The federal estate tax was enacted in 1916 in an effort to raise revenues, reduce the concentration of wealth, and increase economic equality by preventing the wealthy from passing all of their assets to subsequent generations. The estate tax is one of the most progressive elements of the federal tax system, as it applies only to the very largest estates: currently those totaling $11 million for individuals and $22 million for couples.
Instead of exempting most estates from taxation, policymakers could instead tax all inheritances as capital gains. (A capital gain occurs when an investor sells an asset for more than its purchase price.) Heirs would owe taxes on the amount by which the asset appreciated over time. Ideally, the tax would not apply to the portion of the gain in value that results from inflation.
ESTATE AND GIFT TAXES: Policy
Retain the tax
Policymakers should retain estate and inheritance taxes as important components of our tax structure because they help reduce the concentration of wealth in society and prevent large amounts of capital income from escaping tax entirely. In the absence of an estate tax, capital gains should be indexed to inflation and taxed at death.
Federal and state estate and inheritance taxes should affect only the largest transfers, and surviving spouses, domestic partners, and family farms and businesses should be protected from excessive burdens. Heirs should have some protection against the need to liquidate assets to pay taxes.