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The federal gift and estate tax has come to beknown as the “death tax.” There are several pro-posals to reform or repeal the tax pending beforethe current Congress, and at least some death taxchanges are expected soon. Supporters of the taxcontinue to maintain, however, that the tax isnecessary for the sake of fairness, cloudingprospects for ultimate change.This study is a primer on the basic issuessurrounding the death tax. It finds that the taxfails to achieve most—and quite possibly
any
—of the objectives its supporters promote. Thetax raises barely over 1 percent of total federaltax revenues, and when revenue losses fromother tax sources are accounted for, its overallimpact on tax receipts is smaller still. Studiesindicate that for every dollar raised from thetax, roughly another dollar is lost because of avoidance, compliance, administrative, andenforcement costs. Because the death tax is atax on savings, it also almost certainly sup-presses economic growth. Some recent studieseven suggest that the cost of the tax falls dis-proportionately on women, minorities, andowners of small businesses.The main defects of the death tax, however,are not matters of dollars and cents alone. Unlikeother recent studies, this one does not focus onthe economic aspects of the case against the tax.The biggest problem with the death tax is amoral one. The death tax rewards a “die-broke”ethic, whereby the wealthy spend down theirwealth on lavish consumption, and discourageseconomically and socially beneficial intergenera-tional saving. The tax does not promote tradi-tional liberal ideals of redistribution, equality of opportunity, or fundamental fairness. It turnsout that certain appealing and attainable com-prehensive tax reform options—moving toward aprogressive consumption tax, which would fallconsistently on spending, not work or savings—far better serve the goals of tax fairness and com-mon sense.Reducing or eliminating the death tax and itsabsurdly high rates should thus have broadbipartisan appeal.
Grave Robbers
The Moral Case against the Death Tax
by Edward J. McCaffery
Executive Summary
No. 353October 4, 1999
___________________________________________________________________________________
 Edward J. McCaffery is Maurice Jones, Jr., Professor of Law, University of Southern California Law School; vis-iting professor of law and economics, California Institute of Technology; and author of 
Taxing Women
(University of Chicago Press, 1997).
 
Introduction
The federal gift and estate tax has cometo be known as the “death tax.” MostRepublicans and even some Democrats inCongress have been highly critical of the taxand have called for its repeal. Polling datasuggest that the tax is highly unpopularwith most Americans.There is a variety of bipartisan proposalsin Congress to reduce, but not eliminate,the death tax. Those proposals include low-ering its rates; increasing special “carve-outs,” or exclusions, from the tax; and rais-ing its general exemption, or “unified cred-it,” level. While almost no one calls for sig-nificantly raising the tax anymore, therehave been proposals to close perceivedloopholes and others to replace the tax witha systematic alternative, such as the taxa-tion of capital gains at death—a modelemployed in Canada. A recent movement inWashington seeks to shore up sagging sup-port for death taxation by linking its rev-enues to other policy initiatives, such aspaying for prescription drugs for Medicarerecipients.This primer is intended to address themain issues of debate surrounding the deathtax in a balanced and nonpartisan manner. Itbegins by giving general background on thedeath tax—its history, basic operations, rev-enue effects, and so forth. After listing theprincipal arguments for the tax, the primerpresses an argument against the tax by show-ing how the current gift and estate tax is noteffective in serving its own intended goals,why most reform efforts are misguided, andhow outright repeal of the tax is consistentwith basic principles of fundamental reformof the tax system.This study also emphasizes that the highadministrative and economic costs of thetax form a part—but only a part—of the caseagainst the tax. Lawmakers would do betterto understand the fundamentally
moral
case against death taxes, which goes a longway toward explaining their unpopularity.Because particular examples of familyestate planning violate norms of confiden-tiality and privacy, this paper illustrates thecase against death taxation with a fictionalcase study and then sets the same case inthe context of two current best-selling non-fiction works,
 Die Broke
and
The Millionaire Next Door 
. The primer concludes by can-vassing the evidence of widespread popularopposition to death taxation and consider-ing various reform and repeal options.
How the Death Tax Works
History of the Death Tax
America has had an estate tax of someform since 1916, the first year that the mod-ern personal income tax was put in place.
1
Anestate tax is one that falls on the net assets of a deceased individual, as opposed to aninheritance tax, which falls on the heir, or agift tax, which applies only to living donors.Before 1916, there were scattered periodswhen federal taxes were imposed on thereceipt rather than the transfer of property.
2
In 1894, for example, gifts, bequests, andinheritances were included in taxableincome. One year later, in
Pollock v. Farmer’s Loan & Trust Co.
,
3
the Supreme Court invali-dated the income tax as unconstitutionalunder Article I, section 9, of the Constitution,which prohibits any “direct” tax withoutapportionment among the citizens of thevarious states. After the Sixteenth Amend-ment was enacted in 1913, Congress reinstat-ed the federal income tax but chose toexclude gifts, bequests, and inheritancesfrom taxable income. Hence there was a per-ceived need for a separate estate tax. The con-stitutionality of the current death tax wasupheld in
 New York Trust Co. v. Eisner 
,
4
wherethe Court held that the estate tax was a tax onthe transfer of property, not on its ownership,and so was an “indirect” tax that need not beapportioned under the Constitution.A federal gift tax was first enacted in 1924.This tax was designed to complement theincome and estate taxes by taxing transfers
2
Lawmakerswould do betterto understand thefundamentallymoral caseagainst deathtaxes.
 
that would reduce the donor’s taxable estateor future taxable income, or both. It was espe-cially important to prevent a wealthy personfrom avoiding the estate tax by making giftson his or her deathbed—a situation awkward-ly policed by rules governing gifts in anticipa-tion of death. As originally enacted, the gifttax was ineffective because it was computedon an annual basis, without regard to giftsmade in prior years; a donor’s first gift eachyear was subject to the bottom rate bracket ina progressive rate system. That gift tax wasrepealed in 1926 and then permanentlyrevived in 1932, with rates based on thedonor’s cumulative taxable gifts rather than just those made in a particular year.Rates were increased under both the giftand estate tax fairly frequently through 1941,when the top estate tax rate reached 77 per-cent. From 1942 to 1976, there was very littlefundamental change in the gift or estatetaxes. Estate taxes were imposed on transfersoccurring at death; gift taxes were imposedon transfers made during a taxpayer’s life.Under the Tax Reform Act of 1976, the estateand gift tax structures were combined into asingle unified gift and estate tax system,which might be more accurately described asa wealth transfer tax. It applies to the cumu-lative taxable transfers made by a taxpayerduring life and at death.
Revenue Effects of the Death Tax
There are several large exceptions andexclusions to the estate tax, to be discussedfurther below. The result of those exclu-sions is that most Americans never have toworry much about the tax. Only 1 to 2 per-cent of Americans who die each year leaveenough wealth behind to generate anyestate tax at all. One of the most surprisingaspects of the death tax is that it con-tributes only about $24 billion a year(Figure 1), or just a little more than 1 per-cent of all federal revenues. At least sinceWorld War II, when both the income taxand the federal payroll tax system began togather steam, the death tax has not been a
3
The death taxcontributes onlyabout $24 billiona year, or just alittle more than1 percent of allfederal revenues.
$24$58$89$189$829$0$100$200$300$400$500$600$700$800$900Gift and Estate TaxesExcise TaxesCapital Gains TaxCorporate Income TaxIndividual Income Tax
Figure 1Federal Revenue from Various Taxes in 1998
Source:
 Budget of the United States Government: Fiscal Year 2000
, Historical Tables, pp. 30, 41.
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