The Estate Tax

The Estate Tax, like the Graduated Income Tax and the Capital Gains Tax, has been under attack for many years by “conservative groups.” I always have difficulty with the media’s use of this appellation for it is inherently misleading. A “Conservative,” as the term implies, wishes to conserve. He/she opposes innovation, or at least is cautious about it, but reveres that which is established. But as I have shown when they attack the Graduated Income Tax or the Capital Gains Tax, they attack systems that have been with us for a century and a half. That is not conservative! That is as radical as one can get.

This history applies equally to the Estate Tax if not more so. It was as early as 1797 not long after the constitution was ratified, that Congress imposed a “legacy tax.” It was repealed in 1802. In 1862 Congress enacted an inheritance tax and repealed it in 1870. In 1898 an inheritance tax was again passed and repealed in 1902. In each of these cases the sole purpose of the tax was to raise revenue, usually to finance wars, which is why they were repealed when the funds were no longer needed. But until 1916, the US, unlike European and South American countries, did not have a landed aristocracy or an inherited concentration of wealth. In 1916 money was needed to finance World War I but there was also a concern with the increasing concentration of wealth, or as the House Ways and Means Committee put it the tax was needed to deal, “in part (with) concentrations of inherited wealth.”

Nevertheless, Theodore Roosevelt, a Republican, who McCain lauded as the President he most admires, said as early as 1907, "A heavy progressive tax upon a very large fortune is in no way such a tax upon thrift or industry as a like tax would be on a small fortune. No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax; and as an incident to its function of revenue raising, such a tax would help to preserve a measurable equality of opportunity for the people of the generations growing to manhood."

In 1935 Franklin Roosevelt proposed to Congress that they pass both an estate and an inheritance tax but only the estate tax passed the Congress and it went unchallenged until the year 2000. Even during the Reagan years the tax went unchallenged. But in 2000 a major drive to repeal both the Estate tax and the Gift tax was undertaken. It was backed by the wealthiest in our society, who using that wealth mounted a campaign full of misleading and outright false claims. One of the things I personally remember were radio ads that purported to be from financial advisors warning people that unless they sought estate planning they risked having their estate confiscated. Secondly, other groups mounted a campaign that family farms and small businesses were being endangered and that many would have to sell their farms/businesses in order to pay the taxes. The campaign was so effective that when HR 8 the Death Tax Elimination Act Came up for a vote in the House it passed by a vote of 279 to 136 without a dissenting Republican vote and 65 Democrats voting for it. The bill did not pass because President Clinton vetoed it and there were not enough votes to override his veto. The Office of Management and Budget in warning Congress that President Clinton would veto the bill, said in part, “The Administration strongly opposes H.R. 8, which would repeal the estate and gift taxes. Repeal of these taxes would be fiscally unwise, would reduce the overall fairness and progressivity of the tax system, and would harm charitable giving. The President would veto this legislation repealing the estate and gift taxes if it were presented to him.

“The Administration believes that such a tax reduction would harm the important priorities of maintaining fiscal discipline, paying down the national debt, extending the solvency of Medicare and Social Security, and maintaining core government functions such as education and fighting crime. The Administration estimates that this legislation, when fully phased in, would cost close to $50 billion annually, far more than the stated costs of the bill, because most of the cost is delayed to beyond the first five years.

“While the Administration supports appropriately targeted estate tax relief for small business and family farms, a tiny fraction of the tax relief provided under this measure accrues to these important sectors of the Nation's economy. Only the wealthiest two percent of all estates pay any estate tax at all. The estate tax promotes the integrity and fairness of the overall tax system by acting as a backstop to the income tax, ensuring that even income on which income tax is deferred or avoided is ultimately subject to at least some tax. In addition, recent studies suggest that repeal of the estate tax could reduce charitable gifts and bequests by close to $6 billion annually.

“The Administration worked with the Congress in 1997 to lift the burden of the estate tax on the vast majority of small businesses and family farms. The Taxpayer Relief Act of 1997 raised the effective deduction for qualified family-owned business interests to $1.3 million ($2.6 million for a couple), which exempts almost all family farms and small businesses from the estate tax. Current law also allows small businesses and farms to exclude part of the value of real property used in their operations. Those few businesses and farms that are subject to this tax can pay it in installments over 14 years at below-market interest rates.”

I quote this at length because it sums up the case against repeal so well that I feel I cannot possibly improve upon it.

I want to specifically discuss some of the arguments made for repeal and rebut them, but that will have to wait for my next exposition. Let me close here by quoting Louis Brandeis, a highly distinguished Justice of the Supreme Court who served from 1916 to 1939 and who said "We can have democracy in this country, or we can have great wealth concentrated in the hands of a few, but we can't have both."

In my opinion this should be self-evident, particularly at a time when we see both the power and abuse of great wealth.