The estate tax non-gap: why repeal a 'voluntary' tax?

• Author: Caron, Paul L.
• Position: Symposium: Closing the Tax Gap

INTRODUCTION

Over thirty years ago, George Cooper wrote a seminal article arguing that the estate tax (1) at that time was largely voluntary. (2) Many academics still use the voluntary tax rhetoric even though Congress has closed many of the avoidance techniques that Cooper had identified. (3) For example, Jeffrey Kinsler stated, "United States citizens are not required to pay estate and gift taxes! In fact, the only people who should pay such taxes are those wishing to donate money to the U.S. government." (4) Similarly, Edward McCaffery noted that "the system is so racked with exceptions, exemptions, and exclusions that hardly anyone actually pays any wealth transfer tax." (5) And J.D. Trout and Shahid Buttar pegged the effective estate tax rate at five percent in 1988, noting that "[u]ltimately, for political argument, if not scholarly publication, estate taxes can be considered 'voluntary.'" (6)

Yet this conventional wisdom that the estate tax is easily avoided today flies in the face of the nearly twenty-year political struggle over its repeal. Why have so many politicians, think tanks, and lobbyists devoted so much time, money, and effort to repealing a voluntary tax? As one of this Article's authors has previously noted:

Criticisms of the estate tax have often been contradictory and confusing. On the one hand, critics have argued that the wealth transfer tax raises little revenue, is easily avoided, and has no effect on concentrations of wealth. On the other hand, critics have argued that the transfer tax discourages savings and that payments of the estate tax financially burden family businesses. It is difficult to see how a tax that allegedly raises little revenue, is easily avoided, and has no effect on wealth concentration can at the same time impose a significant burden on savings and businesses. (7) This Article argues that the voluntary tax metaphor is a rhetorical device that crumbles under scrutiny. The unprecedented repeal efforts over the past twenty years belie the notion that the estate tax is easily avoided. Indeed, many of the techniques described by Cooper simply no longer provide significant estate tax savings. The techniques that do work to lower the tax burden on an estate often do so by reducing the actual economic value of assets transferred to heirs. This Article also asserts that the voluntary tax metaphor has infected analysis of estate tax empirical data. We argue that commentators confuse the concept of the effective estate tax rate in examining the efficacy of the estate tax. When one correctly considers the effective estate rate, one finds that the estate tax imposes a significant burden on even the largest estates. Lastly, we analyze attempts to calculate the alleged estate tax "gap"--the tax liability that is not paid voluntarily and timely as a percentage of all revenues that should have been lawfully paid. Although such calculations are always difficult because of the lack of reliable data, we show that there are additional reasons to doubt studies that have reported a large estate tax gap. The studies have ignored the personal liability imposed on executors for unpaid estate taxes and the comparatively high estate tax audit rate. These factors suggest that the true estate gap may be small, a view that is corroborated by the IRS's audit results and one empirical study. We conclude that the estate tax is clearly not voluntary and is apparently more efficient than commonly thought in taxing transfers it was designed to reach.

1. ESTATE TAX RHETORIC: WHY REPEAL A "VOLUNTARY" TAX?

   This Part briefly traces the history of the federal wealth transfer taxes and reviews the debate over whether the estate tax should be repealed. We conclude that rhetoric has replaced reason in this debate.

   The federal estate tax was enacted in its current form in 1916 to raise revenue during a time of war and to enhance the progressivity of the tax system. (8) Soon thereafter, the estate tax came to be seen as an important tool to curb concentrations of wealth. (9) For over seventy years, a rough consensus endured around the necessity for the tax, with intermittent skirmishes over the appropriate scope of the tax and its companion gift tax (enacted in its current form in 1932) (10) and generation-skipping tax (enacted in its current form in 1986). (11)

   This estate tax consensus evaporated in the 1990s as disparate anti-tax advocates, initially from outside Washington, D.C. and later assisted by conservative think tanks and lobbyists, joined forces to turn large swaths of the public and Congress against the brilliantly re-cast "death tax." (12) Although the tax affects less than two percent of decedents who die each year, a substantial majority of the public came to oppose the tax. (13)

