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August 31, 2016
Tax History: The Century of the Estate Tax: Made for Revenue, Not Redistribution
Joseph J. Thorndike

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The estate tax turns 100 on September 8. It was a near thing, this century of soaking the rich. For much of the 20th century, the tax coasted along with little comment or controversy, only to find itself beleaguered -- and repealed! -- at the start of the 21st.

Reports of the estate tax's demise proved to be highly exaggerated. The levy disappeared briefly, only to reappear (in somewhat diminished form) soon after. But arguments over the estate tax have continued unabated. Full repeal remains an article of GOP orthodoxy, and Democrats continue to defend the levy as a vital bulwark of progressive taxation. It's a set piece of modern American political debate.

There's a lot of passion in contemporary arguments about the estate tax (and often more heat than light). But it was not always thus. The tax was well tolerated for decades, both by voters and their elected representatives. The origins of the tax, moreover, were notably free of partisan rancor. Established in the years immediately preceding American entry into World War I, it was broadly viewed as a compromise: a way to satisfy popular demand for progressive tax reform without relying too heavily on the highly controversial income tax.

In fact, the estate tax of 1916 enjoyed considerable bipartisan support -- or at least acquiescence. Its popularity, moreover, stemmed partly from its limited ambitions. Then, as now, calls for taxing inherited wealth were often couched in arguments about inequality and the growing concentration of wealth.

But for most of its early supporters, the estate tax was never intended to be a tool for any serious redistribution. While a few of its more passionate fans harbored hopes that the levy could be used to remake society, most of its supporters hoped simply to remake the tax system. The estate tax was designed principally to reallocate the tax burden, not to redistribute wealth.

It was an important distinction.

Early Experiments

Congress first considered a federal wealth transfer tax during the early days of American independence. In 1794 a special committee of the House of Representatives proposed a stamp tax on "any receipt or other discharge" from an estate (Max West, The Inheritance Tax 57 (1908)). Nothing came of the suggestion, but a few years later, lawmakers returned to it while casting about for money to fund the "quasi war" with France -- an undeclared naval conflict that underscored the need for additional military spending. On July 6, 1797, Congress adopted a revenue act that included a documentary stamp tax based on the 1794 proposal. Most documents associated with an inheritance required an embossed revenue stamp, the cost of which was graduated according to the size of the inherited sum: Anything greater than $50 but less than $100 required a stamp worth 25 cents; greater than $100 but less than $500, 50 cents; every further increment of $500, a dollar. Inheritances of less than $50 were exempt, as were bequests of any amount received by a wife, child, or grandchild (John R. Luckey, "A History of Federal Estate, Gift, and Generation-Skipping Taxes," Congressional Research Service, at 3 (2003)).

In 1802 Congress repealed the stamp tax on inheritance documents (along with all other internal taxes, preferring to rely solely on tariff duties instead). During the War of 1812, Treasury considered the possibility of reviving some sort of legacy tax, but the war ended before anything materialized (West at 58).

Civil War. For the next six decades, the federal government imposed no inheritance or estate tax. In 1862, however, Congress imposed a "legacy tax" to help pay for the Civil War. That new levy applied to the transfer of personal property after death and was linked to a new stamp tax on wills and related legal documents. Like the tax of 1797, the legacy tax applied to the inherited share of an estate and was graduated by degree of relationship, from a low of 0.75 percent for immediate family to a high of 5 percent for "collateral relatives, strangers in blood, and bodies corporate or politic." Distributions from estates worth less than $1,000 were exempt, as were bequests to surviving spouses. The documentary stamp tax on wills was also graduated, this time by the total value of the estate, from a low of 50 cents for estates worth less than $2,500 to a high of $20 for those worth between $100,000 and $150,000; additional $50,000 increments required an additional $10 (West at 58-59; Luckey at 4).

