Regulatory Tax Archives – Southern California Law Review

A New Look at Old Money

October 2025October 2025Miranda Perry Fleischer*

Taxing wealth—including inherited wealth—is a hot topic, making headlines and generating heated debate. Should millionaires and billionaires face an annual wealth tax, as championed by Senators and former presidential candidates Elizabeth Warren and Bernie Sanders? Should we strengthen the existing estate tax, as former presidential candidate Kamala Harris urged? Or, as opponents argue, are both annual wealth and once-a-generation wealth transfer taxes unfair and impractical? What makes this debate so intractable is not only that the public as a whole is divided on these issues, but that also many individual Americans hold simultaneous beliefs about wealth, opportunity, fairness, desert, and family that seemingly contradict each other. This Article cuts through that debate by proposing a novel solution for inheritance taxation that reconciles these deeply held beliefs with the benefits of wealth transfer taxation.

Our current estate tax treats the self-made millionaire the same as an heiress who has not earned a cent when they pass their fortunes on to their heirs. But this is misguided. Drawing on recent work on the psychology of taxation, this Article makes the case for an innovative inheritance tax system that taxes old money more heavily than new. This approach would allow individuals to bequeath wealth that they have earned—but not wealth that they have inherited—free of tax. Known as a Rignano tax, this proposal harnesses the finding that many Americans “silo” beliefs about wealth, holding seemingly contradictory beliefs that differ in part based on whether wealth is earned or inherited. By leveraging these findings and building on experience with the existing transfer tax system, this Article elaborates and advances a set of specific and concrete design recommendations for a Rignano tax.

This comprehensive analysis of a Rignano tax—the first in the law review literature—complements philosophical work that advocates for such a tax but does not address key design and policy questions. Further, it contributes to tax scholarship by advancing our understanding of the relationship between a tax’s normative goals and structural design choices. And for both advocates and opponents of the estate tax, it offers a nuanced and fair exploration of the debate surrounding inheritance taxation as well as a potential resolution of the enduring stalemate over taxing wealth.

Her voice is full of money.

—F. Scott Fitzgerald, The Great Gatsby¹

They were new money, without a doubt: so new it shrieked. Their clothes looked as if they’d covered themselves in glue, then rolled around in hundred-dollar bills.

—Margaret Atwood, The Blind Assassin²

Introduction

Compare Tom, who builds a multi-million-dollar business from the ground up, with Mary, an heiress who inherits millions and never earns a cent. Both want to leave their fortunes to their children. Although our current estate tax treats Tom and Mary the same, this approach is misguided. It ignores that not only is the public as a whole divided on the issue of taxing wealth transfers,³ but many individual Americans hold simultaneous beliefs about wealth, opportunity, desert, fairness, and family that seemingly contradict each other. Many believe, for example, both that working hard and saving in order to help one’s children is as American as apple pie and that it is unfair for some children to begin life with a substantial head start.⁴

As a result, the debate over taxing wealth—including inherited wealth—is at a longstanding impasse.⁵ Influential legislators including Senators and former presidential candidates Elizabeth Warren and Bernie Sanders champion annual wealth taxes on ultra-millionaires, while opponents passionately contend that even once-a-generation taxes on wealth transfers are unfair and impractical, calling them “expropriation” and “an especially cruel injury.”⁶ This Article cuts through that debate and reconciles those competing beliefs by proposing a novel inheritance tax system that taxes old money more heavily than new. This innovative approach—known as a Rignano tax⁷—would allow Tom to bequeath wealth that he has created free of tax, while taxing Mary, who simply inherited her wealth.

Drawing on recent work on the psychology of taxation, this innovation harnesses the finding that many Americans “silo” beliefs about wealth, holding seemingly contradictory beliefs that differ in part based on whether wealth is earned or inherited. A Rignano tax thus reconciles the benefits of wealth transfer taxation with deeply held beliefs about fairness, desert, private property, and family. Because these beliefs—which legal philosophers Liam Murphy and Thomas Nagel call “everyday libertarianism”⁸ and which economist Steven Sheffrin terms “folk justice”⁹—generally differ from those of policymakers and academics, they are often ignored. Recent work on the psychology of taxation suggests that this is a mistake.¹⁰ Policymakers who ignore these beliefs do so at their own peril, often undermining their own normative aims.

But taking these beliefs into account does not mean abandoning wealth transfer taxation altogether. People frequently hold views about fairness and morality in different domains that appear to contradict each other, a concept that Zachary Liscow terms “policy silos.”¹¹ A pro-life advocate, for example, may also support the death penalty; someone who opposes redistributive taxation may favor transportation policy that helps the poor. Crucially, evidence indicates that many Americans “silo” beliefs about wealth, holding seemingly contradictory beliefs that depend in part on whether wealth is earned or inherited.

These insights suggest a way out of the morass bogging down the debate over inherited wealth. Supporters of inheritance taxes should not dismiss out-of-hand public attitudes about hard work, thrift, and family, but instead harness the concept of policy silos. By allowing individuals to make tax-free transfers of wealth that they themselves have earned—but not wealth that they have merely inherited—a Rignano tax acknowledges the very real, deeply held value that the public places on hard work, entrepreneurship, and notions of desert while also addressing concerns about inherited wealth.¹²

Although the idea of taxing old money more heavily than new has long fascinated philosophers of all stripes,¹³ philosophical literature leaves key design and policy questions unanswered. This Article answers those questions, offering the only comprehensive analysis in the law review literature of a Rignao tax. It first justifies a Rignano tax as a normative matter, delving more deeply into both expert and lay arguments for and against taxing wealth and recent work on the psychology of taxation. Its key normative insight is that a Rignano tax balances the goals of wealth transfer advocates (such as enhancing equality of opportunity and minimizing dynastic transfers of unearned power) with those of opponents of such taxes (such as rewarding desert, hard work, and family). By acknowledging both the pros and cons of taxing wealth transfers, a Rignano tax can succeed politically where other proposals fail.

What remains to be resolved are important questions of design and administration. Charting new ground in the literature on Rignano taxes, this Article builds on experience with the existing transfer tax system to elaborate and advance a set of specific and concrete design recommendations for a Rignano tax. These are:

Base: Imposing a tax on gifts and bequests received by an individual when that wealth is the subject of a second transfer;

Rate: Levying a rate of 0% on first-generation transfers and 40% on other transfers;

Valuation: Using the risk-free rate of return to determine what portion of a gift or bequest is second-generation wealth;

Frequency: Taxing generation-skipping transfers;

Tracing: Using a first-in-time approach to allocate second-generation wealth;

Trusts: Treating distribution as the relevant date for both imposing the tax and “starting the clock” for determining future growth; and

Transition Rules: Treating one-sixth to one-third of existing wealth as inherited.

Together, these recommendations build upon the insights of the psychology literature to craft an inheritance tax system that balances how the public actually thinks about taxation with the goals of inheritance tax supporters. Taxing heirs instead of transferors harnesses the insight that people silo beliefs about wealth, distinguishing between inherited and earned wealth. It also lessens the pull of moral mandates about double taxation and hard work. At the same time, it reflects the moral intuitions shared by most supporters of inheritance taxation. For example, many of the concerns raised by inherited wealth—such as equality of opportunity—are best measured by how much wealth a given person inherits, not how much total wealth an individual bequeaths without regard to how that wealth is divided among beneficiaries.

Imposing a zero rate on initial transfers of earned wealth likewise diminishes the attraction of the double taxation and hard work arguments. It also minimizes the threat that people often feel when systems of which they are a part—such as the family or an economy that rewards hard work and entrepreneurship—are undermined. By suggesting a rate of forty percent for later transfers, it acknowledges that repeated wealth transfers raise normative

concerns without breaching the fifty percent threshold that is especially salient in tax debates.

Other recommendations address valuation and liquidity concerns to increase administrability and decrease opposition triggered by those difficulties. For example, even though most normative considerations suggest taxing trust beneficiaries when their interests vest, this Article proposes taxing them at distribution. At that point, accurate valuations—and not just estimates—can be made, and liquidity concerns disappear. This acknowledges the instinct many people have that taxing “paper gains” is unfair. And using the risk-free rate of return to determine what portion of an inheritance’s growth is earned versus unearned provides a simple, easy to administer method for distinguishing what portion of a second transfer is old money versus new.

A Rignano tax thus charts a course through the competing beliefs held by both supporters and opponents of inheritance taxation. Although implementing one will require some additional complexity and recordkeeping, these burdens are not insurmountable. Several European countries tax some bequests more heavily than others depending on the relationship between the transferor and transferee.¹⁴ And for the last decade or so, our current system has successfully allowed one spouse’s estate tax consequences to turn on the value of the other spouse’s property as well as actions taken by the predeceased spouse’s executor at his or her prior death. This suggests that tying a recipient’s tax burden to the actions of the transferor is feasible. Administrative concerns therefore do not derail a Rignano tax’s carefully charted course. What remains is a workable inheritance tax system that can gain traction with the public where other proposals fail.

This Article proceeds as follows. Section I offers an overview of the current estate and gift tax system and common alternatives. Section II explores the arguments for and against taxing wealth transfers. Section III describes the justifications for a Rignano tax, and Section IV details what implementing a Rignano tax would entail. Section V concludes by assessing how well a Rignano tax balances competing intuitions concerning inherited wealth and concludes that the Rignano tax is worth pursuing notwithstanding the potential complexities that attach to its design and implementation.

I. An Overview of Wealth Transfer Taxation

Taxing wealth transfers is a longstanding feature of our federal tax system. Our current estate tax dates from 1916, when Congress imposed a tax ranging from one percent on estates over $50,000 to ten percent on estates over $5,000,000.¹⁵ To prevent individuals from avoiding the tax by making lifetime gifts instead of bequests, Congress permanently added a gift tax a few years later.¹⁶ This system is “unified,” meaning that it taxes an individual’s gratuitous transfers once they cumulatively exceed a per-transferor exemption amount, whether those transfers are gifts or bequests.¹⁷ For simplicity, this Article refers to this unified structure as the “estate tax.”

Due to changes in the exemption and rates, the tax’s bite has fluctuated dramatically over the past two decades.¹⁸ As recently as the year 2000, the top rate was 55 percent; by 2013, it had dropped to 40 percent, where it remains.¹⁹ As rates were dropping, the exemption was increasing. Between 2000 and 2017, it grew from a comparatively small $675,000 to over $5,000,000,²⁰ and in 2017, the Tax Cuts and Jobs Act temporarily doubled the exemption to $10,000,000²¹ (adjusted for inflation to $13,990,000 in 2025²²). Although the exemption was scheduled to return to a benchmark of $5,000,000 in 2026, legislation in the summer of 2025 permanently increased it to $15,000,000, adjusted for inflation, starting in 2026.²³ Given the exemption’s size, the estate tax affects only a tiny sliver of the population. In 2020, roughly 4,100 estates were required to file an estate tax return,²⁴ and of those, only about 1,900 actually owed any estate tax—less than 0.1 percent of the estimated 2,800,000 decedents that year.²⁵ Despite the small number of taxable returns, the tax raises a non-trivial amount of revenue—roughly $16 billion in 2020.²⁶ Interestingly, the amount of revenue has not decreased as fast as the number of taxable estates has decreased, which suggests that exempting additional transfers from tax (as a Rignano tax would) would not necessarily eviscerate the tax’s revenue-raising capacity.²⁷

A few features of the estate tax merit mention. First, it focuses on the transferor. This contrasts with recipient-focused taxes, such as the inheritance or accessions tax schemes that are more common abroad.²⁸ Other than the marital and charitable deductions, the estate tax does not distinguish among recipients. Consider Anna, whose wealth totals $15,000,000. She is taxed the same whether she transfers her fortune to one child or splits it among ten cousins.

Second, individuals may make a number of tax-free transfers. Most importantly, each individual has a single lifetime exemption amount—currently $13.99 million—which applies to her cumulative wealth transfers.²⁹ Assume that Anna gifts her daughter $10 million during life and later dies with an estate of $5 million. The lifetime gift uses up most of her exemption amount, leaving only $3.99 million of it left for later transfers. At her death, $3.99 million of her estate will be shielded from tax by the rest of her exemption amount, and the remaining $1.1 million of her estate will be taxed. She does not get a new exemption for her bequests. In addition, the annual exclusion allows each individual to exclude the first $19,000 transferred to each recipient each year from the above calculations.³⁰ Anna can give as many people as she likes—her whole Tax I class, perhaps—$19,000, and the gifts are simply ignored. Anna can do this year after year, and the gifts do not use up any of her exemption amount. Further, there are unlimited deductions for marital³¹ and charitable transfers.³² If Anna bequeaths her entire estate to her spouse, her taxable estate is zero. She does not need to use her exemption amount, and it rolls over to her spouse for later use. Likewise, if Anna bequeaths her $15,000,000 to charity, her taxable estate is zero. In this case, however, her unused exemption simply disappears.

Third, the generation-skipping transfer tax precludes families from minimizing their total tax burden by “skipping” generations. If Anna bequeaths her estate to her daughter Bonnie, who in turn bequeaths the wealth to Anna’s granddaughter Chloe, the estate tax is imposed twice. But if Anna skips Bonnie and bequeaths her wealth directly to Chloe, the estate tax is imposed only once. To equalize the tax burden in these situations, the generation-skipping tax imposes a tax on transfers that “skip” generations.

Finally, this system is separate from the income tax. Gifts and bequests received are not included in a recipient’s income, regardless of size.³³ Later income tax consequences to the transferee depend on whether the transfer is a gift or bequest.³⁴ Assume that Anna buys stock for $100 and transfers it to Bonnie when it is worth $1,000. If the transfer is a gift, Bonnie takes Anna’s basis for income tax purposes and will pay tax on the $900 unrealized gain upon disposition.³⁵ If Anna bequeaths the stock to Bonnie, Bonnie takes a fair market value basis of $1,000.³⁶ The $900 gain that accrued in Anna’s hands disappears.

A transferor-focused estate tax is just one possible way of taxing wealth transfers. Numerous OECD countries, including Belgium, France, Germany, Japan, Spain, and Switzerland, impose either accessions or inheritance taxes that focus on beneficiaries.³⁷ Although the two terms are often used interchangeably, they are technically distinct.³⁸ The former taxes the recipient based on the total amount of gifts and bequests received during her lifetime, while the latter taxes the beneficiary on such receipts annually.³⁹ Inheritance tax rates often vary based on the relationship between the donor and beneficiary, with transfers between close relatives taxed more lightly than transfers between more distant relatives and unrelated individuals. Finally, both accessions and inheritance tax systems generally exempt transfers between spouses.

