Wednesday, September 14, 2016

Estate Tax: Give + Receive

The Estate Tax (a/k/a Death Tax) inspires conflicting impulses. On one hand, it treats a lifelong spender's income differently from that of a lifelong saver just because there is leftover income in the bank (excellent exposition here from Greg Mankiw). On the other hand, it seems unfair for the lucky recipient of the funds to start off life with so much of a leg up.

How can this apparent contradiction of unfairness be resolved?

Notice that an inheritance is really a transaction with two parts:  a give and a receive. One potential resolution is to remove the tax on giving, but to enact a tax on receiving funds over a certain threshold (say, $50,000).

With this knowledge, the giver would know that the gift is more effective when less concentrated. Expect the giver to give lower amounts to more people. Be careful not to set the threshold too low or the giver would find it impractical to stay under it and so might just ignore its intended dispersal effect.

There may be some unintended consequences so consider this food for thought.