In 1864 Congress raised rates for the legacy tax on personal property and imposed an additional "succession tax" on the transfer of real estate; rates for both ranged from 1 percent for immediate family to 6 percent for unrelated individuals and organizations. The two taxes were broadly similar in operation, although Congress allowed for minor variations: Siblings paid at a higher rate under the succession tax than they did under the legacy tax, and the succession tax included no exemption for small estates (or, initially, for surviving spouses; wives, but not husbands, were exempted by subsequent legislation). The succession tax also taxed charitable bequests at the highest rate. Finally, the 1864 legislation increased the stamp tax imposed two years earlier (West at 59-60; Luckey at 4).

In 1866 a special revenue commission headed by David A. Wells declared the legacy and succession taxes a failure, noting their low yield and ease of evasion. In 1865 the two levies had produced just $546,703 -- far short of the $5 million that he thought they should be producing. Wells recommended various administrative changes, including an increase in penalties for noncompliance, but two years later he reported that the taxes were still yielding less than half what they should. He recommended a variety of additional administrative reforms, including the appointment of special revenue officers to collect both taxes (West at 61).

Congress, however, was more interested in cutting taxes than in improving their administration. In 1870 lawmakers repealed both the legacy and succession taxes. In 1872 they repealed the stamp tax, too, ending another chapter in the history of federal wealth transfer taxes.

The Civil War taxes on wealth transfer were not a complete failure. As the economist Max West pointed out in his still-valuable 1908 study, The Inheritance Tax, the Civil War levies grew more productive over time, with revenue rising from roughly $500,000 to more than $3 million over their six years of full operation. As a share of total federal revenue, those figures represented an increase from 0.26 percent to 1.67 percent (West at 62).

Spanish-American War. If wealth transfer taxes were a minor element of the Civil War tax regime, income taxes were a mainstay. And yet they too fell victim to the postwar zeal for tax reduction. Allowed to expire in 1872, the individual and corporate income taxes remained a part of the national political discussion. It took more than two decades for lawmakers to return them to the revenue system, but when they did, they folded inherited wealth into the tax base. The Revenue Act of 1894 taxed inheritances and gifts as regular income. Before that novel treatment took effect, however, the Supreme Court struck down the 1894 income tax in its entirety.

In 1898 the taxation of inherited wealth again found a foothold in the law. During the Spanish-American War, Congress imposed a new estate tax, levied on the value of all personal property in an estate. Property left to a spouse was exempt, as was the first $10,000 of any estate (roughly $300,000 in today's dollars). Rates were graduated by both size of the estate and relationship to the decedent. Initially, the 1898 tax did not grant any favorable treatment to charitable bequests, but in 1901 Congress amended the levy to exempt gifts to many charitable organizations. The following year, however, lawmakers repealed the estate tax entirely. Over its brief life, the levy raised about $14.1 million (Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson, "The Estate Tax: Ninety Years and Counting," Statistics of Income Bulletin, at 120 (Summer 2007)).

Taken as a whole, the early history of federal wealth transfer taxes is a story about revenue, not reform. The taxes were enacted and repealed three times, with each episode prompted by a military and fiscal crisis. The tax was certainly designed with progressivity in mind; lawmakers were eager to spread the budgetary burden of military activity, and they used estate and inheritance taxes to target some of the nation's wealthiest taxpayers. But lawmakers never intended those taxes to redistribute wealth -- rather, they hoped to ensure that wealth paid its fair share of the overall tax burden.

The Modern Estate Tax

When Congress revived the estate tax in 1916, revenue was again the driving force. To be sure, lawmakers were concerned with the surging inequality and growing concentration of wealth. But the estate tax wasn't supposed to remedy those problems, at least not directly. Instead, the tax was designed to reallocate the tax burden. As legal historian Ajay Mehrotra has observed, lawmakers "had a pragmatic, rather than radical or reactionary, notion of redistribution." They did not seek principally to recast society or refashion the economy in any thoroughgoing sense. "Rather, they sought to reallocate the costs of underwriting a modern state across geographical regions and socioeconomic classes" (Mehrotra, Making the Modern American Fiscal State 27 (2014)). (Prior analysis: Tax Notes, July 17, 2006, p. 293 .)

