Comparing a Reformed Estate Tax with an Accessions Tax and an Income-Inclusion System, after Abandoning the Generation-Skipping Tax

Abstract

Those opposing permanent repeal of the federal estate and generation-skipping taxes have fallen back to the position of advocating a "reformed" version of these taxes featuring a very large per taxpayer exemption somewhere in the $2-10 million range. Alternatives to a reformed estate and gift tax system are a federal inheritance tax, an accessions tax, and a repeal of the income tax rule that excludes gratuitous receipts from gross income. The merits of taxing vs. not taxing wealth transfers will not be taken up in this contribution, nor will the issue of whether getting rid of free stepped-up basis at death would be superior to any wealth transfer tax system. Instead, the principal purpose is to compare a reformed version of the present system, an inheritance tax, an accessions tax, and an income-inclusion system. One thesis is that the basic features of the existing transfer taxes (large exemptions, unlimited marital deduction) should not simply be carried over intact to any of the alternative systems, each of which should be true to own nature. A second thesis is that a generation-skipping tax (or its equivalent) is not a necessary feature of any system, and is not justifiable on equity grounds or as a means of rendering the system into a proxy wealth tax. The article examines such basic structural features as the appropriate rate and exemption structures, the marital deduction or exemption, exclusions for inter vivos gifts, timing issues, and valuation issues. Among the conclusions reached are that: (1) an unlimited marital exclusion is contrary to the purpose of an accessions tax; (2) an accessions tax and an income-inclusion system offer considerable justification and simplification advantages over an estate tax or an inheritance tax; (3) an exclusion for consumption-type (as opposed to wealth) transfers is justified under any system; (4) an income-inclusion system is doctrinally the simplest, and can be readily integrated into the system of taxing income from trusts; and, (5) the accessions tax and income-inclusion approaches are sufficiently close as to suggest the possibility of a hybrid system that would combine the most appealing features of each.