An alternative to taxing gifts and bequests through a separate estate, inheritance, or accessions tax system is to change their income tax treatment. Most obviously, gifts and bequests could be included in income, just like salary or lottery winnings.⁴⁰Although this is fairly rare, Latvia and Lithuania do this, and Lily Batchelder’s “comprehensive inheritance tax” is essentially an income inclusion scheme.⁴¹

Another option is to use carry-over basis for bequests as well as gifts so that when transferees sell, they will pay tax on any gain that accrued to the donor regardless of whether the transfer is a gift or bequest (returning to Anna and Bonnie, Bonnie would pay tax on the $900 gain that accrued in Anna’s hands in both circumstances). The U.S. has briefly experimented with carry-over basis twice before—once in 1976 (although it was repealed before going into effect) and again in 2010 (that year, estates could choose between the regular estate tax or a system without an estate tax but with carry-over basis).⁴²And finally, gifts and bequests could be treated as realization events to the donor that trigger tax on unrealized appreciation at the time of transfer.⁴³ The United Kingdom⁴⁴ and Australia⁴⁵ treat gifts as realization events. Canada takes this approach at death, and former President Biden and numerous Senators have proposed that the U.S. follow suit.⁴⁶ In theory, one could both change the income tax treatment of gifts and bequests and impose a separate wealth transfer tax, but in the real world, they tend to be treated as either/or propositions due to political concerns.

II. The State of The Debate over Estate Taxes

Taxing wealth transfers is extremely controversial. As the foregoing history demonstrates, opponents have successfully pursued legislation that has drastically weakened the estate tax over the past two decades. In spite (or perhaps because) of this political history, taxing wealth transfers (as well as wealth itself) remains popular with a substantial portion of the public.⁴⁷ Supporters of wealth transfer taxation focus on egalitarian and welfarist justifications, while opponents generally rely on libertarian arguments. This Article’s goal is not to evaluate the strengths and weaknesses of those arguments in depth, which an extensive body of work does elsewhere. Instead, it is to provide an overview of this debate so that readers can better understand how people think about the estate tax so that they can evaluate the attractions of a Rignano tax.

A. Arguments in Favor of Wealth Transfer Taxation

Equality of Opportunity

Perhaps the most popular argument for taxing wealth transfers stems from the principle of equality of opportunity.⁴⁸ This ideal holds that each individual—regardless of arbitrary characteristics such as race or gender—should have an equal shot at pursuing her vision of the good life, while still bearing responsibility for her decisions.⁴⁹ In tax and legal scholarship, the most common instantiations require “redistribution from those with greater means and opportunities to those with less.”⁵⁰

These “liberal egalitarian” theories⁵¹ rest on two arguments. First, the financial circumstances of birth impact one’s ability to develop one’s talents. An intelligent child born to poor parents generally does not have the same educational opportunities as one born to wealthy parents.⁵² Well-off parents can afford private school tuition or a house in a high-quality school district,⁵³ tutors, and challenging after-school programs. Parents of athletes pay for private coaches, travel teams, and expensive summer camps. Well-off children do not have to work to help pay the rent but can instead spend time on their studies and resume-building activities like internships. And once a child is grown, wealthy parents can provide seed money for a business, pay for graduate school, or cover the down payment on a house. Second, these circumstances are arbitrary. A child does not choose to be born into a rich or poor family, just as she does not choose her race.

Equal opportunity therefore requires some ex ante equalization of resources so that a poor child with an IQ of 150, Mozart’s musical genius, or a keen business sense has the same shot at success as a richer child. In theory, taxing wealth transfers both reduces their size (in turn diminishing the advantages of being born into a rich family) and creates revenue to fund redistribution to those with fewer opportunities.⁵⁴

Dynastic Power

A related justification is to minimize the intergenerational transmission of power.⁵⁵ As our founders recognized, rejecting hereditable power is one of our fundamental values.⁵⁶ Yet great wealth often brings economic and political power over others.⁵⁷ Those favoring wealth transfer taxes on these grounds point to the following.

First, money enables one to make substantial political donations. Donors become de facto gatekeepers and agenda setters, influencing who more easily stays in the race and which issues gain prominence.⁵⁸ Substantial contributions plausibly increase access to elected officials⁵⁹ as well as influencing legislative behavior.⁶⁰ Large contributors often obtain influential positions such as ambassadorships or bureaucratic posts.⁶¹ Having a lot of money also makes it easier to run for office. Consider recent presidential candidates Tom Steyer⁶² and Michael Bloomberg⁶³ as well as President Donald Trump.⁶⁴ Closer to home, numerous candidates in U.S. Senate and House races⁶⁵ and state and local elections⁶⁶ have also spent plentiful sums of their own.

Money also allows one to influence public opinion,⁶⁷ most directly through unlimited, anonymous contributions to Section 501(c)(4) social welfare organizations that can advocate for and against candidates, lobby, and conduct issue advocacy. The wealthy can shape the media’s news and editorial coverage through advertising purchases⁶⁸ or from owning media companies directly.⁶⁹ And finally, the ability to influence policy (both directly and indirectly) also accompanies wealth.⁷⁰ Threats to relocate businesses, cancel events, or abandon planned openings or expansions can influence elected officials eager to protect local economies, even when the policies in question are not directly business-related.⁷¹ Business leaders are often consulted for advice by policymakers,⁷² be it through informal conversations or official advisory councils.⁷³ And more directly, such leaders are often named to policy-making positions that require special knowledge precisely because of the skills and expertise that made them successful. Lastly, the traits that bring business success often enable business leaders to naturally become civic leaders.⁷⁴

Wealth can also mean having economic power over others, especially in areas where a few families dominate economic life. Although the days of official company towns are long-gone, some influential families still control much of the employment opportunities in certain communities—for example, the Kohler family in Wisconsin.⁷⁵Elsewhere, residents might depend on a small set of firms for groceries, housing or other needs, such as cars. Decisions about what food to stock and at what prices, whether to raise rents or wages, expand or close a firm, and the like directly impact residents’ lives.⁷⁶ Handing the family business (or controlling chunks of publicly traded companies) down to one’s heirs is therefore tantamount to handing them economic power over others.

Inheritances and Ability to Pay

A third justification for taxing wealth transfers proceeds from the principle that political institutions should maximize welfare.⁷⁷ This argument equates welfare with utility and assumes that individuals have identical utility functions that decline as wealth and income increase.⁷⁸ Redistribution from an individual with more income or wealth to an individual with less thus increases overall utility. The catch is that taxing higher-income (or higher-wealth) individuals may lead to reduced labor and investment, decreasing overall welfare. The optimal tax literature thus argues that the ideal solution would be to tax ability, which cannot be minimized the way one can choose to work less.⁷⁹ But since ability cannot be directly observed, the next best is to tax income as a proxy.⁸⁰

Starting from this premise, some theorists argue that gifts and bequests received also reflect well-being and ability and should be taxed as proxies therefore.⁸¹ The reasoning is two-fold. If you are comparing two individuals with identical labor income, ignoring the fact that one receives a large inheritance is nonsensical—just as ignoring any other inflow, such as winning the lottery, would be. Second, the receipt of gifts and bequests is linked to a variety of “nonfinancial inherited assets and traits that powerfully affect earning ability.”⁸² These theorists generally reject the standard optimal tax account that taxing capital (which an estate tax does) creates too many economic distortions on three grounds.⁸³ First, they argue that this account overestimates the share of bequests made for reasons that are responsive to tax versus those that are not responsive. For example, someone who is saving to fund a comfortable retirement or for medical and long-term care as they age, and who “accidentally” leaves whatever is left to their heirs, will not really be influenced by taxation. Second, they contend that observed declines in wealth accumulation that correlate to transfer taxes are plausibly attributable to tax avoidance or increased lifetime gifting rather than reduced savings.⁸⁴ Lastly, these theorists note that most studies ignore recipients, who often work less after receiving an inheritance.

A Wealth Transfer Tax as a Periodic Wealth Tax

The foregoing arguments focus on the significance of transferring wealth. In contrast, a second set of justifications focuses on its very existence. But because political and administrative hurdles render taxing wealth itself difficult (if not impossible), taxing wealth transfers is an indirect solution.⁸⁵

Wealth Inequality and Democratic Concerns. A first justification for taxing wealth is to protect our democratic institutions.⁸⁶ There is a strong link between money and political influence, and people have different amounts of money.⁸⁷ As a result, many argue that money muddles the ideal that “the political system should . . . treat[] all citizens as free and equal participants.”⁸⁸ One concern is that the preferences of constituents with money will be prioritized over those without.⁸⁹ A growing body of evidence suggests that policymakers are more responsive to the views of the former;⁹⁰ this phenomenon has been observed at both the state⁹¹ and federal level,⁹² across a range of policies,⁹³ and especially when the two sets of views diverge.⁹⁴ This is both fundamentally at odds with a core tenet of democracy,⁹⁵ and creates a second harm by distorting the deliberative process.⁹⁶ If the system ignores information about the preferences of a large chunk of society, policymakers may lack all the information necessary to make fully-informed decisions. This vacuum also prevents the deliberative system from benefiting from a diversity of viewpoints.⁹⁷ A similar yet distinct harm from overweighting the preferences of the affluent is inefficiency. Here, the concern is that neither the harms to the non-affluent from policies favored by the wealthy nor the benefits from policies favoring the non-affluent will be taken into account. As a result, the true costs of a

variety of policies are obscured, potentially resulting in indirect redistribution to the affluent.⁹⁸

Economic Externalities from Wealth Concentrations. A similar justification for taxing wealth is that large wealth concentrations harm the economy.⁹⁹ Although short-run studies are mixed, several long-run studies suggest that highly unequal concentrations of wealth are negatively correlated with economic growth.¹⁰⁰ Several plausible explanations exist, but two appear most likely.

First, high levels of inequality might lead to underinvestment in education and health. Poorer families often face borrowing constraints that encourage young adults to enter the workforce rather than continue with schooling that increases skills and later income. In turn, fewer resources will be available to pass on to the next generation, compounding the cycle.¹⁰¹ A complex link between wealth, fertility, and education may also exist. Wealthier families tend to have fewer children, leading to greater investment in each one; the opposite is generally true for less-wealthy families.¹⁰² At the societal level, societies with higher levels of inequality may invest less in educational opportunities for the less well-off.¹⁰³

Somewhat similarly, high levels of inequality might decrease societal investment in health care.¹⁰⁴ And on the micro-level, having a relatively low income or social status might negatively impact an individual’s health, which imposes costs in terms of lost human capital and diverted financial resources.¹⁰⁵ Second, unequal concentrations of wealth are linked to social unrest and diminishing social cohesion, both of which can also contribute to slower economic growth in a number of ways.¹⁰⁶ It is plausible that in highly unequal societies, individuals engage in more rent-seeking, which misallocates resources. Inequality also contributes to sociopolitical instability, which both disrupts normal market and economic activities (think

of labor strikes) and creates an environment of political and legal uncertainty.¹⁰⁷

Owning Wealth and Ability to Pay. A final justification for taxing wealth is that simply holding it reflects ability to pay. Consider two people who each have $75,000 of labor income. If one also has several million dollars in the bank, shouldn’t that change our assessment of whether the two have an equal ability to pay tax?¹⁰⁸ After all, the mere existence of wealth enhances one’s financial capacity.¹⁰⁹ It also brings comfort, security, and status, all of which are intrinsically valuable and plausibly make it easier to generate even more wealth.¹¹⁰ Second, recall the welfarist ideal that tax burdens should track ability or endowment, and that income is the best proxy. Due to the realization requirement, our income tax system does not tax all economic income as it accrues. Some therefore propose taxing wealth periodically to capture the same measure more fully.

B. Arguments Against Wealth Transfer Taxation

While advocates of wealth transfer taxes tend to rely on arguments that reflect egalitarian and welfarist ideals, opponents generally ground their criticisms in libertarian and libertarian-adjacent arguments about efficiency, property rights, and the appropriate role of government. These can be a bit hard to categorize because scholarly opposition to wealth transfer taxes is scant in comparison to scholarly support. Most of the arguments made by everyday estate tax supporters are also fleshed out with care by academics. This is less true, however, for many of the opinions held by everyday estate tax opponents. Nonetheless, we can sort these critiques into roughly two groups.¹¹¹ The first set opposes wealth transfer taxes because they have differing normative visions of the role of government, a just distribution of resources, and fairness. The last set focuses on the efficiency of wealth transfer taxes to argue that they are themselves harmful.

Equality of Opportunity Revisited

The argument that equality of opportunity requires redistributing resources from rich to poor is contested.¹¹² Another interpretation of equal opportunity, known as “careers open to talents” or “the merit principle,” instead focuses on open competition.¹¹³ On this view, resources are irrelevant to one’s ability to compete for jobs, school admissions and scholarships, and the like; what counts is whether all individuals have a chance as a formal matter to compete.¹¹⁴ This ensures that positions are awarded based on merit to the most talented, instead of to the less talented due to arbitrary and unrelated characteristics like race or sex. Advocates of the merit principle often point to rags-to-riches stories such as media personality Oprah Winfrey, clothing designer Ralph Lauren, and Starbucks CEO Howard Schultz as proof that formal nondiscrimination sufficiently ensures a level playing field. If one interprets equal opportunity in this manner—as many Americans do—then one would naturally oppose any tax designed to redistribute wealth or income on equality of opportunity grounds, including a wealth transfer tax.