After war broke out in Europe in the summer of 1914, the United States assumed a posture of studied neutrality. Increasingly, however, Americans edged closer to the conflict, aligning themselves practically, if not officially, with the Allied cause. Meanwhile, however, federal revenue began to suffer; as in previous wars, the tariff proved unreliable as a wartime measure. In 1915 revenue from customs duties fell to about two-thirds of the level in 1913 (W. Elliot Brownlee, "Woodrow Wilson and Financing the Modern State: The Revenue Act of 1916," 129 Proceedings of the American Philosophical Society 173, 175 (1985)).

In the fall of 1914, Wilson asked Congress for new revenue, and lawmakers agreed to reinstate many of the taxes used to fund the Spanish-American War. The estate tax, however, was not one of them, nor was the new income tax, then just barely a year old. Instead, lawmakers relied heavily on various excise taxes, including many on consumer goods like chewing gum and toilet articles, as well as some forms of alcohol. Those taxes were not popular with Democrats -- or voters, as it turned out during the 1914 congressional elections -- but they had the virtue of being familiar and readily administered. To make them still more palatable, the Revenue Act of 1914 provided for the expiration of the levies after a single year (Brownlee at 176; Sidney Ratner, Taxation and Democracy in America 342-343 (1967)).

The following year, as the war dragged on and Germany's unrestricted submarine warfare began to wreak havoc with neutral shipping, Wilson asked Congress to approve a new -- and costly -- military preparedness program. To pay for it, he asked lawmakers for new taxes. "In a country of great industries like this, it ought to be easy to distribute the burdens of taxation without making them anywhere bear too heavily or too exclusively upon any one set of persons or undertakings," he insisted. "What is clear is that the industry of this generation should pay the bills of this generation" (Wilson, third annual message to Congress (Dec. 7, 1915) , available at http://www.presidency.ucsb.edu/ws/index.php?pid=29556).

As things stood, that generation was falling short. Tax revenues were down nearly 10 percent from the year before, despite the emergency levies imposed in 1914. Faced with that fiscal reality, Wilson offered Congress a variety of suggestions, including higher excise taxes (especially on industrial and commercial goods), as well as broader application of the new personal income tax. In the latter vein, Wilson and his Treasury proposed a reduction in the personal exemption and a lower threshold for the "surtax" brackets targeting wealthy taxpayers (Brownlee at 176).

As historian W. Elliot Brownlee has explained in his comprehensive history of the 1916 revenue act, Wilson's enthusiasm for raising income taxes was both genuine and strategic. Like many Democrats, the president had long been a fan of using the income tax to make the federal tax system more progressive. But his embrace of progressive taxation in 1915 was also calculated to win support from insurgent members of his own party, including a powerful bloc of anti-preparedness insurgents who were committed to redistributive taxation (Brownlee at 175, 177).

Led by House Ways and Means Chair Claude Kitchin, the insurgent Democrats pushed Wilson to rely more heavily on progressive taxes like those on incomes and estates. They also supported a punitive levy on munitions manufacturing, consistent with their feelings about American involvement in the war. Many of the insurgents agreed, reluctantly, to approve an extension of the 1914 emergency taxes. But they consistently opposed additional excise levies and agitated replacing some of the most detestable ones already on the books (they particularly scorned a collection of stamp taxes imposed in the 1914 bill that targeted many legal and commercial documents). "They believed that taxation should be more than a means of raising revenue," Brownlee wrote of the insurgents. "It should be, they were certain, a positive force for social justice through its redistributive power" (Brownlee at 183).

Kitchin was sympathetic to those views, but his position in the leadership (he served as House majority leader in addition to chairing Ways and Means) induced in him some amount of pliability. As the 1915 revenue bill began to take shape, Kitchin and the Wilson administration were never too far out of step. But the insurgent coalition still had enough votes to defeat Wilson's tax program -- and by extension, his preparedness program, too. In the face of that reality, Wilson and his allies signaled that they could accept a more sharply redistributive bill.

Democrats on the Ways and Means Committee asked Rep. Cordell Hull to take the lead in drafting revenue legislation that would comport more completely with insurgent thinking on the role of redistributive taxes. Hull was no stranger to the subject, having played a key role in writing the original 1913 income tax law. With help from two staff experts, he set about producing a new bill, and in mid-May he delivered one to Kitchin that relied more heavily on progressive taxes than Wilson's original proposal -- including a new federal estate tax.

