Intergenerational Wealth Transfer and the Need to Revive and Metamorphose the Israeli Estate Tax

Notes

1. Moral arguments (Graph 1):

   1. Ascher, supra note 150, at 77 (discussing Blackstone’s perception of inheritance as “a custom turned into positive law”); see also O’Neill, supra note 137, at 65 (the right to property is a legal convention, which the tax system helps to shape); David G. Duff, Taxing Inherited Wealth: A Philosophical Argument, 6 Can. J. L. Jurisprudence 3, 44–45 (1993).

   2. Nozick, as discussed in Beckert, supra note 32, at 199. Ronald Chester argues that the American Supreme Court has recently adopted the view that the transmission of property at death is a natural right, rather than a right created and controlled by the legislator, see Ronald Chester, From Here to Eternity? Property and the Dead Hand ch. 3 (2007).

   3. Calderon, supra note 96, at 73–74.

   4. Maureen A. Maloney, Distributive Justice: That Is the Wealth Tax Issue, 20 Ottawa L. Rev. 601(1998); Duff, supra endnote i(1), at 19.

   5. Robert Nozick, Jan Narveson, & David Gauthier, as discussed in Eric Rakowski, Transferring Wealth Liberally, 51 Tax L. Rev. 419, 430 (1995–1996).

   6. In most cases, inheritance tax is paid out of property and capital rather than labor money, see Michael J. Graetz, To Praise the Estate Tax, Not to Bury It, 93 Yale L. J. 259, 276 (1983–1984) (most wealth of the very rich in the US is inherited or the outcome of enormous one-shot gains); O’Neill, supra note 137, at 64 (in the UK, much of the tax is payable on increased house value). Moreover, Maloney argues that wealth transfer taxation is justified, among other reasons, because even labor-earned money is the outcome of prior socio-economic stratification and luck rather than pure meritocracy, see Maloney, supra endnote i(4), at 614–17.

   7. Duff, supra endnote i(1), at 17 (taxing inheritance is more just than taxing other kinds of income since the beneficiaries “have no prior expectations to be disappointed and no anticipatory commitments to be disrupted”). Moreover, since it is always the heirs who carry the burden of the tax, the double taxing argument has no merit since the heirs have never paid a previous tax on the sum inherited, see O’Neill, supra note 137, at 64 (this argument relates also to argument i(22).

   8. Political argument in the US, see Graetz & Shapiro, supra note 132, at 140–41; Political argument in the UK, see O’Neill, supra note 137. Prabhakar found that this argument was a major criticism raised by participants of focus groups he studied in the UK, see Prabhakar, supra note 136, at 234. A major political argument in Canada, see Maloney, supra endnote i(4), at 606. Interestingly, the double-taxing argument is popular in debates over “death tax” although it can be used against VAT, full taxes, cigarette duties, and other taxes we pay out of our labor-earned money, see O’Neill, supra note 137, at 64. While most scholars view this argument as unconvincing rhetoric, Natalie Lee agrees that inheritance tax causes problematic double taxation, see Lee, supra note 132, at 692.

   9. Maloney, supra endnote i(4), at 611–12. One of the most challenging intellectual tasks for liberals is to mark the distinction between justified and unjustified inequality. John Stuart Mill is often cited as a liberal thinker who opposed the right to private inheritance beyond a minimal sum that will allow the beneficiary a moderate independence and argued that inheritance causes an unjustified inequality that runs against the principle of meritocracy, see Beckert, supra note 32, at 167–68. See also Ascher, supra note 150, at 88–89; Rakowski, supra endnote i(5), at 430–31. Equal opportunity claims are related to autonomy claims: severe inequalities substantially limit the disadvantaged’s ability to fulfill their right to autonomy and freedom, see Duff, supra endnote i(1), at 25–26. Other liberals, however, argue that inheritance and its inequality outcomes should be tolerated as other “accidents of birth,” such as looks, see Milton and Rose Friedman, as discussed by Beckert, supra note 32, at 199. Moreover, liberal thinkers have argued that intergenerational wealth taxation is a harsh violation by the sovereign of the right to property and a damaging interference in the free market, see supra endnote i(5), and Beckert, supra note 32, at 168. Recently, the writing of John Rawls on inheritance have gained attention, as a liberal stance that considers the inequality outcomes of wealth inheritance to be just as fair as the unequal consequences of the inheritance of intelligence, but which nonetheless need to be somewhat limited in the name of liberty and equal opportunity, see Beckert, supra note 32, at 208.

   10. Edward J. McCaffery, The Political Liberal Case against the Estate Tax, 23(4) Phil. & Pub. Aff. 281, 295 (1994).

   11. This discrimination occurs only if the tax is based on a transferor-oriented system (e.g. estate tax) and disappears if the tax is transferee-oriented (e.g. accession tax), see Halbach, supra note 153, at 220–21.

   12. Gale & Slemrod, supra note 135, at 31. This discrimination can be overcome by a tax that equalizes cohabitants’ rights to those of married couples, and even more strongly if the tax is agnostic to the relationship between the testator and the heirs, as is the case in accession tax, see Alstott, supra note 146, at 512.