Rejecting Declining Marginal Utility and Progressivity

Many similarly contest the various arguments relating to the declining marginal utility of wealth and income. Some oppose the estate tax because they believe that redistribution to maximize welfare is beyond the proper scope of government, even if they accept the premise of declining marginal utility.¹¹⁵ Others question the assumption itself.¹¹⁶ Richard Epstein emphasizes, for example, that dollars are not ends unto themselves, but rather means. As he writes, “The decline in the marginal utility of an additional steak after you have already eaten one may be very high. But wealth is convertible into any number of different goods, so in each case the decline in utility has to be measured by referring to the utility of the most desired good as yet unpurchased.”¹¹⁷ And there’s some evidence supporting this view,¹¹⁸ including work suggesting that although utility likely declines as income rises in the lower range, it then increases with income in the middle range before declining again, creating an S-shaped curve.¹¹⁹

A related set of critiques reflects the normative dispute over whether the overall tax system should impose progressive or proportionate tax burdens.¹²⁰ Supporters of progressivity favor taxes that target the wealthy—such as estate taxes—as a way to increase the progressivity of the overall tax system.¹²¹ Opponents of progressivity naturally oppose such taxes, favoring proportionate taxes for several reasons.¹²² Some accept the ideal that tax burdens should track one’s ability to pay but reject the assumption that declining marginal utility requires imposing higher tax rates on the wealthy—the “equal sacrifice” argument. If utility does not decline, then taxing everyone at the same rate imposes an equal sacrifice, negating the need for progressive rates.¹²³

Others reject the ability-to-pay principle, instead arguing that taxes should reflect how much one benefits from the societal infrastructure (the “benefit” theory). As Friedrich Hayek explains, “since almost all economic activity benefits from the basic services of government, these services form a more or less constant ingredient of all we consume and enjoy and that, therefore, a person who commands more of the resources of society will also gain proportionately more from what the government has contributed.”¹²⁴ Richard Epstein analogizes the state to a partnership, highlighting that partnerships default to the “pro rata division of gains and losses derived from any common venture,” which ensures that “every individual [is] made better off to the same degree, that is, receive the same rate of return on his proportionate investment in social infrastructure.”¹²⁵

Private Property Rights

A third normative objection is that estate and inheritance taxes unjustly interfere with private property rights.¹²⁶ Supporters of strong private property rights, ranging from John Locke¹²⁷ and John Stuart Mill¹²⁸ to Robert Nozick¹²⁹ and Richard Epstein, overwhelmingly argue that if someone justly acquires property, she has the right to transfer that property however she likes, including by making gifts and bequests.¹³⁰ Because estate and inheritance taxes interfere with this right, they are not simply unjust, but uniquely unjust. As philosopher Loren Lomasky argues, they are “an especially cruel injury because [they] deprive[] the dead of one of their last opportunities for securing the goods that they value.”¹³¹ On this account, choosing to make a gift or bequest expresses the identity of the donor in a way that selling property does not. It is a sign of her affection for the recipient, as well as her values.¹³² Just as other intimate family matters relating to the expression of values—such as which holidays to celebrate and whether to go to church—should be immune from state interference, so too should gratuitous transfers. Moreover, gifts and bequests take place in the private realm of the home and neither avail themselves of the market infrastructure nor represent a voluntary entrance into the public sphere. In contrast, most taxable activity—like selling labor or property—represents a voluntary entry into the public sphere whereby one willingly consents to the burdens of taxation in exchange for using the market infrastructure. Perhaps, then, the intrusive burden of taxing gifts and bequests (e.g., tracking, valuing, and reporting) in the private sphere should be given more weight than the burden from taxing transactions in the public marketplace.

Double Taxation

Many also view the estate tax as double taxation.¹³³ Although this critique is extremely common among members of the public, policymakers and scholars tend to be dismissive of it as betraying a misunderstanding of the broader tax system. They first note that because of the realization requirement,¹³⁴ many wealthy individuals have never paid income tax on the increase in value of their investments.¹³⁵Studies suggest that untaxed appreciation comprises an average of 32% of smaller estates (a few million dollars) to 55% of large estates (those in the $100 million range).¹³⁶ To some extent, then, estate tax supporters are correct that opponents wielding the double taxation argument either misunderstand this point or overstate their case.

But what about wealth that has already been taxed, such as labor income invested in assets such as taxable savings accounts? Estate tax opponents are correct that an estate tax taxes this twice.¹³⁷ And to many, that just seems unfair on a gut level, despite various counterarguments. One counter is that the same income is often taxed multiple times to the same person; think of income, payroll, and sales taxes. Another counter is that recipients of gifts and bequests do not include them in income. Therefore, taxing gifts and bequests simply matches up the number of people that benefit from the property with the number of times it is taxed. If Hannah gives Iris a gift of $1,000, many argue that taxing both of them makes sense since each benefits from the funds. Hannah could have spent that $1,000 on fancy cheese, but instead chose to give the money to Iris, and she enjoys the warm glow that comes with making a gift. And Iris has $1,000 to spend as she sees fit.¹³⁸

But many transfer tax opponents contest that Hannah benefits when she makes a gift to Iris the same way that she benefits when, for example, she pays Iris to paint her house. In their view, Hannah has transferred the ability to benefit from the funds to Iris. Since only one person—Iris—ends up benefitting, only one person should be taxed. Since Hannah was already taxed via the income tax, it makes no sense either to impose a separate transfer tax or require Iris to include the transfer in income.¹³⁹ Setting aside the issue of appreciated property, we can see that the double taxation argument comes down to a normative view about the definition of income. If Hannah benefits from making a gift just as she benefits from having her house painted, there is no double taxation. But if one believes that Hannah gives up her ability to benefit and passes it to Iris, then taxing gifts and bequests is double taxation. As with arguments about equality of opportunity and progressivity, this simply comes down to reasonable disagreements about normative priors.

Efficiency and Administrative Concerns

A final set of arguments highlight efficiency and administrative concerns. For some, these concerns alone are sufficient to oppose the estate tax, even if they otherwise sympathize with its goals; for others, these concerns buttress normative critiques.

Economic Incentives. At heart, transfer taxes are taxes on savings by donors.¹⁴⁰ As such, opponents contend that they punish savers and reward spenders by raising the price of saving relative to spending.¹⁴¹ This reaction seems intuitive to many laypeople, and is arguably backed up by two recent economic analyses finding a correlation between higher estate taxes and lower wealth accumulations at death—a reduction in wealth at death of roughly 10% for the very wealthiest taxpayers.¹⁴² Some theorists–such as economists who deploy optimal tax analysis—thus argue that transfer taxes decrease overall welfare by shrinking the size of the pie available for redistribution.¹⁴³ Professor Ed McCaffery offers a twist on this argument, arguing that the estate tax exacerbates inequalities of opportunity by encouraging lifetime consumption and early spending.¹⁴⁴ And many everyday people simply recoil at the idea of a tax that seems to single out behavior (working hard, saving, and frugality) that our society deems virtuous.

Harm to Small Businesses and Family Farms. A related critique—one that strongly resonates with the public—is that the estate tax harms small businesses and family farms. To that end, estate tax opponents frequently recount stories of families who allegedly have been or will be forced to sell farms and small businesses to pay the tax.¹⁴⁵ (The story of Lester Thigpen, an African-American tree farmer from Mississippi who was the grandson of slaves, is a prime example.)¹⁴⁶ Opponents also emphasize the costs that families must incur to plan for the tax, such as purchasing insurance to provide liquidity and paying advisors to help minimize potential taxes.

To the ire of estate tax supporters, however, many (if not all) of these stories are unproven. Namely, many of the individuals profiled by estate tax opponents would not have been subject to the tax, even at its pre-EGTRRA levels. And according to Michael Graetz, neither the American Farm Bureau nor New York Times reporter David Cay Johnston could find any farms that had actually been sold to the pay tax after a search in the late 90s.¹⁴⁷ Nevertheless, the possibility (however remote) that a family farm or small business could be harmed troubles many Americans. Moreover, many estate tax opponents overlook that this possibility becomes more likely were exemption levels to drop, and rates to increase, as they advocate.

Avoidance Costs. Another efficiency-related concern is that the tax raises little revenue while encouraging wasteful tax planning that renders the tax essentially voluntary.¹⁴⁸ In 2020, for example, the estate and gift taxes together raised only $17.6 billion—roughly 0.1% of gross domestic product.¹⁴⁹ Meanwhile, millions—possibly billions—of dollars¹⁵⁰ are spent each year on avoidance activities that involve complicated legal structures.¹⁵¹ Because of the availability of these structures to well-advised families, many view the estate tax as a “voluntary” tax that only the less-sophisticated, semi-wealthy pay, while the truly wealthy avoid it.¹⁵² Here, opponents of the estate tax see another reason to reject it, while supporters see a reason to strengthen it.

Administrative Costs. A related critique is the cost and difficulty involved in administering the estate tax. Some opponents estimate that taxpayers spend almost $20 billion annually complying with the tax,¹⁵³ although supporters of the tax dispute this figure. One contributor to high compliance costs is valuation difficulties.¹⁵⁴ While the assets of many middle- and upper-middle class individuals such as lawyers and doctors are fairly easy to value–cash, brokerage and retirement accounts, publicly-traded stock, and straightforward real estate like suburban houses—the same is not true for the wealthy. One estimate suggests that roughly half the assets owned by the wealthiest 1% of American families are hard to value, including unique real estate, closely held stock, noncorporate business assets, farm assets, private equity and hedge funds, art, limited partnership interests, and other miscellaneous assets.¹⁵⁵ Moreover, taxpayers can engage in a number of complicated transactions to artificially minimize the value of normally easy-to-value assets like stock.¹⁵⁶ To opponents, the fact that valuation is costly, time consuming, and imprecise is another reason its limited revenue is not worth the cost.

III. Settling the Debate with a Rignano Tax

As Section II shows, the debate over estate taxation is complex, implicating both normative values and empirical questions. The recent weakening of the tax suggests that opponents are winning this debate, to the great frustration of estate tax supporters who repeat the following laments: If only the public understood that the tax affects a mere sliver of the population and how few family farms and small businesses are impacted by it. If only the public knew that the tax’s burden likely falls on heirs, who have not in fact done anything to earn the wealth in question. If only opponents could see that the estate tax is not double taxation, due to the realization requirement and the step-up in basis. If only the public appreciated the harms of inequality.¹⁵⁷

Estate tax advocates thus keep recycling the same tactics. One approach is to try to correct the public’s factual misperceptions about double taxation, the impact on family farms and small businesses, and how many estates are hit by the tax.¹⁵⁸ Another is to argue that taxing the recipient instead of the transferor (via an accessions tax or income inclusion) would better display the tax’s goals and burdens to the public, thereby convincing them of the value of taxing wealth transfers.¹⁵⁹

But these approaches miss the mark by failing to adequately account for deeply held beliefs shared by a large portion of the population about fairness, desert, private property, and family. This Section first explores these beliefs, as well as seemingly contradictory views on equal opportunity and democratic participation that are also widely held. It then argues that a Rignano tax is the best way to reconcile the competing moral intuitions held by many Americans.

A. Attitudes Toward Taxation, Fairness, Redistribution, and Equality

Crucially, these beliefs about fairness, desert, and property rights—which Liam Murphy and Thomas Nagel call “everyday libertarianism” and which economist Steven Sheffrin terms “folk justice”¹⁶⁰—often do not overlap with the philosophical and economic frameworks favored by policymakers and academics. Sheffrin explains:

Ordinary individuals hold a set of psychological principles about fairness in taxation that are considerably broader and that differ in systematic and fundamental ways from the ideas of fairness that dominate our public debate today. . . . [T]he emphasis on tax fairness as redistribution comes from academic work in philosophy and economics that, in many ways, stands apart from the concerns that motivate everyday people. . . . [T]ax fairness is important, but it is not synonymous with redistribution. To the average person, tax fairness means something else, primarily receiving benefits commensurate with the taxes one pays, being treated with basic respect by the law and the tax authorities, and respecting legitimate efforts to earn income. The average person is not totally indifferent to inequality, but concerns for redistribution are moderated by the extent to which income and wealth have been perceived to be earned through honest effort.¹⁶¹

Because the public takes these views so seriously, policymakers who simply try to convince the public to change its views face an uphill battle. For example, Murphy and Nagel acknowledge that their argument that pre-tax income is meaningless is “counterintuitive” and that “[c]hanging this [belief] would require a kind of gestalt shift, and it may be unrealistic to hope that such a shift in perception could easily become widespread.”¹⁶² Sheffrin terms this “resonance,” arguing that “[a]ny ethical or social theory that does not resonate with folk ideas will be doomed to eventual failure as a vehicle for social change. Understanding folk ideas of justice is then essential to building effective social structures.”¹⁶³

Going further, many theorists argue that when policymakers fail to take these views seriously, they end up undermining their own normative aims.¹⁶⁴ Zachary Liscow illustrates with the common law and economics wisdom that redistribution should take place solely in the tax and transfer system. He argues that this approach makes sense in theory but fails in the real world because it “ignores how ordinary Americans think about [taxes] and thus ends up exacerbating inequality rather than mitigating it.” As a result, “tax policy runs up against political constraints—driven by ordinary people’s

attitudes about taxation” that prevent tax policy from accomplishing policymakers’ goals.¹⁶⁵

Taxation and Folk Justice

What are these attitudes? One key belief relates to what moral philosophers call “desert” and what Steven Sheffrin terms “equity theory.” To everyday people, there should be a roughly proportional relationship between effort and results.¹⁶⁶ People believe that the money they earn belongs to them,¹⁶⁷ and that if they “earn more money, they deserve to keep a decent share of it.”¹⁶⁸ Even those who critique this belief acknowledge that the “idea that people deserve to be rewarded for thrift and industry” is natural to many and that “it can seem preposterous” that hard-working individuals who are willing to take risks do not deserve more than the lazy and unadventurous.¹⁶⁹ Although scholars debate the merits of these views,¹⁷⁰ numerous studies suggest that substantial portions of the public subscribe to them.¹⁷¹ As Murphy and Nagel recognize, to many, these views are “instinctive[],”¹⁷² “ingrained,”¹⁷³ and “hard to banish from [] everyday thinking.”¹⁷⁴

These beliefs lead to a distaste for redistributive taxation generally, and to some extent, opposition to the estate tax simply reflects these general principles of folk justice. But Sheffrin identifies two further aspects of folk justice that supercharge these attitudes as applied to the estate tax. In his view, the fact that estate tax opponents have successfully capitalized on these folk justice beliefs—while estate tax supporters have ignored them—explains a large part of the tax’s deep unpopularity.¹⁷⁵ (Polls consistently suggest that roughly fifty percent of the population supports repealing it entirely).¹⁷⁶

Moral Mandates. One concept is that of moral mandates, which are deeply held, non-negotiable subjective beliefs about right and wrong. These beliefs are resistant to logical argument, and can be seemingly inconsistent, such as when a pro-life advocate also favors the death penalty.¹⁷⁷ When something contravenes a moral mandate, it generates a level of outrage that might seem excessive. An act becomes “wrong” and not merely “disagreeable.”

