[PREVIOUS]
 
The red curve on the accompanying chart traces the course of the proposed totality rate schedule, applicable to net estates above a $20,000 vanishing exemption, with rates ranging from 1.0 percent on taxable estates amounting to less than $100 to 75 percent on estates of $100,000,000 and over. The rate schedule rises at a steadily decreasing rate beginning with 1/50 of 1 percent per $100 at $40,000 and ending with 1/25,000 of 1 percent per $1,000 at $100,000,000. The graphic illusion of uneven progression is attributable to the use of a logarithmic scale. For purposes of comparison the proposed totality rate schedule has been converted into one on the bracket basis, which is presented on page 24 (a). Precise parity between the two schedules is, of course, impossible. That the effective variations between the two schedules, however, are of secondary importance, is revealed by the table presented on page 26.

While no attempt has been made to estimate the increase of estate tax revenue which would be produced by the proposed revision, the extent of the increase may be inferred from the comparison of present and proposed effective rates applicable to estates of various size presented below.

Estate Tax

Proposed Totality Rate Schedule


  Taxable
net estate
(In Thousands)                   Rate of Tax

$0-40            1% plus 1/100 of 1% on each full $100 by
                 which the taxable base exceeds 0.

40-50            5% plus 1/50 of 1% on each full $100 by
                 which the 1000

50-60            7% plus 1/50 of 1% on each full $100 by
                 which the taxable base exceeds $40.

60-70            7% plus 1/50 of 1% on each full $100 by
                 which the taxable base exceeds $50.

70-80            11% plus 1/50 of 1% on each full $100 by
                 which the taxable base exceeds $70.

80-90            13% plus 1/100 of 1% on each full $100 by
                 which the taxable base exceeds $80.

90-100           14% plus 1/100 of 1% on each full $100 by
                 which the taxable base exceeds $90.

100-250          15% plus 1/15 of 1% on each full $1,000 by
                 which the taxable base exceeds $100.

250-500          25% plus 1/25 of 1% on each full $1,000 by
                 which the taxable base exceeds $250.

500-700          35% plus 1/40 of 1% on each full $1,000 by
                 which the taxable base exceeds $500.

700-1,000        40% plus 1/60 of 1% on each full $1,000 by
                 which the taxable base exceeds $700.

1,000-2,000      45% plus 1/200 of 1% on each full $1,000 by
                 which the taxable base exceeds $1,000.

2,000-3,000      50% plus 1/250 of 1% on each full $1,000 by
                 which the taxable base exceeds $2,000.

3,000-5,000      54% plus 1/400 of 1% on each full $1,000 by
                 which the taxable base exceeds $3,000.

5,000-7,000      59% plus 1/500 of 1% on each full $1,000 by
                 which the taxable base exceeds $5,000.

7,000-10,000     63% plus 1/1,000 of 1% on each full $1,000 by
                 which the taxable base exceeds $7,000.

10,000-25,000    66% plus 1/5,000 of 1% on each full $1,000 by
                 which the taxable base exceeds $10,000.

25,000-75,000    69% plus 1/10,000 of 1% on each full $1,000 by
                 which the taxable base exceeds $25,000.

75,000-100,000   74% plus 1/25,000 of 1% on each full $1,000 by
                 which the taxable base exceeds $75,000.

Estate Tax

Bracket Rate Schedule Approximating Proposed Totality Bate Schedule


Taxable net estate                                    Amount of tax
(In thousands of dollars)           Rate of tax     on higher amount

$0    - 10                             2%                 $200
10    - 20                              4                  600
20    - 30                              6                1,200
30    - 40                              8                2,000

40    - 50                             15                3,500
50    - 60                             18                5,300
60    - 70                             22                7,500
70    - 80                             24                9,900

80    - 100                            26               15,100
100   - 200                            31               46,100
200   - 300                            35               81,100
300   - 400                            43              124,100

400   - 500                            51              175,100
500   - 750                            54              310,100
750   - 1,000                          58              455,100
1,000 - 5,000                          62            2,935,100