Wilson offered no major objection to the Hull bill. And on the subject of taxing estates, Treasury encouraged lawmakers to be even bolder. In a memo to the committee, Treasury urged the consideration of a more progressive version of the levy that featured a "considerably higher rate upon very large estates" (Brownlee at 190).

When Kitchin formally introduced the committee bill in early July 1916, it included an estate tax with graduated rates ranging from 1 percent to 5 percent. Estates under $50,000 were exempt, and the top rate applied to portions of an estate above $450,000. The committee expected the bill to raise $17 million in its first year (Brownlee at 192).

Democrats on the committee defended the new estate tax (as well as the bill's higher income taxes) as a move toward fairness. In particular, they emphasized the importance of ability to pay as a standard for policy formulation. As Rep. Charles R. Crisp explained to his colleagues:


    The Democratic Party, while having no fight to make on wealth honestly acquired, believes that a man should contribute to the support and maintenance of the government according to his ability to pay; that great wealth should bear its just and equitable proportion of the expense of the government; and Mr. Chairman, the bill we are now considering raises the entire amount necessary to pay the expenses of this preparedness from the wealth of the country [53 Cong. Rec. 10532].

Crisp neatly encapsulated the principal argument behind the new tax. The levy was not, at least for most lawmakers, a tool for attacking "wealth honestly acquired." To be sure, many of the insurgent Democrats would have been happy to redistribute honest wealth along with every other sort. But for most Democrats, the new estate tax served more modest goals: It was a tool for reallocating the tax burden.

Indeed, the estate tax was actually designed to soften the redistributive edges of the pending tax bill. By providing for substantial new revenue, it lessened the need to further raise income taxes. If the estate tax was unpopular among conservatives, it was still considered more tolerable than heavy income taxes.

Indeed, the estate tax enjoyed a modicum of bipartisan support. Over the years, a variety of prominent business leaders had endorsed estate and inheritance taxes -- some tepidly but others with real enthusiasm. "Of all forms of taxation, this seems the wisest," declared the industrialist Andrew Carnegie. "By taxing estates heavily at death the state marks its condemnation of the selfish millionaire's unworthy life" (Carnegie, "Wealth," North American Review, at 653-654 (1889)).

Republican politicians, too, had been known to embrace estate and inheritance taxes. Theodore Roosevelt had famously proposed the latter in 1906, declaring that "the man of great wealth owes a peculiar obligation to the state because he derives special advantages from the mere existence of government" (Roosevelt, sixth annual message to Congress (Dec. 3, 1906) , available at http://www.presidency.ucsb.edu/ws/index.php?pid=29547).

The Kitchin committee's estate tax was calculated to appease conservatives by offering them the lesser of progressive evils. Indeed, the levy's moderate rate structure -- topping out at 5 percent -- was a further mark of conciliation, especially given the 90 percent rate endorsed by Carnegie and others (Brownlee at 193).

Floor debate over the House bill was vigorous, but the estate tax was a relative sideshow compared with the income tax changes. The bill promised to sharply raise income tax rates while still maintaining relatively high exemptions. Critics denounced that combination as a form of class legislation. The law would "enable 99 people to tax the hundredth man and to put the bulk of the taxation upon the thousandth man," complained Republican Rep. Richard Wayne Parker (53 Cong. Rec. 1499).

By contrast, conservative complaints about the estate tax were distinctly muted. That was probably because Republicans had long been sympathetic to -- or at least tolerant of -- taxing inherited wealth. Faced with the inescapable political ascendancy of progressive taxation, the estate tax seemed like a tolerable concession.

Still, not everyone was willing to embrace the estate tax. Republican Rep. Charles Henry Sloan, among others, complained that Democrats were using new taxes to mask their spendthrift ways, as well as their failure to improve the lives of average Americans. "If they cannot reduce the cost of living, they demonstrate to the public their ability to raise the cost of dying," Sloan quipped.