   13. Calderon, supra note 96, at 44–45.

   14. Id. at 45–44; Mumford, supra note 129, at 592.

   15. McCaffery, supra note 138, at 304–06 (capital formation and saving are important to all segments of society); Richard Wagner, as discussed in Berry W. Johnson & Martha Britton Eller, Federal Taxation of Inheritance and Wealth Transfer, in Inheritance and Wealth in America 61, 85–86 (Robert K. Miller & Stephen J. McNamee eds., 1997) (wealth accumulation is necessary for investments that are beneficial to society as a whole).

   16. Duff, supra endnote i(1), at 24–25.

   17. Beckert, supra note 32, at 197 (describing a discursive shift in the US from viewing the owners of large fortune as “robber barons” to perceiving them as an evidence of meritocratic achievements.

   18. Ascher, supra note 150, at 87 (wealth accumulation by an individual is not only the outcome of his efforts but also of public investments in him, hence society has a right to this wealth); Ackerman & Alstlott, supra note 168, at 96–99. Selingman’s counter-argument from 1893, that poor people receive more from the state than rich people and therefore should pay more tax (see, Mumford, supra note 129, at 577), cannot be found in more recent literature.

   19. Political arguments in the UK and the US, see Gale & Slemrod, supra note 135, at 1.

   20. Id. at 32 (probate process may reveal information about lifetime economic well-being that is difficult to obtain in the course of life; smaller disincentive effects on labor and savings than taxes on the living; allows total lifetime transfer assessment); Mumford, supra note 129, at 568–70 (arguing that inheritance tax should be supported since the deceased is not affected and since taxing the dead lessens the amount needed from living taxpayers). This argument can be made stronger by those who think that the dead cannot be harmed or hold rights, see Daphna Hacker, Death and Dignity through the Prism of Inheritance Disputes (2013) (unpublished manuscript).

   21. Political argument in Germany, see Beckert, supra note 32, at 211.

   22. Batchelder, supra note 96, at 7; Joseph M. Dodge, Estate and Gift Tax: Comparing a Reformed Estate Tax with Accession Tax and an Income-Inclusion System, and Abandoning the Generation-Skipping Tax, 56 SMU L. Rev. 551, 552–53 (2003).

   23. Gale & Slemrod, supra note 135, at 31; John Locke perceived inheritance as a natural right of children, see Ascher, supra note 150, at 76.

   24. Duff, supra endnote i(1), at 59–60. Ascher goes even further by arguing that inheritance harms families since it is used by parents to control children and cause children to torture their parents in order to secure their share. These outcomes can be avoided by a 100% tax with fixed exemptions for offspring. See Ascher, supra note 150, at 112, 122, 127–30).

   25. Mumford, supra note 129, at 583, 592 (a widespread notion in the UK that inheritance tax is an insult to the family and a threat to familial solidarity). Beckert, supra note 32, at 272 (in Germany, inheritance tax is attacked as harmful to “family spirit”).

   26. Alstott, supra note 146, at 507 (Alstott goes further to argue that non-relatives should be exempted from tax while relatives should be fully taxed because relationships with non-relatives is an outcome of choice, see Id. at 511).

   27. In Germany, the argument of the nuclear family as a property unit that should not be taxed was raised by the liberal thinker Paul Achatius Pfizer in 1842, and constantly used by subsequent opponents of inheritance taxation, see Beckert, supra note 32, at 212, 223–24, 236.

   28. Ascher, supra note 150, at 81–82.

   29. For a welfare economic framework to assess estate tax, see Louis Kaplow, A Framework for Assessing Estate and Gift Taxation, in Rethinking Estate and Gift Taxation, supra note 136, at 164. More narrowly, the opponents of wealth transfer taxation point to the very low revenue it yields to support their argument that the tax “does not, in fact, appear to be working,” see McCaffery, supra note 138, at 286, 301, 303. For data on revenue rates from wealth transfer tax in different countries see Batchelender, supra note 96, at 103, Table A5. According to the objectors, even if the tax can be justified on a theoretical level and even if there are benefits to the tax, they are overridden by the (unintended) damage caused by its enforcement, detailed in Graph 2.

   30. See Batchelder, supra note 96, at 11–13; see also Duff, supra endnote i(1), at 6–9 (arguing that although the revenue from estate tax has diminished during the twentieth century (for example, in Britain: from 16.1% of total revenue in 1908 to 0.64% in 1985), this progressive tax can still be a significant source of state revenue). The utilitarian standpoint is of course relevant to other arguments discussed above. For example, Bentham supported state restrictions on inheritance since it harms the utility of all members of society by leading to an unproductive concentration of wealth and to unjustified enrichment of distant relatives, see Beckert, supra note 32, at 212.