5,000 - 10,000                         70            6,435,100
10,000 - 25,000                        72           17,235,100
25,000 - 75,000                        77           55,735,100
Over $75,000                           79

Estate Tax: Effective Rates of Proposed Totality Rate, Approximating Bracket Rate and Present Law


Net estate                  Effective rates            Proposed
before            Totality  Approximating  Present    increase in
exemption           rate    bracket rate    law     effective rates

$25,000             .8%         .8%          --         .8%
30,000              2.0         2.0          --         2.0
35,000              3.4         3.4          --         3.4
40,000              5.0         5.0          --         5.0
50,000              7.0         7.0         .4%         6.6
60,000              9.0         8.8         1.0         8.0
70,000             11.0        10.7         1.7         9.3
80,000             13.0        12.4         2.5        10.5
100,000            15.0        15.1         4.2        10.8
250,000            25.0        25.4        11.4        13.6
500,000            35.0        35.0        16.1        18.9
700,000            40.0        40.4        18.3        21.7
1,000,000          45.0        45.5        21.1        23.9
3,000,000          54.0        56.5        31.2        22.8
5,000,000          59.0        58.7        38.0        21.0
7,000,000          63.0        61.9        43.6        19.4
10,000,000         66.0        64.4        49.4        16.6
25,000,000         69.0        68.9        60.3         8.7
75,000,000         74.0        74.3        66.4         7.6
100,000,000        75.0        75.5        67.3         7.7

3. Prior wealth of the beneficiary as third variable in the rate structure.

It has been advocated that a third variable, prior wealth of the beneficiary, be included in the estate tax rate structure; that, in addition to the size of the estate, the rate schedule be graduated in accordance with the financial status of the beneficiary before receipt of the legacy. The amount of the beneficiary's net income during one or a number of years has been suggested as a measure of his "prior wealth." That the introduction of the prior wealth of the beneficiary as a variable in rate making would be an acceptable extension of the ability to pay principle can be readily conceded. The case of the millionaire nephew receiving bequests from each of a dozen relatives and paying only nominal taxes on each of them without regard to bequests which have gone before, casts into broad relief the ineffectiveness of the present rate structure in taking into account ability to pay.

However, problems of administration loom large in the path of such a provision. In 1919, an attempt was actually made in the Germs inheritance tax to recognize the prior wealth of the beneficiary. Additional percentages were added to the succession duty for each 10,000 M that the previous wealth of the heir (based on 1914 property assessments) exceeded 100,000 M; he was liable to an additional 10 percent if he already possessed 200,000 M; above this figure 1 percent was added for each additional 20,000 M of has prior wealth; but under no circumstance might more than double the original rate of the succession duty be paid, nor might the total tax exceed 90 percent of the legacy or inheritance. Administrative difficulties led to the elimination of this surtax in December 1923. A similar tax enacted in Italy in 1919 was abandoned for similar reasons four years later.

The principle could conceivable be adopted by the Federal Government, the prior wealth of the recipient being predicated upon the capitalized value of his net income as reported to the Bureau of Internal Revenue for one or more years.

The advisability of attempting to levy such a tax at the present time is highly doubtful. The courts might question the constitutionality of prior wealth as a proper basis for taxation. Furthermore, from a practical viewpoint, problems of administration would create numerous difficulties, some arising in connection with the determination of prior wealth and others from the necessity of taking due cognizance of the ultimate beneficiaries. In this latter respect the problems encountered would be akin to those inherent in an inheritance as opposed to an estate tax. Delay in tax settlement would be unavoidable.

At all events, the device would involve a refinement of a far higher order than that employed in the other features of the Federal tax system. Too much stress cannot be placed upon conserving all revenue revision opportunities for application into those channels where the probabilities of profitableness are greatest.