Some lawmakers complained that the new levy would infringe on the states' power to tax inheritances. At the time, 42 states had a succession tax, and some were revenue mainstays. In New York, for instance, the inheritance tax provided a fifth of total revenue. In Illinois and Pennsylvania, it raised 9 and 13 percent of total revenue, respectively (Mehrotra at 225). But those complaints proved less than compelling for a majority of the House. And some estate tax supporters insisted that federal levies on inherited wealth were more efficient than subnational alternatives.

Democrats offered various formulations of Crisp's ability to pay argument. They defended the proposed estate tax as a revenue tool, not as an instrument of social reform. But a few left-leaning lawmakers were willing to make a more ambitious case. Rep. Meyer London, a socialist from New York, was the most outspoken supporter of taxing large estates into submission.


    It is difficult to see how, in a democracy, men will with indifference contemplate the inheritance, through the mere accident of consanguinity, of large estates, of tremendous power in the shape of capital. While we object to the power of making laws being transferred from father to son by inheritance, we do permit the acquisition by inheritance of a financial power which confers the right to legislate for industry, commerce, finance, and to shape the life of the country. As a matter of public policy, and not only as a source of revenue for the support of the government, the tax on inheritance should be increased [53 Cong. Rec. 2030].

But Meyer was the exception, not the rule. Most Democrats focused their defense of the estate tax on its revenue potential. The new tax could help re-balance the allocation of fiscal burdens, they insisted. The levy would be "the first successful attempt to make wealth bear its just and proportionate burden of taxation," Rep. William Cox said (53 Cong. Rec. 10731).

Ultimately, however, it was Hull who made the most complete and compelling case for adopting the new tax. He framed his argument in grand historical terms. "An irrepressible conflict has been waged for thousands of years between the strong and the weak, the former always striving to heap the chief tax burdens upon the latter," he said. "That conflict still continues" (53 Cong. Rec. 10652).

For more than a century, lower-income Americans had borne the burden of consumption taxes, including the tariff and various excise levies, Hull said. Faced with the pressing need for still more revenue, it seemed unreasonable to ask those taxpayers for more. "Shall the masses be mulcted for the remainder of the taxes needed?" he asked his colleagues. "Or shall the additional taxes required be equitably imposed upon the larger owners of income producing property, and from a small graduated estate tax, and a tax upon the profits from the sale of munitions? The latter course will square with every principle of justice and equity in taxation" (53 Cong. Rec. 10655).

Writing years later, Hull recalled the estate tax debate and tried to explain his thinking about taxing inherited wealth -- or wealth of any type. "I have no disposition to tax wealth unnecessarily or unjustly, but I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty," he said (Hull, 1 The Memoirs of Cordell Hull 58 (1948)).

Hardly the words of a leveler.

By a lopsided vote of 240 to 140, the House passed the Ways and Means bill (including the estate tax) on July 10, 1916, less than a week after it was introduced. As the legislation moved to the Senate, the bill's fate became uncertain. Democrats were less united in the upper chamber, and conservatives (in both parties) were more powerful (Brownlee at 194). But once again, the estate tax proved relatively uncontroversial, at least compared with the bill's income tax provisions. Democratic senators pushed through a doubling of the rates for taxable estates, raising the top rate to 10 percent. On September 6 the Senate passed the bill by a vote of 42 to 16.

The conference committee promptly reconciled the House and Senate bills. Congress passed its final version of the revenue act on September 7, and Wilson signed it the following day. As enacted, the estate tax of 1916 featured a $50,000 exemption and applied to all property owned by the decedent at death, as well as specific lifetime transfers and transfers made in contemplation of death. Rates were graduated by the size of the total estate, ranging from 1 percent on the first $50,000 to 10 percent on assets greater than $5 million (Joint Committee on Taxation, "History, Present Law, and Analysis of the Federal Wealth Transfer System," JCX-52-15, at 5 (2015) ).

Taming Progressive Taxation

As the original debate over estate taxation makes clear, the new federal levy was never expected to pose an existential threat to large fortunes. The levy was certainly welcomed by those worried about the prospect of dynastic wealth, and legislative champions of the levy traded on those fears in making the case for enactment.

