only the wealthiest of Americans and their estates pay estate or related taxes. Gift tax and GST tax on lifetime transfers are based upon voluntary action (that is voluntary transfers) by the property owner. A married couple may transfer nearly $26 million to persons (other than themselves or charity, both of which usually are not subject to wealth transfer taxes without paying any wealth transfer tax. That amount is to be adjusted for inflation for years after 2023, although it is slated to be cut in half (but adjusted for inflation) for transfers after 2025.

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There is no question that slavery is morally reprehensible. It also is economically reprehensive not only for those who were enslaved but for all of society that permitted slavery. A rational case can be made that providing reparations to the estates or descendants of slaves would help close the racial gap between those descendants and other Americans. In the long run it seems likely to boost the United States economy for all. Paying reparations to such descendants should be made in a manner that it will increase the chances of achieving that goal. A refundable estate tax credit would spread the reparation payments over time because the payments would be made only as people die. Such a credit system might increase the political likelihood of reparations being paid.

Jonathan G. Blattmachr is a retired member of the Alaska, California and New York bars.