III. Valuation for tax purposes

1. Date of valuation

Prior to 1935 the value of an estate for death tax purposes had been determined as of the date of death. In that year an option was Provided (Revenue Act of 1935), as follows:

"If the executor so elects * * * the value of the gross estate shall be determined by valuing all the property included therein on the date of the decedent's death as of the date one year after the decedent's death * * *"

W. D. Kelly, State supervisor of the Transfer and Inheritance Tax Bureau of New Jersey, stressed the need for such an option in 1930 /6/, by pointing out that there have been instances of over a fifty percent shrinkage in the value of estates between the date of decedent's death and the date of final distributions. In many instances the residuary legatees received nothing due to the fact that specific amounts to other beneficiaries, together with the estate tax, consumed the entire amount of the reduced estate. Since widows and children are the most frequent residuary legatees, the practice of valuation at the date of death worked undue hardship in periods of declining values upon those who should receive the greatest protection. The present optional plan of valuation is a means of affording protection to such residuary legatees.

The provision of this option was prompted by the circumstance that all property values were rapidly declining. Now, however, that that trend has been interrupted and another price break of 1929 intensity is not anticipated the justification for the option no longer exists. In all instances of shrinkage, the executor will no doubt see fit to evaluate the property as of the date of distribution; conversely, in instances of appreciation in the value of the estate, the executor has the opportunity to evaluate as of the date of death. This dual valuation complicates the problem of administration. The option delays the levy of the tax inasmuch as the executor's right to affix the valuation as of one year subsequent to decedent's death makes it impossible to determine the amount of the tax until this later date. The present option is conducive to delay.

The practice of evaluating estates as of date of death is largely the practice the world over. Great Britain, Australia, Germany, the Canadian Provinces, as well as forty-two of the American States value the estate for tax purposes as of the date of death. Furthermore, the hardship befalling residuary legatees in period of declining values, pointed out by Mr. Kelly, may to a certain extent be assuaged by stating legacies in terms of percentages or proportions of the total estate rather than in fixed amounts.

L. H. Parker, Chief of Staff of the Joint Committee on Internal Revenue Taxation, was also impressed with the injustice of the failure of the Federal estate tax to recognize the shrinkage in the value of an estate between the date of death and the date when the tax is paid. As a remedy he recommended a compromise: That the death tax rate be determined by the value of the property at the date of the decedent's death, but that this composite rate be applied to the net value of the estate one year thereafter. However, the Parker proposal is even less acceptable than the optional method now in force. If it is desired to recognize valuation at the date of distribution, what logical reason can possibly be advanced for basing the rate on some earlier valuation which in terms of the present is non-existent? The acceptance of either of the two dates for valuation purposes must imply the simultaneous acceptance of that date for rate making purposes. The practice of evaluating the estate as of date of death is sound. The tax is levied on the right to transfer. The transfer is effective legally at the time of death. The base of the tax -- the value of the property transferred -- should be determined as of the date of death. To remove the date of valuation away from the date of legal transfer to some arbitrary future date, simply because of delays in effecting distribution, does not seem to be sound policy.

Aside from pure economic considerations, the option should be eliminated because of the opportunities it affords for tax avoidance. In this connection the Miscellaneous Tax Unit of the Bureau of Internal Revenue cites among others the two following cases: Decedent A owned all or substantially all of the stock of a close corporation. The present option enables the executor during the year following the decedent's death to strip the corporation of substantially all of its surplus by declaring ordinary dividends which are extraordinary in amount. By the end of the year the value of the stock will be substantially less than it was on the date of the decedent's death. Decedent B left real estate to be administered by an executor or a trustee. If the executor elects valuation as of one year after death, such valuation would reflect shrinkage in value due to usage, depreciation and obsolescence. To permit the executor to rent an office building or operate a factory for a year and value it at the end of that time so as to reflect not only fluctuations in real estate values but wear and tear, depreciation and obsolescence, although enjoying the revenue from the rented building or the operation of the factory, the use of which to a large extent was responsible for depreciation, would be contrary to the spirit of the law.

These are but two of numerous examples which may be cited in support of the recommendation that Section 202 of the Revenue Act of 1935 which amended Section 302 of the Revenue Act of 1926 by the addition of new Subdivision (j), should be repealed.

2. Community Property Problem

Eight States -- Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington -- have adopted the community property concept. Under this principle, the combined property and income of the spouses (subject to certain minor limitations varying among the States) belong one-half to the husband and one-half to the wife. These eight States stand in contradistinction to the other forty States which have accepted the common law concept of marital property subject only to statutory variation.