But for every fire-breathing redistributionist, there were a dozen more tepid supporters of the new tax. Although it can be hard to remember during today's heated debate over taxing inherited wealth, the original impulse behind the 1916 estate tax was at least partially a conservative one.

The estate tax was a compromise measure with relatively modest -- if still vitally important -- goals. To be sure, it was primarily a compromise among Democrats, who were more or less united in support of progressive tax reform. But it appealed to tepid reformers and radical redistributionists alike.

With the exception of a few outliers like London, however, few expected -- or even hoped -- that the new estate tax would recast American society along more egalitarian lines. As a special revenue commission in New York observed while debating the state's own inheritance tax: "A graduated inheritance tax is defensible not so much on the ground that large fortunes are a menace to the public, as on the theory that the ability to contribute to the support of government grows more rapidly than the amount of the fortune or the size of the estate" (see Edwin R.A. Seligman, "Progressive Taxation in Theory and Practice," in 9(1-2) Publications of the American Economic Association 322 (1894)).

Of course, 1916 marked the beginning of a story about taxing inherited wealth, not the end. But later chapters in the history of the estate tax confirm its limited goals. During the conservative ascendancy of the 1920s, the levy came under pressure from conservative critics. But even as Congress moved to slash income tax rates, lawmakers raised estate taxes, pushing the top rate in 1924 from 25 percent to 40 percent. Two years later, they retreated from that rate hike, but the trajectory of estate tax rates continued steadily upward. In 1932 the top rate reached 45 percent, and in 1934, 60 percent.

Indeed, the New Deal seemed poised, at least for a while, to make the estate tax into something that London could get excited about. In his famous 1935 call for progressive tax reform, Franklin D. Roosevelt suggested using wealth transfer taxes to fundamentally remake American society. "The transmission from generation to generation of vast fortunes by will, inheritance, or gift is not consistent with the ideals and sentiments of the American people," he told Congress. "In the last analysis such accumulations amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others" (Roosevelt, message to Congress on tax revision (June 19, 1935) , available at http://www.presidency.ucsb.edu/ws/?pid=15088).

FDR's ambition for taxing inherited wealth was notable but not transformative. Congress agreed to raise estate tax rates, and the levy's percentage contribution to total federal revenue climbed steadily through the single digits, reaching just shy of 10 percent in 1936 (David Joulfaian, "The Federal Estate and Gift Tax: Description, Profile of Taxpayers, and Economic Consequences," Treasury Office of Tax Analysis Paper 80, at Table 17 (Dec. 1998) ).

But lawmakers declined to create the new federal inheritance tax that Roosevelt sought as a supplement to the estate tax. And while the top rate climbed to a peak of 77 percent in 1941 -- where it stayed until the 1970s -- the estate tax was almost never defended in leveling terms. At least not by its mainstream supporters.

The later history of the estate tax, including its near-death experience in the 1990s and 2000s, has been ably told elsewhere, most notably by Michael Graetz and Ian Shapiro in Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth (2005). But the levy's recent travails -- and the overheated rhetoric used to attack it -- can obscure its limited ambit at the moment of creation.

Of course, it's also possible -- and increasingly common -- to underestimate the importance of the estate tax. Its modest revenue yield amplifies that tendency; these days it contributes barely more than half of 1 percent of total federal revenue. But of course, the same was true in 1917 when the tax first made its appearance. For most of its existence, the tax has contributed between 1 and 2 percent of total revenue.

And yet, that modest contribution is exactly what the levy's creators had expected -- and desired. They understood that taxes could be merely symbolic and yet still vital to the perceived fairness of the overall tax system. The estate tax didn't need to be a tool of wholesale wealth redistribution. Indeed, it was ill-suited to the task. "If swollen fortunes are evil, let us not beguile our common sense by indirection," advised the economist T.S. Adams in 1915. "Let us go after them with something better than a lath painted to look like iron" (Adams, "Effect of Income and Inheritance Taxes on the Distribution of Wealth," 5 Am. Econ. Rev. 243 (1915)).

But a lathe it was. Exactly as its creators intended.