   But the anti-estate tax forces did not achieve total victory. In 1999, (14) and 2000, (15) Congressional votes to repeal the estate tax were overridden by President Clinton's veto. President Bush endorsed estate tax repeal efforts in the 2000 campaign, and soon after assuming office in 2001 he signed tax legislation which increased the estate tax exemption amount and reduced rates through 2009, (16) and then completely repealed estate and generation-skipping taxes (but not the gift tax) in 2010. (17) Because of arcane Senate budget rules, (18) the Act "sunsets" in 2011 and reinstates prior law, including the estate tax in effect in 2001. This budgetary sleight of hand allowed anti-tax forces to claim victory at having attained repeal (albeit for only one year) while mitigating the revenue loss by delaying the biggest increase in the exemption to 2009 and absorbing the full cost of repeal only for a single year (2010). (19)

   Since the passage of the 2001 Act, annual congressional skirmishes over the estate tax have ensued between two camps: those who advocate complete repeal and those who wish to retain it in a revised form. (20) The House on several occasions has voted to make the estate tax repeal permanent, (21) but the Senate has been unable to muster the sixty votes needed for passage. (22)

   Michael Graetz and Ian Shapiro examined how "such broad, diverse swaths of Congress and the voting public converge[d] to oppose a tax that only a tiny slice of the wealthiest Americans actually pay?" (23) Through a series of interviews of many of the participants they reveal the extent to which rhetoric has been shamelessly employed to promote repeal. Beginning in the early to mid-1990s, a loose coalition of anti-tax activists from outside Washington, D.C., with backing from eighteen wealthy families that contributed $500 million, (24) began efforts to recast public opinion against the estate tax. Among the eighteen families were the Blethen (Seattle Times), Cox (Cox Enterprises), Dorrance (Campbell Soup), Gallo (E&J Gallo Winery), Johnson (Black Entertainment Television), Nordstrom (Nordstrom), and Walton (Wal-Mart) families. Their success in mobilizing public sentiment against the estate tax was based in part on a series of studies from conservative think tanks purporting to show the deleterious effects of the estate tax. (25) But a more important element was the use of "myriad stories of estate tax trauma," (26) to paint the "death tax" as an enemy of hard-working American families.

   A succession of stories about small business owners, farmers, and others were publicized to illustrate the allegedly pernicious effects of the estate tax on core American values of thrift, hard work, entrepreneurship, and family. (27) Graetz and Shapiro painstakingly point out the inconsistencies, inaccuracies, and often outright lies in these stories. (28) Perhaps the most egregious example was the story of Chester Thigpen, an elderly grandchild of slaves whose Mississippi family tree farm was supposedly threatened by the estate tax but in fact was well under the threshold subject to the tax. (29)

   But the accuracy of the stories did not matter--the prevailing ethos was that the stories could have been true, so they deserved to be retold. The stories succeeded in painting estate tax repeal as a moral issue. Estate tax defenders failed to offer an effective response (30)--initially incredulous at the mere possibility of estate tax repeal, they responded with ineffective dry, technical arguments. (31) The result was that "[a]bsent contrary moral arguments or compelling personal stories, their scientific rationality had little allure for the public or their representatives in Washington." (32) Because their stories had succeeded in capturing the moral high ground, (33) the anti-tax advocates held out for full estate tax repeal and rejected offers of compromise to raise the exemption and lower the rates, even though most wealthy Americans (other than the super-rich) would have been better off with immediate reform rather than the future one-year repeal ultimately adopted. (34)

   Other commentators have also noted the increasing role of rhetoric in tax debates, which "seeks to persuade through bombast and confusion." (35) Marjorie Kornhauser has criticized this trend, arguing that it undercuts democratic legitimacy. (36) Of course, the use of tax rhetoric divorced from reality did not originate in the estate tax repeal debate, but it may have reached its apogee there.

2. THE ESTATE TAX NON-GAP

   Part of the estate tax repeal rhetoric embraced the notion that the tax is voluntary and easily avoided. Repeal proponents claim that the estate tax is voluntary by relying upon Cooper's masterful, but dated, exegesis of estate planning devices employed in the middle of the twentieth century. (37) For example, Bruce Bartlett, a senior analyst with the National Center for Policy Analysis ("NCPA"), relied on Cooper's article in declaring that "careful estate planning can virtually eliminate the tax." (38)

   In this Part, we first refute estate tax opponents' claims that simple estate planning techniques exist to easily circumvent the tax. We then...