The significance of these inter-State variations lies in the fact that the power of the Federal Government to levy a death duty upon the transfer of property at death is subject to State laws governing property rights, more specifically, to State laws governing the transfer of marital property at death. In the eight community property States, only the husband's one-half share of the community property is subject to the Federal estate tax. In non-community property States, on the other hand, the whole of such community property is subject to the tax at the death of the husband.

Under the present progressive rate schedule, residents of community property States obtain a great advantage over residents of strict common law States. On the basis of the present law, assuming a $1,000,000 net estate acquired during coverture, and assuming that the husband predeceases the wife by more than five years, the total Federal tax levied at both deaths in a community property State would amount to $286,216, whereas in a non-community property State the tax at both deaths would be $381,324 (assuming a static estate unaffected by interest accumulations in both instances). Thus the approximate tax advantage on such an estate to the resident of a community property State would be $95,108. Furthermore, the advantage would increase with the size of the estate.

The advantage of community property States over common law States with respect to the Federal estate tax levied at the time of the death of the first spouse is shown in the table below.

Table 1. Federal estate tax liability on estates of specified size in community and non-community property States /*/


Net estate                       Estate tax liability
before exemptions   Non-community           Community property
(In thousands of    property States         States
dollars)                                    Amount        Advantage

$50                     $100                    -             $100
 65                      540                    -              540
 75                    1,050                    -            1,050
100                    3,000                 $200            2,800
125                    5,625                  750            4,875
150                    8,550                1,600            6,950
200                   15,300                4,200           11,100
250                   21,800                7,250           14,550
300                   29,000               10,800           18,200
400                   43,700               18,300           25,400
500                   60,300               27,300           33,000
1,000                160,700               78,700           82,000
5,000              1,396,300              696,700          699,600
10,000             3,583,700            1,805,300        1,788,400
50,000            22,981,900            13,181,900       9,800,000

                          FOOTNOTE TO TABLE

     /*/ (In making the comparison), it is assumed that each of the
estates consisted of realty 50 percent, tangible personalty 25
percent, common stock 15 percent, insurance payable to wife 10
percent, and that the entire estate, with the exception of 20
percent of the realty acquired by the decedent prior to marriage,
was acquired during coverture.

                           END OF FOOTNOTE

A disturbing factor FROM THE STANDPOINT OF FEDERAL REVENUE is the trend in the forty non-community property States away from the common law concept of the wife as a ward of the husband toward the community property concept of the wife as a partner in marriage. By 1931 twenty of these forty States recognized the validity of contractual relationships between husband and wife. /7/ Later data are not available. In such States it is possible for the husband and wife to form an equal partnership, the partnership to hold title to all property acquired during coverture. The formation of such a partnership places the husband and wife in substantially the same position with respect to their property as if they resided in a community property State.

The dual evils of inequity and lose of revenue arising from this source should be eliminated. The present indecisive status of the Federal tax law in regard to community property privileges is undesirable. A method recommended for immediate consideration, is to make the transfer of the right of management and control the basis of the tax. This would necessitate a prima facie presumption that management and control of community or marital property was vested in the husband. This proposal to make management and control the tax base has been advocated by the Treasury Department since 1920 in regard to the income tax. Such a proposal has never been incorporated into the tax law. The Judicial attitude toward that procedure cannot be determined until it has actually been incorporated into law.

IV. Compensatory Tax On Accumulated Capital Gains

The existing lack of coordination between the capital gains features of the income tax and the property transfer taxes enables substantial capital gains to escape income taxation. Specifically, reference is had to the fact that when property which has enhanced in value is transferred by inheritance, the accretion in value escapes taxation under the capital gains tax. The transferor, never actually realizing his capital gains, is free of the tax; the transferee, on the other hand, having acquired the property at its higher value, cannot be held liable for taxes on capital gains accrued in the hands of the preceding owner (Section 113(a)(5), Revenue Act of 1936). This type of tax avoidance acquires particular significance in the case of closely held business assets and long-term capital holdings of families depending largely upon income from investments.