According to Sheffrin, several of the arguments discussed in Section II.B. rise to the level of moral mandates. One is that imposing a tax when someone dies is simply immoral. On this account, the estate tax “comes at the worst possible time for families – the death of their family’s breadwinner.”¹⁷⁸ People are simultaneously grieving their loved ones and worried about providing for the family that’s left behind. Telling people that it’s not death per se that triggers the tax but instead the transfer of wealth; or that grieving families have to deal with all kinds of logistical and business arrangements, such as funerals and the probate process; or that the families affected by the tax are wealthy and well-provided for, will not make any headway. The tax is associated with death, and that simply seems immoral to many.

Another moral mandate—one which polling data suggests has been extremely influential—is that double taxation is unfair.¹⁷⁹ People have deeply-held beliefs that if someone works hard and saves their whole life, paying taxes as she goes along, she should be able to leave her wealth to her family at her death without the government swooping in a second time.¹⁸⁰ And again, telling people that double taxation is not unique to the estate tax, or that much wealth subject to the estate tax has not already been taxed, is pointless.

And finally, people value entrepreneurship.¹⁸¹ They view the tax as disincentivizing hard work and wealth accumulation, thus undermining another deeply held value. Demonstrating that very few small businesses or family farms owe the tax, let alone need be liquidated to pay the tax, is largely fruitless.

System Justification. In addition to touching on moral mandates, Sheffrin argues that the tax also implicates “system justification theory.” This theory—somewhat like cognitive dissonance—posits that individuals adapt their beliefs to defend existing systems and the status quo, even when they do not appear to benefit from those systems. They thus react strongly to threats to that system, even when people other than themselves—such as the wealthy—will be the ones harmed by those threats.¹⁸²

Specifically, the estate tax appears to threaten two key systems: the family and our meritocratic system that rewards talent and effort. Even if the estate tax will not affect the majority of Americans, many view wealthy businesspeople as “valuable members of society who deserve their wealth and support the American economy.”¹⁸³ As such, a tax that affects them undermines an entire system of which they are a part. Likewise, even if the families affected by the tax are rich families, taxing them when they engage in a familial act of generosity threatens the family system that we are all a part of.¹⁸⁴

Policy Silos

At the same time that the public opposes estate taxes, however, it also shares many of the values highlighted by its supporters. Economist Stefanie Stantcheva’s recent empirical work on how people reason about income and estate taxes illustrates this seeming contradiction. In a large-scale representative survey, Stantcheva finds that 58% of respondents believe that parents should be able to pass along whatever they wish to their children, even if that creates unequal opportunities at a societal level, and that 61% of respondents believe that it is unfair to tax the estates of hard workers. Yet in this same group,

68% say that it is unfair that children from wealthy families have access to better amenities such as schools;

64% believe that the wealth distribution is unfair; and

46% view inequality as a serious issue.¹⁸⁵

Stantcheva is not the first to note that many people hold a variety of conflicting beliefs simultaneously. In fact, her findings illustrate another aspect of moral mandates—people form them on an issue-by-issue basis. They do not represent an overarching world view, and they may contradict each other, as when a pro-life advocate also favors the death penalty.¹⁸⁶

Zachary Liscow calls this phenomenon “policy silos,” meaning that “ordinary people hold category-by-category views about what is just for a given policy and apply those views partly in isolation.”¹⁸⁷ For example, people view taxation and transportation separately, such that they may oppose redistributive taxation but favor redistributive transportation policy. The former is “giving” money to the poor, while the latter is helping them get to work.¹⁸⁸ Stantcheva’s findings echoed this observation, as respondents’ views differed based on whether the questions focused on parents/transferors or children/transferees. To put it in Liscow’s terms, people appear to view estate taxes in a different silo than equal opportunity concerns.

As a result of siloing, public support for two economically identical but superficially different programs can vary based on framing.¹⁸⁹ This has two implications. First, Liscow argues that lawmakers should not rely on the tax system as the sole means of redistribution but should also implement redistributive policies elsewhere. A second implication is that when policymakers do use the tax system for redistributive or similar reasons, they should take advantage of siloing, as the public’s dislike of one tax might not necessarily translate into a dislike of a different tax. Joseph Thorndike has observed, for example, that even though the public hates the estate tax, it favors wealth taxes.¹⁹⁰

A Rignano Tax Reconciles These Competing Intuitions

What does all this mean for wealth transfer taxes? One common suggestion is to replace the estate tax with a recipient-focused accessions or inheritance tax.¹⁹¹ The hope is that focusing attention on recipients will shift the debate more firmly into the equal opportunity silo instead of the tax silo, as well as lessening the intensity of some of the moral mandates around double taxation, entrepreneurship, hard work, and thrift.

This Article takes that suggestion one step further. A Rignano-style accessions tax that exempts first-generation transfers does an even better job of incorporating folk justice and people’s everyday psychological intuitions about the estate tax. Imagine the following structure (which Section IV fleshes out in more detail): Grandfather builds a business from the ground up and bequeaths $10,000,000 to Mother. No tax is imposed, but if Mother does not create any wealth of her own and simply retransfers $10,000,000 to Daughter, all of Mother’s estate is taxed. In contrast, if Mother creates new wealth, different portions of her estate are treated differently. The inherited $10,000,000 that Mother re-transfers is taxed, while any newly earned wealth is not.

By allowing individuals to make tax-free transfers of wealth that they themselves have earned—but not wealth that they have merely inherited—a Rignano tax acknowledges the very real, deeply-held value that the public places on hard work, entrepreneurship, and notions of desert while also addressing the concerns people hold about the prevalence of inherited wealth.¹⁹²

IV. A Rignano Tax

The idea of taxing second- or third-generation wealth more heavily than newly earned wealth has a long history. Roughly 100 years ago, Eugenio Rignano offered the first sustained treatment of it, arguing that such a tax is the best way to move gradually toward socialism.¹⁹³ Rignano believed that the means of production should eventually be owned by the government, but that individuals, not the government, are better wealth-creators. He thus proposed a tax that would exempt transfers by wealth-creators, tax second transfers at 50%, and tax third transfers at 100%. This, he believed, would be the most efficient way to implement socialism.¹⁹⁴

Libertarian Robert Nozick later picked up this idea, albeit for decidedly non-socialist reasons. In The Examined Life, Nozick suggests that a Rignano-type structure is the best means of balancing competing intuitions about family ties, wealth and inheritance, and fairness. He first defends the right of individuals to bequeath what they have created themselves as an act of love: “Bequeathing something to others is an expression of caring about them, and it intensifies those bonds. . . . [T]he donor . . . has earned the right to mark and serve her relational bonds by bequeathal.”¹⁹⁵ But he does not view second-generation inheritances as a similar act of love, due to the lack

of connection between the person who created the wealth and the second recipient.

He also acknowledges, moreover, that when wealth is “passed on for generations to persons unknown to the original earner and donor, [it] produc[es] continuing inequalities of wealth and position” and that the “[t]he resulting inequalities seem unfair.”¹⁹⁶ Unfortunately, Nozick’s discussion of this tension is rather sparse. He does not explain, for example, why he believes the resulting inequalities are unfair. Nor do we know whether first-generation bequests are inherently fair, or whether they are unfair, but whose unfairness is outweighed by the value of the donor’s ability to express affection and love.¹⁹⁷

And most recently, philosopher Daniel Halliday argues that a Rignano tax furthers equality of opportunity ideals better than traditional estate and inheritance taxes. In his view, context matters—that is, whether someone is born into a family that has not just wealth, but long-standing wealth and the social and cultural capital that accompanies it (let’s call these “wealth norms”). Imagine that Grandfather starts with nothing, builds a successful business, and leaves all his wealth to Mother at his death. Halliday believes that this bequest does not give Mother a head start in life. Her life prospects were largely shaped long before receiving her inheritance, when she was young and Grandfather was still building his business. He had not yet amassed enough wealth to pay for private school and expensive tutors for Mother, to give her seed money to start her own business or to launch her own career. Moreover, Grandfather’s self-made status suggests that the family did not have wealth norms when Mother was growing up. Instead of golfing at a country club, Grandfather likely bowled in the neighborhood bowling league and did not have the same cultural norms and social and professional networks as families with older wealth.

But now consider Mother and Daughter. Halliday argues that “parental conferral of advantage compounds over successive generations. . . . Families that have been wealthy for longer possess a greater range of powers that keep their children privileged.”¹⁹⁸ Grandfather’s bequest allows Mother to provide advantages to Daughter that she herself did not have, such as high-quality schools, tutors and after-school lessons, and expensive camps. It also means that Daughter—unlike Mother—grows up in a family with wealth norms. The family belongs to a country club, not a bowling league. Mother’s contacts can give Daughter internships, and Daughter knows which fork to use during the interview lunch and how to dress for it. For these reasons, Halliday views the transmission of wealth across three generations as a contributor to and a tag for economic segregation, which he argues undergirds unequal opportunities. As such, these inheritances should be taxed.

In contrast, Halliday contends that first-generation inheritances should not be taxed. Not only are they not problematic, but they might even reduce economic segregation by serving as a safety net keeping middle-class families afloat in a stagnating or contracting economy. Halliday observes that in many areas, the costs of housing and other necessities have skyrocketed while middle-class wages have stayed flat, rendering home-ownership unaffordable to many such families. But if Grandfather leaves the family home to Mother, or enough money for a down payment, this helps minimize economic segregation in such areas. First-generation inheritances thus counteract inequality of opportunity and therefore should not be taxed.

Implementing a tax that exempts the first transfer but taxes the second might sound simple to those unfamiliar with tax policy. Yet the devil is in the details. Implementing a Rignano tax requires resolving seven design decisions, explored below: the (1) base; (2) rates; (3) valuation; (4) frequency; (5) tracing; (6) transfers in trust; and (7) transition rules. Although a Rignano tax is complex, crafting one is possible.¹⁹⁹ As we shall see, in many instances one solution is superior regardless of why one wants to tax old money more heavily than new. With other decisions, however, differing justifications for taxing repeated wealth transfers point in different directions.

A. The Base

This section addresses three base-related decisions: Should the tax focus on transfers or receipts? Should it treat gifts and bequests equally? And should it contain any exclusions or exemptions?

Transfers or Receipts?

The first base-related question is whether to tax receipts or transfers. If Grandfather earns a fortune, leaves it to Mother, and Mother in turn passes it along to Daughter, who does the tax focus on? Does it look at Grandfather and Mother in turn, and tax Mother because she’s the one who re-transfers wealth while exempting Grandfather because he’s the one who earned the wealth? This model is akin to a traditional estate tax, which focuses on the total amount of wealth transferred by an individual over the course of her lifetime.²⁰⁰ Or does it look at each and ask who among them received re-transferred wealth (here, Daughter)? This is similar to traditional accessions or inheritance taxes, which apply to transferees based on gifts and bequests received.²⁰¹

In either case, the tax is imposed once, at transfer.²⁰² But the distinction matters, both psychologically and normatively. At first glance, one might think an estate tax model makes the most sense. If Grandfather creates the wealth, and the goal is to allow him to transfer it tax-free, then the focus should be on him. Yet this ignores many of the normative aims of those who wish to tax wealth transfers in the first instance.²⁰³

Start with dynastic wealth and equality of opportunity concerns. Looking at the sum of gratuitous transfers received by a given individual tracks ex ante differences in opportunity better than looking at aggregate transfers made by an individual. Imagine a decedent with an estate of $5,000,000. An estate tax treats her the same whether she leaves it all to one child or splits it up among ten recipients. Yet receiving $5,000,000 impacts life opportunities much more dramatically than receiving $500,000. The same is true for dynastic wealth: what matters is how much wealth someone receives. An inheritance of $50,000,000 bestows political and economic power in a way that an inheritance of $500,000 does not. As numerous commentators have acknowledged, a recipient-focused accessions or inheritance tax better reflects these concerns.²⁰⁴

Next consider the welfarist argument that gratuitous transfers received should count toward an individual’s ability to pay, just like salary, business profits, and gains from property sales. This concern also suggests a recipient-focused tax. How much wealth a transferor has does not necessarily correspond to the ability to pay of the transferee. For example, Lily Batchelder and Surachai Khitatrakun estimate that “22% of heirs burdened by the estate tax have inherited less than $500,000, while about 21% inheriting more than $2,500,000 bear no estate tax burden.”²⁰⁵

An accessions-tax framework also better addresses the concern that wealth concentrations are in and of themselves harmful by encouraging donors to split their fortunes up. An estate tax would treat Warren the same whether he leaves his fortune in one big bundle to one lucky heir, or whether he splits it up among multiple recipients. But an accessions tax treats these two situations differently, since it focuses on cumulative gifts and bequests received in excess of an exemption amount. Since each recipient has their own exemption amount, splitting a large fortune up generates a lower overall tax bill.

Finally, the psychological insights discussed in Section III.B. also point to the superiority of an accessions tax. Recall, for example, Stantcheva’s findings that support for transfer taxes rises when people focus on recipients instead of transferors.²⁰⁶ This is likely due in part to framing and siloing, but perhaps also to the fact that focusing on recipients weakens the pull of moral mandates about double taxation and hard work.²⁰⁷

Gifts

A second decision is whether the tax should apply not only to bequests but also to gifts. Although Rignano clearly suggests taxing both, Halliday is more equivocal. Halliday’s equivocation is misplaced; the tax should apply to both equally.

a. Gifts in General

Consider the various reasons for taxing wealth transfers, starting with equality of opportunity. As Halliday notes, gifts are usually received earlier in life than bequests. This creates advantages sooner rather than later for the donee and her family, thus magnifying those advantages.²⁰⁸ For this reason, Anne Alstott has suggested varying inheritance tax burdens based on the recipient’s age.²⁰⁹ Further, the act of making a gift suggests that the donor feels financially secure enough to dispose of some of her wealth while alive, which makes it more likely that her heirs grew up in a family with wealth norms.

