Originally Published: 6/26/2006
WHY AN ESTATE TAX?
By The Issue Wonk
The federal estate tax (26 U.S.C. § 2001) is one of the oldest and most common forms of taxation. An estate tax is a charge upon the decedent’s entire estate, regardless of how it is disbursed.”1 The estate tax is better described as a tax on inheritance, since the person with the estate doesn’t pay the tax. Only those who inherit it pay the tax. The first estate tax was enacted in 1797 to raise money to create a navy. It was terminated four years later. In 1862 a direct tax on inheritance was imposed to pay for the Civil War. It was abolished in 1870. In 1898 the tax was brought back to pay for the Spanish-American War and was again repealed in 1902. In 1916 it was resurrected to pay for World War I and has never been repealed, although rates have frequently changed.2 Looking at the reasons behind this tax affords a chance to reexamine society’s values that gave rise to it.
There are two primary reasons for the popularity of an inheritance tax over other forms of taxation: (1) the fear of the development of an hereditary aristocracy accumulating vast amounts of wealth and (2) the belief that society plays a role in the accumulation of wealth and therefore taxpayers should get some return on their investment.
At the core of American values is the idea of opportunity for all, which, many say, is undermined when there is more opportunity for a few than for the many. The belief is that the hereditary transfer of concentrated wealth is incompatible with American values and democratic aspirations. The best way to understand the thinking of our nation’s greatest leaders regarding this issue is just to look at what they said:3
Thomas Jefferson: “I am conscious that an equal division of property is impracticable. But the consequences of this enormous inequality producing so much misery to the bulk of mankind, legislators cannot invent too many devices for subdividing property, only taking care to let their subdivisions go hand in hand with the natural affections of the human mind. Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise.”
James Madison (listing ways to combat “the evil of parties”): “1. By establishing a political equality among all. 2. By withholding unnecessary opportunities from a few, to increase the inequality of property, by an immoderate, and especially an unmerited, accumulation of riches. 3. By the silent operation of laws, which, without violating the rights of property, reduce extreme wealth towards a state of mediocrity, and raise extreme indigence toward a state of comfort.”
Daniel Webster: “The freest government cannot long endure when the tendency of the law is to create a rapid accumulation of property in the hands of a few, and to render the masses poor and dependent.”
Andrew Jackson (vetoing the Second Bank charter extension, 1832): “Many of our rich men have not been content with equal protection and equal benefits, but have besought us to make them richer by act of Congress.”
Theodore Roosevelt: “I believe in a graduated income tax on big fortunes, and in another tax which is far more easily collected and far more effective – a graduated inheritance tax on big fortunes, properly safeguarded against evasion and increasing rapidly with the size of the estate.”
Franklin D. Roosevelt: “The transmission from generation to generation of vast fortunes by will, inheritance or gift is not consistent with the ideals of the American people.” “Great accumulations of wealth cannot be justified on the basis of personal and family security . . . Such inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our government.”
Wesley Lloyd (Congress, 1933): “There is no thinking man in our Nation but who knows that the only reason there is widespread poverty is that wealth and the ownership of wealth has become centralized – the only reason men are too poor is because a few men are too rich.”
Louis Brandeis: “We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both.”
Society’s Role in the Accumulation of Wealth
A second reason for the imposition of an inheritance tax is the belief that society plays a significant role in the creation of individual wealth. Moreover, it is the acts of the government which provide for the accumulation of wealth. Therefore, society has a claim upon the wealth of the very rich. Theodore Roosevelt said, “The man of great wealth owes a particular obligation to the State because he derives special advantages from the mere existence of government.”3
Third World Traveler4 sets forth many examples of how the government has contributed to individual wealth over the history of our nation. The government provided money for bankers setting up national banks, subsidies to manufacturers in the form of tariffs, and gave a government guarantee for bondholders. To pay for these subsidies, taxes were levied on farmers which, incidentally, led to the Whiskey Rebellion in 1794.
State legislatures also helped to create wealth for a lucky few. The builders of railroads and canals didn’t raise their own capital, but received money from government – the taxpayers. “In Wisconsin in 1856 the LaCrosse and Milwaukee Railroad got a million acres free, after distributing about $900,000 in stocks and bonds to 72 state legislators and the governor.” According to Third World Traveler:4
Altogether, in the decade of the 1850s, state governments gave railroad speculators 25 million acres of public land, free of charge, along with millions of dollars in loans. During the Civil War, the national government gave a gift of over 100 million acres to various railroad capitalists.
The first transcontinental railroad was not built by laissez-faire. The railroad capitalists did it with government land and money. The great romantic story of the American railroads owes everything to government welfare. The Central Pacific, starting on the West Coast, got 9 million acres of free land and $24 million in loans (after spending $200,000 in Washington for bribes). The Union Pacific, starting in Nebraska and going west, got 12 million acres of free land and $27 million in government loans.
And don’t forget the Fugitive Slave Act, wherein the taxpayers paid for the infrastructure to capture and return slave “property” to their “owners.” The government has also granted subsidies to the shipping business, has built the highways, and imposed higher and higher tariffs.
More recently, the very rich corporations have relied on the U.S. military and its interventions in other countries. In 1954 the CIA organized the overthrow of the elected president of Guatemala to save the properties of the United Fruit Company. In 1973 the U.S. government worked with the IT&T Corporation to overthrow the elected socialist leader of Chile, Salvador Allende. Allende had not been friendly enough to the foreign corporations that exploited Chile’s wealth for so long.4
Even today, we guarantee income to farmers for not producing crops, we guarantee subsidies to railroads, and we just gave more subsidies to oil companies, as well as reducing royalties they pay for removing oil and gas – public assets – from public lands. The wealth of the owners, officials, and stockholders of these corporations was built with taxpayer money.
Larry King: “I can’t stand the pompous among us who complain about welfare. The biggest welfare recipients in the United States are the richest people.”
1 Cornell Law School. Estate and Gift Tax: An Overview.
2 National Center for Policy Analysis Idea House. Estate Tax History Versus Myth. (2001)
3 Inequality Quotes. Inequality.org.
4 Third World Traveler. Excerpted from Economic Justice: The American Class System. From the book Declarations of Independence by Howard Zinn (HarperCollins)
© The Issue Wonk, 2006