The elimination of this loophole is contingent upon the imposition of a compensatory tax on the occasion of the property transfer, such compensatory tax to be assessed on the basis of the accumulated capital gains. That the capital gains in question should be subjected to taxation is obvious. It should be kept in mind that this form of tax avoidance is not necessarily intentional. Investments are frequently held over long periods of time and passed from generation to generation because they represent long-term investments for income purposes. Failure to trade them and thereby realize on the capital gains may be due to inertia, to lack of acquaintance with investment procedure, or to conditions imposed by the benefactor. Furthermore, the individual who withholds assets from sale is somewhat at a disadvantage in comparison with the one who trades more frequently in that he is deprived of the flexible use of his resources. It follows that a tax imposed upon accumulated capital gains will tend to stimulate security trading on the part of those who otherwise would not do so. However, since we are here concerned with the plugging of a loophole which has the potentiality of rendering the basic capital gains tax ineffective, this latter consideration is of small significance.

The logical procedure for the treatment of these accumulated capital gains and one which has ample economic Justification would be the imposition of the regular capital gains tax on the occasion of the property transfer by the incorporation of such capital gains either in he fiduciary income tax return filed for the estate or in the last income tax return of the deceased. Either of these procedures, however, is certain to be held unconstitutional.

Since it is impossible to apply the income concept to these capital gains, recourse must be had to some other treatment which will of necessity be less equitable. A workable procedure is available in the imposition of an additional estate tax with appropriate crediting for items in the estate not constituting capital gains. The rates employed in connection with the proposed capital gains transfer tax, which for statutory purposes may be referred to as the initial estate tax, would be identical with those employed for the basic estate tax.

The proposed capital gains transfer tax would be computed in the manner described below and would leave the determination of the basic estate tax unaffected excepting that the capital gains transfer tax liability would be allowable as a deduction from gross estate for the purpose of determining the net taxable estate.

The capital gains which it is proposed to tax under this new capital gains transfer tax are only those that have accrued to real estate, stocks, and bonds. This characterization, however, is not restricted to the real estate reported on Schedule "A" and stocks and bonds reported on Schedule "B" of the estate tax return, but also to those groups of real estate, stocks, and bonds which comprise jointly-owned property and are reported on Schedule "E", or represent interest in copartnerships and unincorporated businesses and are reported on Schedule "F" of the estate tax return. The procedure of valuation employed in the determination of the capital gains should be made to correspond to the valuation procedure employed for the purpose of determining capital gains in the income tax.

The capital gains transfer tax liability is to be determined as follows: A tentative tax is to be computed at the regular estate tax rates on the entire amount of the gross estate without the allowance of any deductions whatsoever. Against this tentative tax there is to be permitted a tax credit, computed at the regular estate tax rates on an amount which will be the sum of the adjusted bases for real estate, stocks, and bonds, and the current market of all other gross estate assets. The difference between the tentative tax and the tax credit thus determined will be the capital gains transfer tax or the initial estate tax liability which is to be allowed as a deduction for the purpose of computing the basic estate tax.

Capital losses on real estate, stocks, and bonds are to be computed on the same basis as is now done for the purpose of the income tax, but such losses are to be disallowed for the purpose of the initial estate tax to the extent that they are in excess of the taxable capital gains. In other words, the amount of the tax credit can never exceed the amount of the tentative tax on the total gross estate.

It follows that in some cases the computation inherent in the determination of the initial estate tax will result in little or no taxable gains. Furthermore, recognition of losses will serve as an incentive to hold on to worthless securities which would otherwise have been discarded, and will also encourage the purchase of securities involving great risk on the theory that should they prove worthless they could be used by the estate to offset initial estate tax liability. It may, therefore, be expected that the adoption of the proposed initial estate tax will bring to light a great supply of worthless investments which have gathered dust in the family vaults for many years. This consideration notwithstanding, losses must be recognized to the extent of the gains, for no recognition of losses whatever would represent a compromise in principle while the unlimited recognition of losses would, in some instances, result in a negative tax which would properly be creditable against the basic estate tax. Accordingly, losses must be limited to the extent of the gains.