The ability-to-pay and dynastic wealth concerns also suggest taxing both gifts and bequests. Both gifts and bequests enable recipients to spend money for political purposes as well as influence the economic lives of others. Both gifts and bequests provide utility to recipients. In fact, declining marginal utility suggests that gifts might even provide more utility than bequests of comparable size, as individuals tend to have less money earlier in their lives. And both serve as a tag for one’s nonfinancial endowment. Again, gifts may signal greater nonfinancial advantages than comparably sized bequests, as families that engage in lifetime gifting are often wealthier than families who do not.

Moreover, Halliday’s arguments for excluding gifts from a Rignano tax do not withstand scrutiny. One argument is that transferors have such a strong preference for bequests that excluding gifts would not encourage them to make gifts instead.²¹⁰ Halliday correctly observes that many transferors do not maximize opportunities to make tax-free gifts under current law and that many people save more than enough to cover the expenses of old age. He also acknowledges, however, that these statistics reflect decisions made during periods with relatively low rates and that they likely underestimate the extent to which wealthier families will change their behavior. A key part of estate planning for such families is maximizing the tax advantages of lifetime gifts, and minimizing the ability of transferors to characterize bequests as gifts creates a great deal of complexity in the current estate tax system.

Halliday also argues that taxing gifts is essentially pointless.²¹¹ He believes that most gifts can be easily concealed—unlike bequests, which are documented during probate and hard to hide. But many large gifts are similarly hard to conceal. Stock transfers are recorded; large cash transfers are tracked. And even gifts of jewelry and other family heirlooms generate records when donees insure them. Of course, under-the-table gifts will always occur, but not at a level that makes attempting to tax gifts pointless. Because this Article advocates for treating gifts similarly to bequests, later references to “bequests” or “inheritances” refer to gifts and vice versa.

b. Gifts and Timing Complications

Taxing gifts does raise a complication related to timing. Return to Grandfather, Mother, and Daughter. We do not know exactly how much Mother will inherit—which affects the accessions tax imposed on Daughter—until Grandfather is dead. If the tax only applied to bequests, this would not be a problem. But what if the tax also applies to gifts and Mother makes a gift to Daughter while Grandfather is still alive, before he bequeaths any wealth to Mother?

To illustrate, imagine that Mother gives Daughter $1,000,000 and five years later, receives $10,000,000 from Grandfather. If we look just at the first gift of $1,000,000, it initially appears to be newly created wealth that should not be taxed. But money is fungible; if Mother knows she’s about to receive an inheritance, this frees her up to make a lifetime gift to Daughter, whether from her own or borrowed funds. The tax would be easy to avoid if we simply cast any transfer from Mother’s generation to Daughter’s generation as a first transfer of wealth if it comes before Grandfather transfers anything to Mother. Yet whether Mother inherits before or after the gift to Daughter seems irrelevant if the point is to tax the second generation in a family that inherits wealth. This is especially true if one views second-generation wealth transfers as more of a welfarist or equal opportunity concern than first-generation transfers.

A “catch-up tax” that applies to transferees who have themselves made prior transfers can account for this scenario. When Daughter receives $1,000,000 from Mother, the tax—as applied to Daughter—would treat it as a first-generation transfer because at that point, Mother has not yet inherited anything. When Mother later inherits $10,000,000 from Grandfather, the tax—as applied to Mother—would treat different parts of that bequest differently. It would treat $9,000,000 as first-generation wealth and any amounts previously transferred by Mother to Daughter—here $1,000,000—as second-generation wealth.

Now consider what might happen later. One possibility is that Mother consumes the $10,000,000 she inherits from Grandfather, making no more gifts to Daughter. Because Daughter receives nothing more, no more tax is imposed upon the family. In total, $11,000,000 has been transferred within the family ($10,000,000 to Mother, and $1,000,000 to Daughter.) Overall, the tax will have treated $10,000,000 as first-generation wealth (Daughter is taxed as receiving $1,000,000 of first-generation wealth and Mother is taxed as receiving $9,000,000) and $1,000,000 as second-generation wealth (imposed on Mother via the catch-up tax at Grandfather’s death).²¹² In essence, the price Mother pays for making a lifetime gift before receiving her own inheritance is that she, not Daughter, is treated as having received a second-generation transfer.

Another possibility is that Mother later passes her $10,000,000 inheritance down to Daughter. In that case, a total of $21,000,000 has been transferred within the family ($10,000,000 to Mother, and $11,000,000 to Daughter). Of this, $10,000,000 represents a second transfer, and $11,000,000 represents newly created wealth (Grandfather created $10,000,000 and Mother created $1,000,000). When Daughter receives Mother’s $10,000,000 inheritance, the tax should therefore treat only $9,000,000 as second-generation wealth. This accurately taxes $10,000,000 of the family’s total transfers as second-generation wealth (recall that when Mother received her inheritance, $1,000,000 was treated as second-generation due to the catch-up tax), and $11,000,000 as first-generation wealth ($1,000,000 when Daughter received Mother’s lifetime gift, $9,000,000 of Mother’s receipt from Grandfather, and another $1,000,000 when Mother dies).

Exclusions and Exemptions

The last set of base-related decisions concerns exclusions and exemptions. As both Rignano and Halliday suggest, each individual should have a relatively small lifetime exclusion amount.²¹³ Assume that after Grandfather bequeaths his $10,000,000 to Mother, she has several runs of bad luck and passes along only $1,000,000 to Daughter. Even though that $1,000,000 is second-generation wealth, it seems plausible to allow Daughter to inherit something free of tax for the same reasons that most (if not all) systems have such exemptions. In addition to administrative concerns, allowing small inheritances tax-free recognizes that bequests are a natural part of most families’ lives, and that they can provide a needed cushion for many less-wealthy individuals. Any amount chosen would be arbitrary, but something like $500,000 or $1,000,000 seems reasonable.

For similar reasons, the tax should have something similar to the annual exclusion described in Section I, but on a smaller scale. The annual exclusion’s purpose is to simplify record-keeping and to recognize that intra-family gift giving for birthdays, weddings, and holidays is a normal, everyday occurrence in almost all families that does not trigger any normative concerns. These same concerns are relevant in a Rignano tax. That said, the current $19,000 per recipient exclusion is far larger than necessary to cover regular birthday and holiday gifts, and in fact, allows for much tax-free giving that exacerbates unequal opportunities.²¹⁴ As with the lifetime exemption amount, any chosen number would be arbitrary, but something like $5,000 seems reasonable.

Most transfer tax systems also exempt marital and charitable transfers. Intra-spousal transfers should not be taxed, as they do not transmit wealth down to a lower generation.²¹⁵ Charitable transfers are a bit trickier from a normative perspective. In theory, their treatment should depend on what kind of charity receives the gift or bequest. If one’s concern is equality of opportunity, for example, a gift to an inner-city tutoring program furthers equality of opportunity while other gifts may undermine it (imagine gifts to private foundations that employ family members or to a private school that provides few scholarships).²¹⁶ But if one goal of a Rignano tax is to gain public traction where other transfer taxes flounder, charitable transfers should be exempted. Charities benefit from a “halo effect,” and the point that some charities exacerbate social ills is nuanced and hard for the public to understand. Further, giving to charity is seen as virtuous, and may invoke reactions similar to the moral mandates and systems justification theories discussed earlier.

A final question is whether the relationship between the wealth creator and the second recipient should matter in determining whether a gift or bequest received is second-generation. Specifically, should second-time-around transfers that originate in a different family be exempted if the recipient is the first in her family to inherit? Halliday, for example, suggests the tax should apply to anyone whose parents or grandparents have inherited, but not to individuals who are the first in their families to inherit. That makes sense if one’s concern is equal opportunity and if one agrees with Halliday that repeated wealth transfers are the real culprit in that context due to the creation of wealth norms and economic segregation.²¹⁷

Imagine two scenarios in which Grandfather starts with nothing, earns a fortune, and leaves it to Mother. In Childless, Mother has no children and leaves her wealth to Friend’s child. Mother’s Friend neither inherits from Friend’s parents nor bequeaths any wealth to Friend’s child. In Helping Hand Family, Mother has a daughter, to whom she leaves her wealth. In both cases, Mother inherited wealth and then passed it along a second time. In that sense, both Daughter and Friend’s child have received second-generation wealth. But if the concern is that repeated wealth transfers create or signal economic segregation and wealth norms, then Daughter and Friend’s child are not similarly situated. Friend’s child is the first in Friend’s family to inherit, and in that sense, what she receives is not second-generation wealth.²¹⁸ Daughter, by contrast, belongs to the second generation of Mother’s family to inherit. This suggests looking not only at the recipient, but also at the pattern of prior transfers in the recipient’s family—if one shares Halliday’s concerns.²¹⁹

However, other normative justifications for taxing wealth transfers point in other directions. If one’s focus is dynastic wealth and traditional equality of opportunity concerns, or welfarist concerns, then the source of the gratuitous transfer should be irrelevant. Receiving unearned advantage, power, or welfare is the main concern, more than whether that receipt followed an intra-familial chain of transmission. The same is true if one’s concern is the mere existence of wealth.

Likewise, the psychological insights of folk justice suggest that treating intra-family transfers worse than other transfers would not fare well. First, system justification theory indicates that a large factor in hostility to the existing estate tax is its perceived threat to the family.²²⁰Second, it is plausible that people hold moral mandates about family businesses and family farms that would be triggered if intra-family transfers were treated worse. Thus, any softening of the public’s opposition to inheritance taxes that comes from exempting first transfers would likely be undone if familial transfers were treated worse than other second transfers.

B. The Rate

After choosing a base, one must also choose a rate. Halliday and Rignano both use examples in which first-generation transfers are not taxed, second-generation transfers are taxed at 50%, and third-generation transfers are taxed at 100%.²²¹ This Article proposes completely exempting first-generation inheritances and taxing subsequent ones at a rate of 40%, although it acknowledges that any rate will be somewhat arbitrary. Although this Article’s normative arguments point to taxing later transfers more heavily than initial transfers, they do not point to specific rates the way they signal, for example, that gifts and bequests should both be taxed. Nor does past experience illuminate the perfect rate as a technical matter. Perhaps

more than any other design question, choosing a rate reflects balancing numerous political considerations.

Initial Transfers

The rate on initial transfers should be a simple, easy to understand zero. Work on cognitive psychology and tax suggests that individuals focus on “highly visible” and “easily recallable” aspects of a tax; this is known as “prominence” or “saliency.” When thinking about income taxes, for example, the public tends to focus on the highest marginal rate.²²² Completely exempting initial transfers of wealth provides a sharp and clear distinction between initial and successive transfers in a way that merely using a lower rate does not. “You are not taxed at all when you pass along wealth that you have earned” has a salience that “you are taxed less” lacks.

The former also harnesses the power of folk justice better than the latter. Start with systems justification theory and the notion that taxing wealth transfers threatens a system that people are a part of and value. Here, it is the act of taxation in and of itself which is harmful. Taxing transfers of earned wealth at a low rate is still taxing them. Telling people that a system they care about is damaged only “a little bit” will do little to assuage the concerns of those who value the family. Damaging something valuable a little bit still damages it.

Completely exempting initial transfers also better counters the double taxation argument. Once again, it is the act of taxation—not the level of taxation—that gives this argument weight with the public. The public believes (rightly or wrongly) that the wealth-earner has already been taxed on the wealth. Educating the public about untaxed appreciation and the step-up in basis has not countered that. Nor has emphasizing that what should matter is the total tax burden, not the number of times something is taxed. Telling the public that you are taxing earned wealth less than inherited wealth will be similarly fruitless. From a folk justice perspective, the best way to address concerns that earned wealth is being double taxed is to be crystal clear that transferring it does not trigger tax. Only completing exempting such transfers does this.

Subsequent Transfers

If first-generation transfers are completely exempted, how should later transfers be treated? Rignano suggested taxing second-generation transfers at 50% and third-generation transfers at 100%; although Halliday rejects the latter suggestion, he does not address whether second- and third-generation transfers should be taxed differently.²²³ This Article proposes treating them alike by taxing all later transfers at a flat rate of forty percent.

As an initial matter, second- and later-generation transfers should be treated similarly to each other. While the insights of folk justice strongly point to distinguishing first-generation wealth, they do not justify treating later transfers differently from each other. Nor do most of the justifications for taxing wealth transfers. Gifts and bequests received increase well-being and enhance ability to pay, regardless of whether the transferor earned or inherited the wealth in question. Money is money when it comes to political spending. Similarly, under traditional equality of opportunity concerns, money is money when it comes to paying for private school tuition or houses in top school districts, tutors, or fancy camps.

That said, other justifications are plausibly consistent with distinguishing among second-generation and later transfers, even if they do not necessarily mandate such an approach. Take Halliday’s linkage of wealth norms and equality of opportunity; it is likely that the older the family’s money, the stronger the wealth norms. Likewise, it is plausible that the longer a family has been politically or economically powerful in a given town, the more powerful they are. Knowing that another family has had power over yours for decades is probably more demoralizing the longer that has been the case.

In these cases, however, any difference in power or opportunity between second- and later-generation wealth diminishes over time. Let’s illustrate with wealth norms and equal opportunity: Grandfather creates wealth, which he passes along to Mother, who in turn passes her inheritance along to Daughter. Under Halliday’s reasoning, Mother enjoys substantially fewer advantages than Daughter, since Mother grows up in a family with first-generation wealth and Daughter grows up in a family with second-generation wealth. Yet it is unlikely that Daughter has substantially fewer advantages than Daughter’s children. The marginal advantage of growing up with third-generation wealth as opposed to second is likely much smaller than the marginal advantage of growing up with second- versus first-generation wealth. The case for distinguishing between second- and later-generation inheritances is therefore much weaker than for distinguishing first transfers.

And on a practical level, treating second and third inheritances alike minimizes the valuation, tracing, and record-keeping concerns addressed below. All that need be determined is how much an individual’s parents inherited. Given the weak theoretical case for distinguishing among later transfers, and the strong practical case against doing so, treating second and later transfers similarly to each other is preferable.

This Article thus proposes a rate of 40% on subsequent transfers, which is the current estate tax rate in the U.S. This number is admittedly arbitrary, and none of the theoretical considerations discussed above mandate any given rate. That said, something about tax rates that exceed 50% seem to hit a nerve with people. And given the prominence bias discussed above, it is likely that a Rignano tax that is seen as “raising rates” above current levels would face more opposition than one that does not raise rates.

