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A way out of the social security dilemma -- tax estates

By Glenn N. SolomanGlenn N. Soloman is a third-year student at Northeastern University's School of Law. / December 24, 1982



Almost every day the American public is told that the social security system is in a state of crisis; and that this crisis, as set in the context of the current economic quagmire, has posed a dilemma for our society. We must either reduce benefits, and thereby break faith with those whose faith has been so important to the evolution of our society, or we must raise social security taxes, prolonging the recession and burdening the working population.

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However, there are ways to keep from being impaled on either horn of the social security dilemma - alternatives to choosing between the short-term interests of the young and the old. One such way may be the taxation of estates for the special purpose of funding the social security system.

It is not to be wondered that this suggestion may seem bizarre. As Ronald Chester points out in ''Inheritance, Wealth, and Society,'' estate taxation has never been an important producer of revenue for the federal government. Under the 1976 Tax Reform Act, which represents estate taxation at its post-World War II height, approximately 56,000 estates were taxed annually. Under the Economic Recovery Act this number will be reduced to about 6,500 by 1986. This drastic reduction in the number of estates subject to taxation will result in a loss of only about $5.6 billion annually.

Yet there is an enormous amount of wealth which could be subjected to estate taxation. Most of the wealth held in trust is not included on estate tax returns. Ten years ago about $800 billion in trust investments was being managed by corporate fiduciaries. Given inflation and even moderate return on these investments, it would be reasonable to surmise that the $800 billion of 10 years ago is now about $1.5 trillion.

It would be misleading to suggest that the laws which allow many forms of trusteed wealth to escape inclusion on estate tax returns are riddled with loopholes. It is more as if, when taken together, they make up the Grand Canyon.

Consider as well that by 1986 all estates of up to $600,000 will be entirely exempt from federal estate taxes, and that even at present there is an unlimited marital deduction. This means that, no matter how large, an estate can pass to a surviving spouse without paying a single penny in federal estate taxes.

It is not clear why the taxation of estates has never been used to bring in substantial revenues. Among our founders, Jefferson expressd the opinion that individuals' power to control property ought to end upon death, and that this property should then be used to the benefit of society.

Obviously the Jeffersonian view has not been embodied in our laws and customs. Perhaps this is due to the notion that control of wealth after death is somehow akin to an extension of life, or the equally treasured idea that the freedom to control the disposition of property after death is an inherent right of property.

Given, however, that there is a tremendous concentration of wealth in our society (6 percent of American families control roughly 60 percent of the total family wealth) and the laws on trusts and estate taxation are facilitated by freedom of bequest, these are notions whose sacredness we can ill afford. It is clear that the controlled imposition and reform of estate taxes would produce substantial revenues badly needed by a social program that has come to be regarded as essential.

Of course this suggestion does amount, in a sense, to a call to raise taxes. But revenue production by means of estate taxation will not burden the young working population. It should therefore not retard economic recovery. The proposal could be criticized as calling for the taking of funds from general revenues to support social security. I do not regard this criticism as having much merit. For those who do, a special social security estate tax could be imposed to create a fund separate from general revenues for the benefit of the social security system.

An estate tax to fund social security could avoid or at least mitigate most of the negatives on the crisis list. This is not to suggest that the crisis of the system is not serious. It is as serious as the range of options being considered by those attempting to deal with the crisis is narrow.