The effects of the proposed initial estate tax are illustrated on the attached table which reveals the operation of the tax on estates of various sizes and of various composition. It will be observed that the computed initial estate tax liability bears no fixed relationship to what the tax liability would have been had the capital gains been fully realized and taxed under the income tax. The resulting inequity, however, is less than may at first hand be assumed, since the accumulated capital gains are in effect taxed at the top brackets of the estate tax schedule which bears a general relationship to the transferor's income level and thus to the relative income tax burden that would be imposed were such capital gains superimposed upon his normal regular income.

Operation of the Proposed Compensatory Tax on Accumulated Capital Gains in Conjunction with the Proposed Estate Tax


                                      Composition
                            Real estate and securities Other
Gross estate      Adjusted basis      Capital gains    Market price

$30,000               $8,000            $2,000            $10,000
                       4,000            16,000             20,000

50,000                20,000             5,000             25,000
                      10,000            15,000             25,000

75,000                30,000            10,000             40,000
                      10,000            30,000             40,000

100,000               50,000            25,000             75,000
                      25,000            50,000             75,000

300,000              150,000            50,000            200,000
                      50,000           150,000            200,000

500,000              100,000           200,000            300,000
                     300,000           100,000            400,000

1,000,000            500,000           250,000            750,000
                     250,000           500,000            750,000

20,000,000         8,000,000         8,000,000         16,000,000
                   5,000,000         5,000,000         10,000,000

100,000,000               --       100,000,000        100,000,000
                  25,000,000        75,000,000        100,000,000
                  40,000,000        40,000,000         80,000,000
                  60,000,000        20,000,000         80,000,000

                                                       Tax credit:
                                                        Tentative
                                                        tax on sum
                                                        of cost (or
                                                       other basis)
                                                         of real
                                                        estate and
                                                        securities
                    Other assets       Tentative        and market
                     /1/ market      tax on gross        value of
Gross estate           price            estate          other asset

$30,000              $20,000             1,200              1,064
                      10,000             1,200                336

50,000                25,000             3,500              2,700
                      25,000             3,500              1,575

75,000                35,000             9,000              6,500
                      35,000             9,000              2,700

100,000               25,000            15,000              9,000
                      25,000            15,000              3,500

300,000              100,000            81,000             62,500
                     100,000            81,000             27,500

500,000              200,000           175,000             81,000
                     200,000           175,000            124,000

1,000,000            250,000           450,000            306,250
                     250,000           450,000            175,000

20,000,000         4,000,000        13,600,000          7,968,000
                  10,000,000        13,600,000         10,050,000

100,000,000               --        75,000,000                 --
                          --        75,000,000         17,250,000
                  20,000,000        75,000,000         43,500,000
                  20,000,000        75,000,000         59,360,000

                 Initial estate
                  tax liability
                  (Using revised                       Net estate
                 revised proposed                    (Gross estate
                  totality rate        Assumed           minus
Gross estate       schedule)         deductions       deductions)

$30,000                  136           $24,000              6,000
                         864            24,000              6,000

50,000                   800            10,000             40,000
                       1,925            10,000             40,000

75,000                 2,500            15,000             60,000
                       6,300            15,000             60,000

100,000                6,000            20,000             80,000
                      11,500            20,000             80,000

300,000               18,500            60,000            240,000
                      53,500            60,000            240,000

500,000               94,000           100,000            400,000
                      51,000           100,000            400,000

1,000,000            143,750           100,000            900,000
                     275,000           100,000            900,000

20,000,000         5,632,000         1,000,000         19,000,000
                   3,550,000         1,000,000         19,000,000

100,000,000       75,000,000         2,500,000         97,500,000
                  57,750,000         2,500,000         97,500,000
                  31,500,000         2,500,000         97,500,000
                  15,640,000         2,500,000         97,500,000

                 Net taxable
                 estate (Net      Regular estate
                estate subject      tax (Using          Combined
                 to tax minus    revised proposed      initial and
                initial estate    totality rate      regular estate
                      tax)          schedule)              tax

