Racing to find political common ground on estate tax policy before the Bush administration tax cuts expire, congressional leaders are urging Republicans and Democrats to “think outside the box” when considering reforms.Among the alternatives placed on the table for discussion during recent Senate Finance Committee hearings: proposals to tax the beneficiaries of inheritances, rather than estates, as well as options under which estate taxes would be levied based on the heir’s “access to sophisticated tax advice.”

Representatives of the accounting profession, however, remained squarely inside the box in issuing their recommendations for estate tax reform to the committee.

In their priority list of suggested reforms of the current estate and gift tax system, officials from the American Institute of CPAs called on Congress to cap the top estate tax rate at the maximum federal income tax rate, raise the exclusion amount enough to exempt at least 90 percent of estates from the “death tax,” and preserve current rules providing relief from a number of generation-skipping transfer tax traps that are scheduled to expire at the end of 2010, along with the rest of the Bush tax cuts.

Senate Finance Committee Chairman Max Baucus, D-Mont., however, made it clear that with the current estate tax scheduled to be eliminated altogether in 2010 and then be resurrected at an even higher rate a year later, the time for tinkering with the Tax Code was over. “Usually when people talk about the estate tax ... they talk about a little change here and a little change there, as though they were tuning a radio,” he said. “In this hearing, we put the old radio aside and we’re going to take a look outside of the box.”

Calling the present law “complicated, intimidating to small businesses, and lacking in certainty for the American people,” Baucus said that the committee needed to focus on more creative approaches to estate tax reform.


Witnesses at the Senate hearing were quick to oblige by providing a smorgasbord of options based on economic theory and the wealth transfer tax experience of other countries.

New York University associate law professor Lily L. Batchelder, for one, urged the Senate to consider shifting away from taxing the estates of the deceased, in favor of taxing the inheritance of their heirs.

Under her plan for a comprehensive inheritance tax, Batchelder explained that, “An individual inheriting an extraordinary amount over his lifetime would pay income tax and a flat 15 percent tax on a portion of his inheritance.”

Relative to the 2009 law, she said that this change could be implemented on a revenue-neutral basis if approximately the first $2 million in lifetime inheritances were tax-exempt.

“In effect, extraordinary amounts of inherited income would be taxed at about the same rate that families pay on earned income under the income and payroll taxes,” Batchelder told Congress. “This reform would substantially alter tax burdens, and improve the fairness of the current system by more accurately targeting the unfair advantages that exceptionally large inheritances create.”

In contrast, she said, under the current law, “A wealthy donor can give to 100 heirs or one, to Paris Hilton or a foster child, and the tax rate is unaffected.”

If Congress lacks the stomach for shifting to an inheritance tax, the NYU professor suggested an alternative that some tax professionals might consider even more radical. Under that approach, Congress would enact a package of simplification reforms that would limit the extent to which the tax burden on heirs depends on their access to sophisticated tax advice.

Batchelder’s proposal for an inheritance tax drew fire from another witness at the hearing who told congressional estate tax reformers that this option “should be taken off the table.”

“An inheritance tax is basically like an estate and gift tax, but with a more complicated rate and exemption structure,” Florida State University law professor Joseph M. Dodge testified. “An inheritance tax distorts bequest choices by creating tax incentives in favor of certain classes of legatees,” and is difficult to integrate with a gift tax.

Still another law professor at the hearing, University of Toronto faculty member David Duff, urged the committee to consider scrapping the present estate tax system and replacing it with an “accessions tax.”

In outlining this approach, Duff said that, “While the current gift and estate tax applies to aggregate amounts transferred by donors over the course of their lifetimes and at death — regardless of how this wealth is distributed among recipients — an accessions tax would apply to the cumulative value of gifts and inheritances that are received by beneficiaries over the course of their lifetimes — which are the amounts that actually contribute toward inequalities in wealth and opportunities.”

Duff blamed those inequalities for undermining public support for estate taxes in other countries, and he urged Congress to learn from the experiences in those nations.

Noting that in recent years Canada, Australia and New Zealand have all abolished their wealth transfer taxes, Duff attributed those changes largely to the fact that all three of those countries relied on donor-based estate taxes similar to those currently in the U.S.

“To the extent that these kinds of taxes send the wrong message about the taxation of wealth transfers, it is not surprising that they failed to generate many defenders when they were under attack,” he told the Senate. “In contrast, it is worth noting that recipient-based inheritance taxes appear to have been far more resilient over the last 30 years, accounting for a larger share of total tax revenue and GDP in some countries today than they did in the early 1970s.”

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