Adjusting for Age

A final rate-related issue is whether gifts and bequests received earlier in life should be taxed more heavily than those received later in life. Here, practical and theoretical considerations are in tension. Several justifications for taxing wealth transfers point in the direction of adjusting for age, such as equal opportunity theory.²²⁴As theorists recognize, receiving an inheritance early in life alters one’s life prospects more than receiving one later in life. A $1,000,000 bequest at age twenty-five provides seed money for a start-up, while such a bequest at age sixty-five likely does no more than enable one to enjoy a more comfortable retirement. Other justifications, however, do not support adjusting for age. A large bequest increases one’s ability to pay regardless of one’s age, for example. And although such adjustments could be made,²²⁵ doing so adds another layer of complexity and is probably not worth that additional complexity.

C. Frequency: Determining the Number of Transfers

A further issue is determining how many times wealth has been transferred. Revisit Grandfather, Mother, and Daughter. Two questions arise. First, if Grandfather leaves his wealth directly to Daughter in a “generation-skipping transfer” that skips over Mother, is that a first- or second-generation transfer? Put another way, should that be treated the same or differently than if he leaves it to Mother, who in turn re-bequeaths it to Daughter? Second, what if Grandfather leaves his wealth to Mother, who

dies soon thereafter? Should adjustments be made for deaths in rapid succession?

Generation-Skipping Transfers

Let’s start with generation-skipping transfers. Current law imposes an additional tax on such transfers to ensure that families face an equivalent level of tax whether their wealth proceeds directly from one generation to the next or skips over one generation. This prevents ultra-wealthy families in which Mother’s generation may not need Grandfather’s wealth from minimizing their tax burden by having Grandfather pass his wealth directly to Daughter.

Although counterarguments exist, a Rignano tax should contain similar rules that treat a transfer by Grandfather directly to Daughter as a second transfer instead of a first. This would prevent families from avoiding one level of tax by skipping generations. As under current law, however, exceptions should apply if Mother pre-deceases Grandfather, such that Grandfather’s transfer to Daughter does not skip over a living person.²²⁶

To be sure, this design decision runs counter to folk justice principles. It renders transfers directly to grandchildren vulnerable to the double taxation argument and to system justification concerns about harming families. But the Rignano tax is not a tax designed to further folk justice principles; rather, it is a tax designed to take such principles into account when designing a wealth transfer tax that achieves other goals. Here, treating such transfers as first transfers would allow for too much game-playing, thus undermining the goals of taxing second-generation wealth. Moreover, it is plausible that the treatment of such transfers will be less salient to the public than the fact that the default for first transfers is complete exemption.²²⁷ For these reasons, the better approach is to treat generation-skipping transfers as two transfers, not one.

Transfers in Rapid Succession

A related issue is how to treat transfers in rapid succession. Imagine that Grandfather bequeaths his fortune to Mother, who dies unexpectedly a few months later, re-transferring his wealth to Daughter. Should this be considered a second transfer? Halliday argues that it should not be: “A short interval between bequests may mean that a donor has had less opportunity to save and accumulate due to an early death. It is harder to say, in that case, that this person’s bequests should still be taxed as if he or she had remained idle.”²²⁸

Halliday’s approach is misguided; transfers in rapid succession are still transfers. Halliday is correct that Mother has had less time to build upon Grandfather’s inheritance after receiving it. Yet he ignores that she had time before either her or Grandfather’s death to earn her own wealth, and that wealth will be taxed as first-generation wealth. Counting each transfer treats Mother and Daughter the same as other families.

D. Valuation

Perhaps the most difficult issue is how to value re-transferred wealth. Revisit Grandfather, who starts with nothing and builds a $10,000,000 fortune. He bequeaths his wealth to Mother, who later dies with a $50,000,000 fortune which she leaves to Daughter. How much of Mother’s $50,000,000 should be considered a second transfer of Grandfather’s wealth? Rignano and Halliday, without discussion, use a simple but flawed approach in their examples: they would treat $10,000,000 as a second transfer and $40,000,000 as newly created wealth.

The Problem

This approach erroneously overlooks the fact that asset values fluctuate over time due to a variety of causes—inflation, the time value of money, changing market conditions, and the owner’s efforts. Take inflation. Imagine that Mother invests her inheritance in an asset that keeps exact pace with inflation. $10,000,000 inherited in 1993 has an inflation-adjusted value of roughly $22,700,000 in 2025.²²⁹ The Rignano/Halliday default wrongly treats the $12,700,000 increase that is due to inflation as instead stemming from Mother’s efforts. But Mother has added no value. The asset has simply kept up with inflation.

Risk-Free Rate of Return as the Default Solution

A more accurate approach would impute the risk-free rate of return to Grandfather’s fortune. This better distinguishes between earned and inherited wealth by recognizing the dual roles of risk and choice. To illustrate, imagine that Grandfather leaves Mother a building worth $10,000,000 that is worth $30,000,000 when she re-bequeaths it to Daughter. As explained above, attributing only $10,000,000 of the building’s value to Grandfather overstates Mother’s contribution and understates Grandfather’s. Yet attributing all $30,000,000 to Grandfather does exactly the opposite. It overstates Grandfather’s contribution and understates Mother’s.

What is key is that when Mother inherited the building, she had a choice. At that point, she held $10,000,000 of wealth that she could invest however she liked. She could continue to hold that particular building, swap it for other real estate, or cash out and invest in stocks, bonds, or a risky start-up. If she keeps the building itself, some—but only some—of any later increase in value is due to her choice to do so.

More specifically, a later increase in value has three possible components: the risk-free rate of return, a return to risk, and (occasionally) inframarginal returns.²³⁰ The risk-free rate of return is the return one would receive by investing in a zero-risk project with a guaranteed return, such as a U.S. Treasury bond. This return is simply compensation for using the invested funds—a pure time-value-of-money return sometimes referred to as the “return to waiting.”²³¹

To illustrate, imagine a stock investor. Unlike a bond investor, the stock investor does not know ex ante whether she will recoup her investment. Because the company’s value could either increase or decrease, she will insist on a higher return to compensate her for taking on that risk. Most investment returns are comprised solely of these two elements, which means that the return to risk is the excess over the risk-free return.

Occasionally, an investment also yields an inframarginal return, which is a return above and beyond the market rate for risky investments. These arise from “special opportunit[ies] not generally available in the market” and are usually associated with “rents to ideas, managerial skill, or market power.” They can include unique returns to capital due to information asymmetries or imperfect markets, as well as returns to some combination of a person’s labor, ingenuity, and/or luck.²³²

Although distinguishing between inframarginal and market-rate returns is difficult, we need not do so. Mother—not Grandfather—should be credited for both whenever Mother has a choice about investing her inherited wealth. Any investment of Grandfather’s $10,000,000 would have triggered, at minimum, the risk-free rate of return and should be traced back to Grandfather’s bequest. Returns above and beyond the risk-free-rate of return, however, should be attributed to Mother.

The default rule should therefore be to attribute the risk-free rate of return—as measured by the average U.S. Treasury bond yield—to Grandfather’s investment. The best measure of this is the average yield on a U.S. Treasury Bond of comparable length. Imagine that Mother outlives Grandfather by 30 years. If so, the average rate of return for a 30-year bond should be imputed to Mother’s inheritance from Grandfather. Any “extra” wealth should be credited to Mother and treated as new, first-generation wealth.

Complications

The foregoing analysis assumes both that Mother has a choice about what to invest in, and that her investments are successful. But what if those assumptions are incorrect? Start with choice. Imagine that Grandfather bequeaths stock that skyrockets in value to a trust with an independent trustee over whom Mother has no control. Given that Mother has no say in how to invest the asset and assumes no risk herself, none of the stock’s value is attributable to her choices. The stock’s full value at her death should be credited to Grandfather. Moreover, we already have rules that identify when one has control over a trust; the Rignano tax could simply import the grantor trust rules.

Next let’s upend the assumption that Mother’s investments are uniformly successful. Imagine that Mother quickly squanders Grandfather’s fortune by investing his $10,000,000 in Blockbuster Video stock. She later, however, invests in a relatively unknown start-up called “Google,” parlaying a few thousand dollars into $10,000,000. How should Mother’s fortune be treated at her death?

Mother’s fortune should still be treated as inherited and traced back to Grandfather for three reasons (an approach favored by Rignano).²³³ First, Mother is able to leave Daughter $10,000,000 more than without Grandfather’s wealth. His bequest enables Mother to start at $10,000,000; lose $10,000,000; and nevertheless end at $10,000,000. Without the bequest, if Mother loses and re-earns $10,000,000, she ends at zero. Second, if we assume that Mother would have earned the risk-free rate of return when successfully investing Grandfather’s bequest, parity requires us to make the

same assumption even when the outcome is different. Either we assume that return or we do not.

Finally, ignoring Grandfather’s bequest ignores that money is fungible and creates incentives that undermine the goals of wealth taxation by essentially encouraging Mother to squander Grandfather’s bequest. Let’s say that Mother has an idea for a successful business that will earn her $15,000,000, and Mother also wants to spend $10,000,000 on a year-long first-class trip around the world. Compare two scenarios, Early Trip and Late Trip. In Late Trip, Mother saves Grandfather’s money and starts a business that earns $15,000,000 before taking the trip. The trip reduces her bank account from $25,000,000 to $15,000,000. Under the default rule established above, we’d use the risk-free rate of return to see what Grandfather’s wealth would have grown to. For the sake of illustration, let’s assume it would have grown to $14,000,000. If so, only $1,000,000 of Mother’s bequest to Daughter is treated as earned by Mother.

In contrast, imagine what happens if we use a rule that ignores Grandfather’s bequest if she spends it or invests it poorly. Mother can reduce her tax burden by travelling before earning her own money. In Early Trip, Mother spends Grandfather’s money on the trip and zeroes out her account. She then starts a business and earns $15,000,000, which she passes along to Daughter. If we ignore Grandfather’s bequest on the grounds that she spent it or wasted it, all her $15,000,000 wealth is treated as self-made.

Mother should not be treated differently depending on what she does with Grandfather’s money. Whether she spends it, invests it poorly, or invests it wisely, she had power over $10,000,000, and at her death, $10,000,000 (plus the risk-free-rate-of-return) should be credited back to Grandfather.

E. Tracing

A fifth issue—flagged by neither Rignano nor Halliday—is determining who receives inherited wealth as it moves downstream. This has two components, one normative and one administrative.

The Normative Question

Let’s start with the normative question. We’ve been using an example with one member in each generation for simplicity. Again, assume that Grandfather leaves Mother $10,000,000, but now imagine that Mother has not one but two children, Daughter and Son.

In applying the tax to Daughter and Son, how should we decide as a normative matter who receives Grandfather’s wealth, and who receives the wealth created by Mother? Ideally, we’d somehow allocate Grandfather’s wealth to each of them in proportion to how much wealth they actually receive from Mother. This would be possible if Mother does not make any lifetime gifts, instead re-transferring all of Grandfather’s wealth at her death. Lifetime gifts, however, render this impossible.

One option is to allocate Grandfather’s bequest pro rata among Daughter and Son by giving them each a $5,000,000 “taxable amount” that is essentially a mirror-image of existing exemptions (this represents the total amount of Grandfather’s wealth that should be taxed as a second transfer when Mother passes it along, divided by two since Mother has two children). Under this approach, transfers to each of them would be taxed until they reached $5,000,000; later transfers would be untaxed. This solution, however, has two problems. First, it undertaxes the family if Mother favors one child. Imagine that Mother does not earn her own wealth, and transfers all of Grandfather’s $10,000,000 to Daughter and none to Son. Under the pro rata apportionment approach, only $5,000,000 would be treated as second-generation. Second, assigning a per-capita amount at Grandfather’s death requires knowing who Grandfather’s bequest should be apportioned among—that is, who Mother is going to leave her wealth too—which may be unknowable at his death.

A better solution is a first-in-time approach that treats the first $10,000,000 received by either Daughter or Son as second-generation, regardless of how Mother splits $10,000,000 between them. This is essentially how the current system treats a donor’s lifetime exemption amount and allows Mother to allocate the tax burden via the timing of her transfers.

Administration

The next question is how one determines as an administrative matter, that a recipient of a gift or bequest has received wealth that has been inherited by the transferor. This requires more record-keeping than a traditional estate or inheritance tax, but not an insurmountable amount. And in fact, certain elements of this Article’s proposal exist in current estate and inheritance taxes in the U.S. and internationally.

Revisit Grandfather, Mother, and Daughter. As under current law, Grandfather’s executor will file a tax return at his death that shows the total amount of gratuitous transfers that Grandfather has made. To implement a Rignano tax, his executor would also make an election on that return to treat some or all of Grandfather’s wealth as first-generation, as well as recording to whom Grandfather left his wealth. Any wealth not elected by the executor will be treated entirely as a second-generation transfer. Absent malpractice, Grandfather’s executor will make the election. Mother, who receives Grandfather’s bequest, will also file a tax return upon receipt showing the bequest’s source and value, as well as indicating whether any assets are not under her investment control. Assuming Grandfather’s executor make the proper election, however, Mother will pay no tax.

These records enable us later to determine how much of any wealth that Mother later passes along should ultimately be traced back to Grandfather. When Mother makes a gift or bequest later, we need to know three things to calculate Daughter’s tax liability: the imputed value of Grandfather’s bequest to Mother at the time of Mother’s later transfer, the amount of that later transfer, and the value of any assets transferred from Grandfather to Mother over which Mother had no control.

We know the imputed value of Grandfather’s bequest by applying the risk-free rate of return to its value, as recorded on his and Mother’s tax return. This, of course, assumes Mother had investment control over the assets. If Grandfather also bequeathed assets to Mother over which she had no control, we’d determine both the imputed value of assets over which she control, and the current value of any assets over which she lacked control. This determines what dollar value of any transfers from Mother should be taxed to the recipients. Any excess will be treated as wealth created by Mother and not taxed.

This approach requires more record-keeping than under current law—namely, it requires both transferors and recipients to file returns, instead of just the transferor (in an estate tax) or just the recipient (in an inheritance tax). But the valuations required present no more difficulties than under current law. Transferors must already value assets at the time of a gift or bequest, and at times, formulas are used to impute such values based on current interest rates.