30,000                $7,864              $140               $276
                       7,136               122                986

50,000                39,200             1,929              2,729
                      38,075             1,828              3,753

75,000                57,500             4,830              7,330
                      53,700             4,081             10,381

100,000               74,000             8,732             14,732
                      68,500             7,261             18,761

300,000              221,500            51,093             69,593
                     186,500            38,661             92,161

500,000              306,000            83,354            177,354
                     349,000           101,070            152,070

1,000,000            756,250           309,558            453,308
                     625,000           238,281            513,281

20,000,000        13,368,000         8,912,927         14,544,927
                  15,450,000        10,365,405         13,915,405

100,000,000       22,500,000        15,412,500         90,412,500
                  39,750,000        28,013,813         85,763,813
                  66,000,000        48,246,000         79,746,000
                  81,860,000        60,801,024         76,441,024

                  Estate tax         Increase in
               liability without      tax due to
                recognition of      recognition of
                capital gains       capital gains

     30,000             $144              $132
                         144               842

     50,000            2,000               729
                       2,000             1,753

     75,000            5,400             1,930
                       5,400             4,981

    100,000           10,400             4,332
                      10,400             8,361

    300,000           58,392            11,201
                      58,392            33,769

    500,000          124,000            53,354
                     124,000            28,070

  1,000,000          390,000            63,308
                     390,000           123,281

 20,000,000       12,882,000         1,662,927
                  12,882,000         1,033,405

100,000,000       73,027,500        17,385,000
                  73,027,500        12,736,313
                  73,027,500         6,718,500
                  73,027,500         3,413,524

                          FOOTNOTE TO TABLE

     /1/ "Other assets" including bank accounts, insurance, and
tangible personal property.

                           END OF FOOTNOTE

The proposed initial estate tax is subject to the criticism that it discriminates in favor of appreciated capital assets other than real estate, stocks, and bonds. Personal property and collectors' items are cases in point; an appreciation in their value will remain untaxed. This inequity notwithstanding, the proposed arbitrary classification of assets is necessitated by the fact that any other procedure would require a dual valuation of every single item of property in an individual's estate -- valuation at the time of death and valuation at the time of acquisition by the deceased. The task of providing data regarding valuation of property at the time of acquisition would in the first instance devolve upon the executors, who may or may not have been left in possession of the facts. In the event that no records were left behind, which would be likely in the case of personal property, the reconstruction of acquisition price would be an exceedingly difficult task. Since the dual valuation of every individual item of asset in an estate would create difficult administrative problems, it seems advisable to restrict the proposed capital gains tax to appreciation in the case of real estate, stocks, and bonds. These general categories present comparatively little difficulty with respect to valuation as of date of acquisition since the data are already required for income tax purposes.

V. Complementary Revisions In The Federal Gift Tax

In line with the revisions of the estate tax proposed above, certain changes should be made in the structure of the gift tax to maintain the complementary relationship between the two. No attempt is here made to discuss the adequacy of the present gift tax as a complement to the estate tax. That problem, involving primarily the coordination of the two taxes will be made the subject of a separate memorandum. The purpose of this section is more limited: To focus attention upon those changes in the gift tax which will automatically be called for by the above-recommended revisions of the estate tax.

1. It has been proposed in the preceding sections that the specific exemption of $40,000 provided by the estate tax be reduced to $20,000. A similar reduction from $40,000 to $20,000 should be made in the specific exemption provided by the gift tax.

2. The specific exemption afforded in the case of the gift tax should be of the same type as that employed in the estate tax. It has been pointed out in connection with the estate tax that the vanishing exemption is the most desirable of the three alternatives. If a vanishing exemption is incorporated into the estate tax, it should also be employed in the gift tax. It has been urged that in the event the vanishing type of exemption is not incorporated into the estate tax, but if the present rate schedule is replaced by one on the totality plan, the constant exemption ought to be granted in terms of a constant tax credit rather than in the form of a deduction from the taxable base. By the same token, if the vanishing type of exemption is not incorporated into the gift tax, the constant exemption provided should be expressed in terms of a constant tax credit rather than as a deduction from the otherwise taxable base.