2. Practical arguments (Graph 2):

   1. McCaffery, supra endnote i(10), at 288,

   2. Rakowski, supra endnote i(5), at 452–453; Ascher, supra note 150, at 100–02.

   3. McCaffery, supra note 138, at 320.

   4. Maloney, supra endnote i(4), at 614.

   5. O’Neill, supra note 137, at 66.

   6. Wojciech Kopczuk & Joel Slemro, Tax Consequences on Wealth Accumulation and Transfer of the Rich”, in Death and Dollars: The Role of Gifts and Bequests in America 213, 222 (Alical Munnell & Annika Sunden eds., 2003) (empirical evidence that tax rates negatively affect the reported estate’s size of the richest 0.5% of descendants); see McCaffery, supra note 138, at 306, 311 (estate taxation deters savings which society as a whole has an interest in since saving reduces costs of capital and increases productivity, and ultimately results in higher wages). But see, Rakowski, supra endnote i(5), at 458–59 (arguing that McCaffery’s trickle-down affect argument is baseless). The practical argument of encouraging spending, as well as encouraging in vivo gifts (see endnote ii(12) below) is related to the moral argument of equality. The opponents of the tax claim that increased spending and giving sabotages the tax supporters’ aim of minimizing inequalities since it increases the rich’s and their children’s enjoyment of spending resources compared to the underprivileged, see McCaffery, supra endnote i(10), at 290–291;. Alstott answers that a consumption of 100% will achieve the tax abolitionist goal, see supra note 146, at 492.

   7. Duff, supra endnote i(1), at 12 (people save for many reasons other than bequeathing and so the impact of wealth transfer tax on saving is minimal. Furthermore, the tax might increase the testator’s motivation to save “in order to maintain the transfer of a desired after-tax amount”). For an analysis of the literature on motives for wealth accumulation and the conclusion that “Egoistic and accidental transfer of wealth transfers appear to make up the majority of wealth transfers” see Batchelder, supra note 96, at 8–9. Finally, there are indications that a wealth transfer tax might encourage the testator’s children to save, see William G. Gale & Maria G. Perozek, Do Estate Taxes Reduce Saving?, in Rethinking Estate and Gift Taxation, supra note 136, at 216. But see, Robert H. Gordon, Comment, in Rethinking Estate and Gift Taxation, supra note 136, at 248 (agreeing that estate tax does not substantially affect parents’ saving, but arguing that it does reduces children’s saving).

   8. Stuart White, What (If Anything) Is Wrong with Inheritance Tax?, 79(2) Pol. Q. 162, 166 (2008).

   9. McCaffery, supra note 138, at 313; See also findings reported by Johnson & Britton Eller, supra endnote i(15), at 85. Avoidance options are greater in the global era and due to the existence of countries that are happy to become a tax haven, see Douglas J. McCready, Is Wealth Taxation a Plausible Reform? 34 (2) Can. Pub. Adm. 260, 265 (1991).

   10. Calderon, supra note 96, at 104.

   11. Id. at 105. However, Young and Varner have recently argued that there is little evidence on whether and to what extent high-income earners migrate in response to taxation. Furthermore, they found no impact of the new New Jersey tax on incomes over 500,000$ on millionaires’ migration, see Cristobal Young & Charles Varner, Millionaires Migration and State Taxation of Top Incomes: Evidence from a Natural Experiment (2:1) Nat. Tax J. 255–84 (2011).

   12. McCaffery, supra note 138, at 314–18.

   13. Ackerman & Alstott, supra note 168, at 105–07.

   14. Norborn & Ohlsson argue that although altruistic parents would avoid estate taxation by transferring in vivo gifts to their children, this effect would disappear if estates and gifts were jointly taxed, see Katarina Nordblom & Henry Ohlsson Tax Avoidance and Intra-Family Transfers, 90 J. Pub Eco. 1669 (2006).

   15. Political argument in the UK, see Mumford, supra note 129, at 590.

   16. Political argument in the US, see Beckert, supra note 32, at 201; Johnson & Britton Eller, supra endnote i(15), at 86. Political argument in Canada, see Maloney, supra endnote i(4), at 601.

   17. Maloney, supra endnote i(4), at 630–31 (in the US and Canada, wealth transfer taxation hardly ever causes forced liquidation). Maloney goes further by arguing that the selling of small businesses and farms should not be seen as an evil since in many cases the heirs of the owner fail to the run the business efficiently, see id. at 632.

   18. McCready, supra endnote ii(9), at 262–63; Lee, supra note 90, at 700–01.

   19. Duff, supra note 51, at 119 (arguing that the emphasis should be shifted from revenue to the symbolic and social function of wealth transfer taxes to lesson inequalities and unequal opportunities).

   20. Denis Kessler argues that the effect of the current inheritance taxes in many Western countries is so minimal that it can be understood as a symbolic tax used by politicians to reassure pressure groups and segments of the electorate concerned with equality. See Denis Kessler, The Taxation of Wealth in the EEC: Facts and Trends, 17 (3) Can. Pub. Pol’y 309, 320 (1991). See also Lester Thurow, as discussed in McNamee & Miller, supra note 1, at 209.

   21. Jonathan S. Feinstein & Chin-Chin Ho, “Elderly Asset Management and Health”, in Rethinking Estate and Gift Taxation, supra note 136, at 457, 409. (Estate tax encouraged the elderly to give in vivo gifts, and there are indications that those in poor health are pressured to give more, which might leave them without the necessary resources to care for themselves toward the end of life).

   22. Kopczuk & Slemro, supra endnote ii(6), at 223–30.