Two additional aspects of this approach are similarly used both in the U.S. and abroad. First, many inheritance tax systems tax recipients differently depending on from whom they inherit. (Generally, heirs who inherit from close relatives such as parents are treated more leniently than those who inherit from more distant relatives like cousins.). There is thus precedent for looking at the source of a gift or bequest when taxing the recipient.

Second, current law in the U.S. provides that in some circumstances, the tax consequences to a decedent turn on actions taken at the prior death of a spouse.²³⁴More specifically, the second spouse to die can use any of the first spouse’s unused exemption amount, so long as the first spouse’s executor made the proper election. The success of portability, as these rules are known, suggest that tying one person’s tax consequences to the actions of prior transferors is workable.

F. Transfers in Trust

The foregoing illustrations have used outright gifts and bequests. But many wealthy families transfer most of their wealth in trusts that last for several generations. For example, Grandfather may choose to create a trust that pays the income to Mother for her life, and at her death, distributes the corpus to Daughter. Applying a Rignano tax to transfers in trust raises additional questions. The first, which arises in any accessions tax proposal, is to determine when the taxable events occur. Note that for each trust beneficiary, there are potentially two important events—the date the tax is actually imposed, and the date the clock starts for valuation purposes for later transfers.

Remainder Interests

Let’s start with Daughter and her remainder interest. Should she be taxed at vesting, or at distribution?²³⁵ Most accessions tax proposals suggest distribution for administrative and valuation reasons.²³⁶ First, we do not know until distribution exactly how much Daughter receives. While we can often estimate the value of her remainder interest when Grandfather creates the trust based on current interest rates and Mother’s life expectancy, any figure is just that—an estimate. And for some trusts, additional valuation difficulties appear. Imagine that Grandfather’s trust was to Mother for life, and then to her children equally. Perhaps Daughter is the only living child at Grandfather’s death. But whether Mother has more children affects the share of the remainder Daughter will receive. Finally, many interests are subject to trustee discretion, as would be the case if the remainder interest in Grandfather’s trust passed to “Mother’s children in such proportions as the trustee determines to be in their best interests.” Second, until distribution, Daughter may not have liquid funds with which to pay the tax. Although some trust interests can be sold or borrowed against, many cannot.

These concerns apply with equal force to a Rignano tax. But where do normative considerations point, vesting or distribution? With a traditional accessions tax, one could argue that most (but not all) normative justifications suggest treating vesting as the taxable event. For example, if an accessions tax is designed to further welfarist principles, then vesting seems logical, as one’s welfare (from security, reputation, and the fungibility of money) increases upon vesting. Political influence likely starts accumulating at vesting, when politicians and PACs start courting the remainder beneficiary. And since money is fungible, a vested interest frees up other funds that can provide a head start when it comes to educational and economic opportunities. That said, Anne Alstott has argued that the choice/chance distinction counsels in favor of distribution if an accessions tax is designed to reflect equal opportunity concerns.

But a Rignano tax is not designed to further any single normative goal such as equality of opportunity or welfarism in isolation. Instead, it is designed to find a compromise among competing intuitions about wealth transfer taxation—even when those intuitions may seem “wrong” to tax theorists. To that end, some of the administrative considerations discussed above take on normative weight. Consider valuation. In theory, one could tax at vesting based on estimated values and then adjust at distribution to account for divergences from the estimate. But it is quite likely the public would react negatively to the taxation of undistributed yet vested interests, for the same reason the public reacts negatively to the possible taxation of unrealized gains. To many, it simply seems unfair to impose a tax when there has not yet been an event that provides liquidity, or when valuation is unclear. Given that one purpose of a Rignano tax is to make political headway where other inheritance taxes fail, the better course is to wait until distribution of remainder interests to impose the tax—that is, until we know exactly who gets exactly how much.

The same rule, with two exceptions, should apply when determining when Daughter’s clock starts ticking for purposes of valuing later growth for subsequent transfers. Daughter generally does not have control of the funds until distribution, and therefore none of their prior growth (or lack thereof) should be attributed to her to determine what part of subsequent transfers by Daughter stems from her own initiative or Grandfather’s wealth. The first exception would be if Daughter somehow had discretionary investment control of the assets during Mother’s income interest, in which case investment decisions could plausibly be attributed to her. The second is if Daughter could sell her remainder interest at vesting, in which case the decision to leave it invested in the trust should be attributed to her and any later distribution of wealth beyond the risk-free-rate of return should be deemed self-made.

Income Interests

What about income interests? Assume that Mother’s income interest has an estimated FMV of $1,000,000 at vesting based on the present value of its payment stream and is predicted to pay out $100,000 a year for the rest of Mother’s life. Or imagine that Daughter receives a secondary life estate instead of the corpus outright at Mother’s death. Should she be treated as receiving the inheritance all at once at vesting, or over time when she receives her annual income distribution? In theory, these are economically equivalent, assuming perfect information about interest rates and lifespans (just as the difference between taxing a remainder interest at vesting and distribution is).

The same considerations that apply to remainder interests should apply here as well. The normative considerations that justify a traditional accessions tax do not point clearly in one direction, while weighty valuation and liquidity concerns remain. The default should be that the taxable event, be it imposing tax or starting the clock for later valuation purposes, happens at distribution. Exceptions would be made where the beneficiary has control over investment assets or the ability to sell her income interest.

G. Transition Rules

A Rignano tax contains a unique transition issue. In the illustrations used throughout this Article, we have assumed that Grandfather was self-made. And in the example above, we know how much of Mother’s wealth to tax because Grandfather’s estate would have filed an election to treat his estate as first-generation wealth.

But what if Grandfather himself inherited some money, and was not completely self-made? How do we treat the first generation after a transition to a Rignano tax? Treating all existing wealth at the time of the tax’s imposition as self-made is unsatisfactory, for it essentially delays implementation of the tax for a generation and does not reflect reality. Instead, some existing wealth should be treated as self-made, and some should be considered second-generation wealth. Halliday and Rignano both acknowledge the need for a transition rule to determine that portion, with Rignano suggesting that one-third to one-half of current wealth should be treated as inherited.²³⁷ Fairly recent studies suggest that anywhere from 15% to 46% of current wealth is inherited. Although any number will be admittedly arbitrary, treating one-sixth to one-third of existing wealth as second-generation wealth seems reasonable.²³⁸

CONCLUSION

This Article has made the case for an inheritance tax system that—unlike our own—taxes old money more heavily than new. Specifically, it proposes completely exempting gifts and bequests of self-made wealth, but taxing heirs who receive re-transferred wealth. Although such a tax is more complex than our current system, the challenges are manageable and are well worth it.

Crucially, this proposal provides a way out of the enduring stalemate over taxing wealth. The estate tax has been the subject of passionate debate for decades, resulting in an ongoing state of political uncertainty. Rates and exemption levels have ping ponged back and forth for two decades, including a single year—2010—that had no estate tax at all. And although recent legislation ostensibly made the exemption’s expansion “permanent,” there is no reason a future Congress could not “permanently” shrink it again. Given the current political polarization, there is no doubt that questions about whether and how to tax wealth will continue to generate heated debate.

What makes this debate so intractable is not only that the public as a whole is divided on the issue of inheritance taxation, but that many individual Americans hold simultaneous beliefs about wealth, opportunity, desert, fairness, and family that seemingly contradict each other. Many of us, for example, have at least a sliver of sympathy for some of the claims of both supporters and opponents of the tax.

Yet our current system treats taxing wealth transfers as an all or nothing proposition, without acknowledging a key source of our seemingly contradictory beliefs: the finding that many of us silo beliefs about wealth, distinguishing among earned and inherited wealth. By harnessing this finding, as well as the insights of other recent psychological work on taxation, a Rignano tax thus reconciles the benefits of wealth transfer taxation with deeply held beliefs about fairness, desert, private property, and family. And by so doing, it offers an opportunity for a stable and lasting resolution to the debate over taxing inherited wealth.

98 S. Cal. L. Rev. 1439

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Miranda Perry Fleischer*

*Richard and Kaye Woltman Professor in Finance, The University of San Diego School of Law. For helpful feedback and suggestions, the author thanks Anne Alstott, Jordan Barry, Lily Batchelder, Heather Field, Dov Fox, David Gamage, Ari Glogower, Daniel Halliday, Shelly Layser, Ray Madoff, Shu-Yi Oie, Caley Petrucci, Jim Repetti, Diane Ring, Darien Shanske, and Mila Sohoni, as well as participants at the University of Virginia Tax Policy Workshop, the Boston College Law School/Tulane Law School Tax Roundtable, the Association of Mid-Level Tax Scholars Conference, the University of San Diego Colloquium Series, and the staff of the Southern California Law Review. Thanks to the University of San Diego Law Library and Carlisle Olson for invaluable research assistance.

Crack Taxes and The Dangers of Insidious Regulatory Taxes

December 2022December 2022Hayes R. Holderness*

An unheralded weapon in the War on Drugs can be found in state tax codes: many states impose targeted taxes on individuals for the possession and sale of controlled substances. These “crack taxes” provide state officials with a powerful means of sanctioning individuals without providing those individuals the protections of the criminal law. Further, these taxes largely escape public scrutiny, which can contribute to overregulation and uneven enforcement.

The controlled substance taxes highlight the allure to lawmakers of using tax law to regulate behavior, but also the potential dangers of doing so. Surprisingly, the judiciary has an underappreciated role in creating the allure of regulatory taxes. Because courts apply less scrutiny to taxes than to other types of laws, regulatory taxes get a blank check when challenged, incentivizing their use. Courts must reconfigure the way they approach regulatory taxes to remove the judicially created incentive for insidious regulatory taxes like controlled substance taxes.

Introduction

“ ‘It was going through the mail and the mail lady smelled it and called the police . . . . I’m not ever gonna get out from underneath this, ever, not unless I win the lottery and become a millionaire’ . . . .”[1] The North Carolina woman offering these statements was troubled not by her arrest and charge of attempted drug trafficking, but by the twenty-thousand-dollar tax assessment she received for possessing controlled substances (that is, illegal drugs). North Carolina brings in millions of dollars from its so-called “crack tax”[2] or “Al Capone law”[3] each year,[4] and several other states use similar taxes on the possession and sale of controlled substances to further regulate already criminalized activities.[5]

The idea of taxes as a weapon in the War on Drugs may seem surprising, but perhaps it is predictable that lawmakers wanting to look tough on drugs would co-opt tax law in this way. More surprising though is the underappreciated role courts have in incentivizing lawmakers to enact controlled substance taxes and other regulatory taxes to achieve their goals.

How do courts incentivize the enactment of regulatory taxes? At its core, the answer to this question is a story of veiled consequences of elevating form over substance. Courts have habitually treated tax laws with the utmost respect,[6] resulting in a privileged regime of relaxed judicial scrutiny for taxes.[7] Governments must raise revenue, and taxation is a powerful tool to raise that revenue from whatever members of society lawmakers see fit. Unelected judges, the line of thinking goes, should be hesitant to upset these fundamentally political decisions.[8] This hesitancy has pushed courts to be exceedingly cautious when examining laws labeled “taxes.”

In addition to their revenue-raising role, taxes have also long been recognized as legitimate and powerful tools to regulate behavior.[9] One might expect courts to heighten their scrutiny of taxes with intentional regulatory goals (as opposed to mere revenue-raising taxes) to ensure that the interests of regulated individuals are appropriately considered. However, this is rarely the case, even when the taxes’ revenue goals are insignificant compared with their regulatory goals.[10]

In short, as critics of “tax exceptionalism”—the idea that tax law is categorically different from other areas of law and should be treated so—have long observed and frequently lamented, courts often employ a unique approach to analyzing tax laws.[11] Once a court determines that laws are tax laws, those laws become privileged before the judiciary, even when the laws have intentional regulatory effects.[12] This subtle elevation of form (tax law) over substance (regulatory effects) results in the judicially created incentive for lawmakers to pursue their regulatory goals through taxation rather than through direct regulation: taxes will not face as much scrutiny from courts.[13]

Lawmakers have noticed and responded, using taxes to achieve regulatory goals where other laws might receive more scrutiny from courts.[14] Though this phenomenon may appear benign, it can generate serious harms for individuals, as controlled substance taxes illustrate.[15] By adopting the taxes rather than increasing existing criminal sanctions, lawmakers impose punishment on those possessing and selling controlled substances without running up against legal protections for criminal defendants.[16] Even those people who would be acquitted under the criminal law can still be sanctioned for their behavior through these insidious regulatory taxes.[17] Thus, controlled substance taxes are a potentially powerful and unchecked weapon in the War on Drugs. Given the biased manner in which the War on Drugs has been carried out,[18] skirting protections for individuals is particularly concerning, as tax law becomes a tool of state oppression of overpoliced communities.[19]

The harms of these taxes do not stop with those cavalierly imposed on individuals. Regulatory taxes like controlled substance taxes also impose stealth costs on society because they are less effective than their direct regulation alternatives.[20] For example, controlled substance taxes are often burdensome laws for tax authorities to administer, making the taxes a costly alternative to laws directly regulating controlled substances, which are enforced by those more familiar with the substances.[21] Further highlighting the insidious nature of these taxes, they also obscure the total amount of regulation that an activity is subject to by remaining out of public view, leading to harmful overregulation that is difficult to address.[22]

Despite the dangers of regulatory taxes like controlled substance taxes, these insidious taxes have gone largely unnoticed in the tax literature. Rather, tax scholars have focused on the relative substantive strengths of taxation versus direct regulation when analyzing the best options for achieving regulatory goals.[23] Literature regarding the related phenomena of fines and civil forfeiture laws has not considered the unique situation of tax laws before the courts.[24] In short, the role of judicial deference regimes in tilting the scales toward regulatory taxes and the resulting consequences for individuals and society are underappreciated. This Article is the first to home in on these issues,[25] analyzing them and demonstrating how courts should take them into account to correct for the inadvertent judicial incentive for lawmakers to enact insidious regulatory taxes.

Courts can remove this incentive and head off future insidious regulatory taxes by recognizing the potential for these taxes to exist and placing such taxes under more scrutiny when exposed.[26] This Article builds on scholarly developments in modern tax expenditure analysis—which explores the role of taxes as a tool for achieving regulatory goals[27]—to propose an analytical framework for uncovering insidious regulatory taxes. A comparatively weak tax law passed to take advantage of the privileged judicial scrutiny regime for taxes is an insidious regulatory tax, and, once that tax is uncovered through the proposed analysis, a court should scrutinize the tax as it would a similar direct regulation.