3. It has been recommended above in connection with the estate tax that the exemption of charitable bequests be eliminated and in its place a tax credit substituted, such tax credit to bear that ratio to the total tax liability which 50 percent of the charitable bequest bears to the net estate. Similar considerations point to the advisability of corresponding treatment of charitable gifts.

4. It has been suggested above in connection with the estate tax that the present bracket rate schedule should be replaced by one on the totality basis with rates ranging from 1 percent on taxable estates amounting to less than $100 to 75 percent on net estates amounting to $100,000,000 and over. In view of the complementary relationship of the two taxes, it follows that a totality rate structure should be incorporated into the gift tax, the effective rate at each step to be three-quarters of that proposed for the estate tax.

Part II. Coordination Of The Federal Estate And The Federal Gift Tax.

A. Introduction

Sound fiscal practice requires that the complementary constituents of any tax system be properly coordinated. Such coordination need not necessarily imply uniformity in the tax burdens imposed. When, however, the differential in tax burdens imposed upon either of two complementary tax bases is greater or less than that calculated to express the preference which it is intended to bestow upon the one or the penalty which it is intended to impose upon the other, and more particularly, when the differential in tax burdens varies from case to case or is not uniform in all cases, coordination can be said to be lacking.

Estate and gift taxes comprise one phase of taxation in which coordination is especially important. Both are levied upon the right to transfer property; the one upon transfers at death, the other upon transfers during life. It follows that the treatment accorded these complementary tax bases by our tax laws should be harmonious. Public policy may properly justify the imposition of lighter or heavier burdens upon either of the two. If, for instance, it is desired to encourage the distribution of fortunes during the lifetime of their owners, preferential treatment accorded inter vivos gifts, as opposed to transfers at death, is readily reconcilable with coordination. When, however, the preferential treatment accorded inter vivos gifts is greater than that required by public policy and when the preferential treatment is not accorded uniformly to all donors, with the result that the benefits accruing to one individual are relatively greater or less than those accruing another, lack of coordination exists.

In this respect, the present Federal estate and the Federal gift taxes are in pressing need of coordination. The need for such coordination emanates from the following considerations:

(1) The gift tax has greatly reduced the effectiveness of the estate tax by affording substantial opportunity for reducing tax liability incident to property transfers.

(2) The opportunity for reducing tax liability in this manner is not uniformly available to all individuals but varies with their transferable wealth.

(3) The reduction in the tax liability incident to property transfers available through inter vivos gifts is greater than that required by public policy.

(4) The distribution of estates through inter vivos gifts encouraged by the preferential treatment accorded it for tax purposes and the consequent reduction of property transfers subject to the estate tax has reduced the amount of inheritance and estate tax revenue available to States.

B. The Existing Lack Of Coordination

The use of inter vivos gifts enables a conspicuous reduction in Federal transfer tax burden. The advantages accruing to the taxpayer inherent in the gift tax as opposed to the estate tax emanate from five major causes: (1) The gift tax rate schedule is three-quarters of the estate tax rate schedule; (2) the gift tax rate schedule applies to the amount of the transfer after deductions for taxes, while that for estate taxes applies to the amount of the transfer, including the amount of the tax; (3) the gift tax affords exemptions in addition to those afforded by the estate tax; (4) the use of inter vivos gifts enables a double use of the lower brackets for transfer tax purposes, thus defeating progression; and (5) the use of inter vivos gifts enables a reduction in income taxes by enabling the breaking up of large incomes into smaller units with the accompanying multiple use of exemptions and lower brackets.

Because of the progressive character of both the income tax and property transfer tax rate structures, the tax advantage inherent in the gift tax from the above-enumerated considerations, is not uniformly available to all estates. The value of the double use of the transfer tax exemptions and lower brackets and the value of the multiple use of income tax exemptions and lower brackets grows more than proportionately greater with the increase in the size of the taxpayer's transferable fortune.

 
[Next]