This report will give an analysis on the benefits and drawbacks of implementing inheritance tax in America. Analysis One benefit of inheritance tax is that it can redistribute wealth fairly. Inheritance tax is progressive, which means tax rate increases as the taxable base amount increases. According to Tax Policy Center, the richest 1% people paid 78. 5% of the inheritance tax in 2011. In recent years, national budget for public education and universal health care exceeds 60% of the total
These two figures combined show that inheritance tax is mainly generated from the rich, but eventually spent on the public welfare that benefits the masses, hence it can improve social equality. Additionally, inheritance tax provides incentives for the rich to donate their property to charities. The Tax Code states that donations within 7 years of death can be exempt from tax. Many people choose this method to legally avoid inheritance tax. These donations contribute 22. 3% of charitable giving and contribution (NASASBO, 2010), which objectively improves philanthropy.
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Congressional Budget Office also pointed out that there would be a $13 to $25 billion reduction in charitable giving if inheritance tax was repealed in 2000. However, inheritance tax will possibly reduce social mobility to some extent. Although the 25% low-income people in America pay much less than the rich, inheritance tax still occupies a significant share of their property. Self-employed ones in this group are over twice as likely to enter a higher wealth class than others (Saxton, 2006).
About one half of the start-up funds are from family support. Therefore by limiting intergenerational transfers, inheritance tax makes it difficult for them to raise funds to establish their own business, not to mention climbing the economic ladder. Also, inheritance tax ultimately reduces the amount of total capital in the economy. With a high tax rate, about 50%, people’s incentive to save and invest is weakened. Wealth that would otherwise serve for productive uses is transferred to government, which hinders the accumulation of capital.
It is estimated that every $1 reduction in the intergenerational property transfers will cause $39 loss of capital in America (Saxton, 2006). In this way, inheritance tax is likely to lower the economic efficiency. Conclusion Inheritance tax can be justified in terms of improving social equality, but it may cause other problems that hinder the development of economy. It is, after all, a redistribution of social wealth in essence. Therefore, if redistributive policy alone does not work well, American government should consider reforming the income distribution as a fundamental solution to social inequality.
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