Controlled substance taxes offer a prime example of insidious regulatory taxes and their dangers, but not all regulatory taxes are insidious. Regulatory taxes like carbon taxes that are more effective than their direct regulation counterparts are substantively justified and do not raise the concerns associated with insidious regulatory taxes.[28] However, as regulatory taxes continue to become more prevalent,[29] the proposed framework will become more crucial to aid courts in separating the insidious regulatory taxes in need of heightened scrutiny from the unobjectionable ones.

The Article proceeds in three parts. Part I provides background on controlled substance taxes and the judicial privilege granted to all types of taxes. The resulting allure of regulatory taxes can be too much for lawmakers to ignore, resulting in the enactment of insidious regulatory taxes like controlled substance taxes. Part II then details the dangers of insidious regulatory taxes in more depth, exposing the problems created by the judiciary’s current approach to taxes. Finally, Part III fleshes out the proposed framework for analyzing tax laws to remove the judicially created incentive for insidious regulatory taxes, using the controlled substance taxes as a case study to illustrate the framework’s operation.

[1]. Michael Hennessey, Inside the North Carolina Law Requiring Drug Dealers to Pay Taxes, myfox8.com (May 10, 2019, 10:21 AM), https://myfox8.com/news/inside-the-north-carolina-law-requiring-drug-dealers-to-pay-taxes [https://perma.cc/DT5B-NDPS].

[2]. See Jeremy M. Vaida, The Altered State of American Drug Taxes, 68 Tax Law. 761, 787 (2015).

[3]. See Anne Barnard, In Taxing Illegal Drugs, the Trouble Comes in Collecting, N.Y. Times (Jan. 24, 2008), https://www.nytimes.com/2008/01/24/nyregion/24drugs.html [https://perma.cc/PMS5-YBU
7] (quoting an associate of the Federation of Tax Administrators describing the taxes as hearkening to “the Al Capone model”); Christopher Paul Sorrow, The New Al Capone Laws and the Double Jeopardy Implications of Taxing Illegal Drugs, 4 S. Cal. Interdisc. L.J. 323, 323 (1995); Christina Joyce, Expanding the War Against Drugs: Taxing Marijuana and Controlled Substances, 12 Hamline J. Pub. L. & Pol’y 231, 239 (1991).

[4]. See N.C. Dep’t of Revenue, Statistical Abstract of North Carolina Taxes 2019 tbl. 15 (2019) (showing tax revenues ranging from approximately $6.5 million to approximately $11.5 million for fiscal years 2005 through 2019 from the state’s controlled substance tax, which includes taxes on illicit liquors in addition to illicit drugs).

[5]. See infra note 34.

[6]. See infra Section I.B.

[7]. See, e.g., Eric Kades, Drawing the Line Between Taxes and Takings: The Continuous Burdens Principle, and Its Broader Application, 97 Nw. U. L. Rev. 189, 192 (2002) (“At times, judges and legal commentators have declared that Congress’ power to tax is beyond constitutional review.”).

[8]. See Nat’l Fed’n of Indep. Bus. v. Sebelius, 567 U.S. 519, 531-32 (2012) (“We do not consider whether the Act embodies sound policies. That judgment is entrusted to the Nation’s elected leaders.”). As Justice Felix Frankfurter articulated,

[Governments] need the amplest scope for energy and individuality in dealing with the myriad problems created by our complex industrial civilization. They need wide latitude in devising ways and means for paying the bills of society and in using taxation as an instrument of social policy. Taxation is never palatable, and its exercise should not be subjected to finicky or pedantic arguments based on abstractions.

Felix Frankfurter, The Public and Its Government 48-49 (1930).

[9]. See infra note 30.

[10]. See infra Section I.B.

[11]. See, e.g., Alice G. Abreu & Richard K. Greenstein, Tax: Different, Not Exceptional, 71 Admin. L. Rev. 663, 663-64 (2019) (surveying tax exceptionalism scholarship and arguing that tax is not different in kind from other types of law and should not be analyzed as though it were); Paul L. Caron, Tax Myopia, or Mamas Don’t Let Your Babies Grow Up to Be Tax Lawyers, 13 Va. Tax Rev. 517, 518-31 (1994) (highlighting and criticizing the perception that tax law is different from other areas of law).

[12]. See, e.g., Gillian E. Metzger, To Tax, to Spend, to Regulate, 126 Harv. L. Rev. 83, 90 (2012). Part of the opinion from Department of Revenue of Montana v. Kurth Ranch illuminates this claim. While observing that taxes are subject to constitutional constraints, as are criminal fines and civil penalties, the Court notes demanding constraints for criminal sanctions and relatively trivial constraints for taxes, even if those taxes fall on the same criminal activities as the criminal sanctions do. Dep’t of Revenue of Mont. v. Kurth Ranch, 511 U.S. 767, 778 (1994).

[13]. See infra Section I.B.

[14]. See Michael S. Kirsch, Alternative Sanctions and the Federal Tax Law: Symbols, Shaming, and Social Norm Management as a Substitute for Effective Tax Policy, 89 Iowa L. Rev. 863, 865–66 (2004) (describing how federal tax laws are used for regulatory goals); Stanley S. Surrey & Paul R. McDaniel, The Tax Expenditure Concept: Current Developments and Emerging Issues, 20 B.C. L. Rev. 225, 247 (1979) (describing how taxes have been used when direct regulations might be unconstitutional or difficult to enact). See generally R.A. Lee, A History of Regulatory Taxation (1973). Lee examines a number of federal taxes with regulatory effects in his work. In describing the historical context and creation of each tax, Lee uncovers the statements of many members of Congress demonstrating their understanding that they could achieve their goals in a less constitutionally suspect manner by using the taxes instead of direct regulations. For example, in detailing a proposed federal tax on grain futures in 1921, Lee describes a discussion in which Congressman Marvin Jones opined that “if that approach [of direct regulation] were used . . . ‘a constitutional question might arise’ but the Supreme Court had ‘allowed us to go a long ways in the taxing power,’ so he believed this was the ‘wiser method.’ ” Id. at 73. In a later passage, Lee describes a 1937 House Ways and Means Committee Report as finding that “ ‘the law is well settled’ that a regulatory tax, although controlling a subject reserved to state jurisdiction, would be valid ‘if it appears on its face to be a revenue measure.’ ” Id. at 182.

[15]. See infra Part II.

[16]. See infra notes 117-22 and accompanying text.

[17]. See, e.g., Barnard, supra note 3 (reporting comments of a tax administrator recognizing the potential for the taxes to impose punishment when criminal sanctions cannot); Robert E. Tomasson, 21 States Imposing Drug Tax and Then Fining the Evaders, N.Y. Times (Dec. 23, 1990), https://www.
nytimes.com/1990/12/23/us/21-states-imposing-drug-tax-and-then-fining-the-evaders.html [https://per
ma.cc/VD68-HAJF] (reporting on controlled substance taxes as effective tools in combatting illegal drug sales because of their ability to avoid the protections afforded to criminal defendants).

[18]. See authorities cited infra note 125.

[19]. Indeed, the taxes are often enforced only against individuals charged with violations of criminal controlled substance laws. See authorities cited infra note 57.

[20]. See infra Section II.B.

[21]. See infra Section III.A.2.

[22]. See infra Section II.C.

[23]. See, e.g., Stanley S. Surrey, Pathways to Tax Reform: The Concept of Tax Expenditures 148-54 (1973) (discussing tax expenditures and the choice between taxation and spending programs); Surrey & McDaniel, supra note 14, at 227-28 (same); David A. Weisbach & Jacob Nussim, The Integration of Tax and Spending Programs, 113 Yale L.J. 955, 959-64 (2004) (same); Eric J. Toder, Tax Cuts or Spending—Does It Make a Difference?, 53 Nat’l Tax J. 361, 361-63 (2000) (same); Edward A. Zelinsky, James Madison and Public Choice at Gucci Gulch: A Procedural Defense of Tax Expenditures and Tax Institutions, 102 Yale L.J. 1165, 1165-67 (1993) (same); Eric M. Zolt, Deterrence Via Taxation: A Critical Analysis of Tax Penalty Provisions, 37 UCLA L. Rev. 343, 348 (1989) (same).

[24]. See, e.g., Ariel Jurow Kleiman, Nonmarket Criminal Justice Fees, 72 Hastings L.J. 517, 520 (2021) (detailing similar issues surrounding criminal fees); Beth A. Colgan, Fines, Fees, and Forfeitures, 18 Criminology, Crim. Just., L. & Soc’y 22, 28 (2017) (detailing the use of fines, fees, and forfeitures as sanctions for criminalized activities); Suellen M. Wolfe, Recovery from Halper: The Pain from Additions to Tax Is Not the Sting of Punishment, 25 Hofstra L. Rev. 161, 197 (1996) (detailing similar issues surrounding civil forfeiture laws); Kenneth Mann, Punitive Civil Sanctions: The Middleground Between Criminal and Civil Law, 101 Yale L.J. 1795, 1799-1800, 1802, 1870 (1992) (observing the harms of failing to provide protections for individuals subject to civil state sanctions); Marc B. Stahl, Asset Forfeiture, Burdens of Proof and the War on Drugs, 83 J. Crim. L. & Criminology 274, 274-79 (1992) (critiquing civil forfeiture laws).

[25]. As far back as 1979, Stanley Surrey, former Assistant Secretary of the Treasury for Tax Policy, predicted that “Congress, by inserting spending programs in the tax law, essentially has forced the courts to apply to tax law the legal provisions hitherto imposed on direct spending.” Stanley S. Surrey, Tax Expenditure Analysis: The Concept and Its Uses, 1 Can. Tax’n 3, 9 (1979) [hereinafter Surrey, Tax Expenditure Analysis]; see also Surrey, supra note 23, at 46-47; Surrey & McDaniel, supra note 14, at 246. Though this prediction seemed based on Surrey’s conclusion that “tax expenditures”—the normatively unnecessary provisions of tax law designed to achieve regulatory results—should not be entitled to the privilege given to revenue-raising tax provisions, Surrey and others since have not fully analyzed the issue of judicial scrutiny of regulatory taxes and its implications. This Article fills that void.

As an aside, Surrey’s prediction may have come true in some cases regarding special tax breaks offered in lieu of direct spending. See, e.g., Espinoza v. Mont. Dep’t of Revenue, 140 S. Ct. 2246, 2260-61 (2020) (holding tax credits for education to the same level of scrutiny under the Free Exercise Clause as direct spending measures); Mueller v. Allen, 463 U.S. 388, 393-404 (1983) (holding tax breaks to the same level of scrutiny under the Establishment Clause as direct spending measures). However, surely Surrey would be surprised to find that his prediction has largely failed to materialize in the case of tax laws used in lieu of direct regulations. Rather, courts have continued to privilege tax laws regardless of the regulatory effects those taxes might have.

[26]. See infra Section III.A.4.

[27]. See generally Weisbach & Nussim, supra note 23 (laying the foundation for modern tax expenditure analysis, which focuses on the comparative institutional competencies of taxes and direct spending measures); see also infra notes 151-62 and accompanying text.

[28]. See generally Shi-Ling Hsu, The Case for a Carbon Tax: Getting past Our Hang-Ups to Effective Climate Policy (2011) (comparing economic, social, administrative, and political merits of carbon taxes versus direct regulations and concluding that a tax would be the most effective policy); Reuven S. Avi-Yonah & David M. Uhlmann, Combating Global Climate Change: Why a Carbon Tax Is a Better Response to Global Warming than Cap and Trade, 28 Stan. Envtl. L.J. 3, 6-8 (2009) (similar).

[29]. See, e.g., Lucy Dadayan, Tax Pol’y Ctr., Are States Betting on Sin? The Murky Future of State Taxation 3-4 (2019), https://www.taxpolicycenter.org/publications/are-states-betting-sin-murky-future-state-taxation/full [https://perma.cc/K6AX-5D4C] (reporting upward trends in the imposition of “sin taxes” on unwanted behaviors); Rachelle Holmes Perkins, Salience and Sin: Designing Taxes in the New Sin Era, 2014 BYU L. Rev. 143, 145 (2014) (describing increasing use of sin taxes).

* Associate Professor, University of Richmond School of Law. For their helpful thoughts and comments, I would like to thank my outstanding colleagues at the University of Richmond and the participants in the 2019 Junior Tax Scholars Workshop, the 2019 Junior Faculty Forum, and the 2021 AALS New Voices in Taxation program. I owe specific thanks to Aravind Boddupalli, Beth Colgan, Erin Collins, Jim Gibson, Ari Glogower, Mary Heen, Dick Kaplan, Ariel Jurow Kleiman, Corinna Lain, Sarah Lawsky, Ruth Mason, Lukely Norris, Tracey Roberts, Erin Scharff, and Allison Tait. I am indebted to Chris Marple, Tyler Moses, and Whitney Nelson for their excellent assistance with research.

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Introduction

I. An Overview of Wealth Transfer Taxation

II. The State of The Debate over Estate Taxes

A. Arguments in Favor of Wealth Transfer Taxation

Equality of Opportunity

Dynastic Power

Inheritances and Ability to Pay

A Wealth Transfer Tax as a Periodic Wealth Tax

B. Arguments Against Wealth Transfer Taxation

Equality of Opportunity Revisited

Rejecting Declining Marginal Utility and Progressivity

Private Property Rights

Double Taxation

Efficiency and Administrative Concerns

III. Settling the Debate with a Rignano Tax

A. Attitudes Toward Taxation, Fairness, Redistribution, and Equality

Taxation and Folk Justice

Policy Silos

A Rignano Tax Reconciles These Competing Intuitions

IV. A Rignano Tax

A. The Base

Transfers or Receipts?

Gifts

a. Gifts in General

b. Gifts and Timing Complications

Exclusions and Exemptions

B. The Rate

Initial Transfers

Subsequent Transfers

Adjusting for Age

C. Frequency: Determining the Number of Transfers

Generation-Skipping Transfers

Transfers in Rapid Succession

D. Valuation

The Problem

Risk-Free Rate of Return as the Default Solution

Complications

E. Tracing

The Normative Question

Administration

F. Transfers in Trust

Remainder Interests

Income Interests

G. Transition Rules

CONCLUSION

98 S. Cal. L. Rev. 1439