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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  In 1898 the tax was brought back to pay for the Spanish-American War and was again repealed in 1902.  In 1916 it was resurrected to pay for World War I and has never been repealed, although rates have frequently changed.2  Looking at the reasons behind this tax affords a chance to reexamine society's values that gave rise to it.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.

Hereditary Aristocracy

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.

4 Third World Traveler.  Excerpted from Economic Justice:  The American Class System.  From the book Declarations of Independence by Howard Zinn (HarperCollins)

Originally posted to The Issue Wonk on Mon Jun 26, 2006 at 11:48 AM PDT.

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Comment Preferences

  •  this is fascinating: (4+ / 0-)
    Recommended by:
    redlami, cathy b, hhex65, rockhound

    The estate tax has been levied to raise funds during a time of war.

    This Republican Congress has reversed things entirely--choosing to eliminate it during a time of war.

  •  1/2 (1+ / 0-)
    Recommended by:
    cathy b

    Point one is an arguement for an estate tax.

    Point two is an arguement for taxes in general, which seems tome to apply better to the income tax than the estate tax.

    Lying can never save us from another lie - Vaclav Havel

    by Muwarr90 on Mon Jun 26, 2006 at 11:51:33 AM PDT

    •  Except (2+ / 0-)
      Recommended by:
      cathy b, Oaklander

      that an estate tax prevents the avoidance of income tax by the very wealthy. For example, Bill Gates paid essentially $0 for the MSFT stocks he owns that are worth, say, $50 billion. If he sold those stocks, he would have $50 billion in taxable (capital gains) income. When he dies, his estate realizes that income, and is taxed on it.

      Without an estate (or gift) tax, when Gates dies, his kids get the stock and their basis (the value at the time they get the stock) is $50 billion. If they sell it at exactly that price, they realize no income and pay no taxes. In fact they can sell it for $49 billion, and use the loss to offset other income taxes.

      (Gates is actually giving most of his fortune to his foundation and not his kids; same for Warren Buffet)

      The simple idea is that when someone gives you something of value, you accrue income. That we're willing to exempt small gifts (less than $10K per year, I believe) or small estates doesn't change that.

      People want to be part of governance, but what they want from government is respect for their ways of living. - Jack Balkin

      by badger on Mon Jun 26, 2006 at 01:10:15 PM PDT

      [ Parent ]

      •  Great point (0+ / 0-)

        and one that is often missed.

        Most of the wealth that is taxed by estate taxed would otherwise be subject to capital gains taxes.  While the right-wing cries "double taxation, double taxation," this is largely a myth.  Indeed, an estate tax is the only way to tax this HUGE amount of wealth.

        Another interesting thing about Gates and Buffett: AFAIK, neither of them opposes an estate tax.  

        Your president lied to me.

        by Oaklander on Mon Jun 26, 2006 at 03:27:15 PM PDT

        [ Parent ]

  •  Great Diary (2+ / 0-)
    Recommended by:
    redlami, cathy b

    I've been calling this the "Inherited Wealth" Tax wherever possible.

    It's just framing, but it's sooooo darned tasty. ;)

    •  As opposed to the 'Death Tax' (1+ / 0-)
      Recommended by:
      cathy b

      The right has been very effective in framing this issue so far. We've got a long way to go. "Inherited Wealth" tax is good-n-tasty, but quite a mouthful.

      When your dream comes true, You're out one dream ~ Nerissa Nields

      by redlami on Mon Jun 26, 2006 at 12:48:50 PM PDT

      [ Parent ]

  •  You Overlook a Key Provision (2+ / 0-)
    Recommended by:
    hekebolos, Eddie Haskell

    This is an excellent post, and those quotes -- particularly the one from TR -- should be widely circulated.  I highly recommend it.

    But you fail to mention one point: a major change in the law that will eviscerate most inherited wealth for the middle and working classes.
    Under current law, if you leave property to your children or grandchildren, there is a "step up" in the basis of the property when you die.  All the value that the stock accumulated from when you bought it until you died escapes taxation.  Its one of the easiest and best ways to develop intergenerational wealth for the middle class.  It can make the grandson of a ditch digger a business owner or at least a homeowner.

    But almost ALL of the "death tax" reform bills would ELIMINATE the step-up in the basis of inherited property for EVERYONE.  So, if your great-grandma left you stock in, say, Bristol Meyers Squibb, YOU will have to pay tax on all the gain that accumulated from the time she acquired it to the time she died -- 30 or 40 YEARS worth of untaxed appreciation.

    Why the change?  Why, to help offset the revenues from the loss of the estate tax, of course!!!  The plan is to soak the middle-class so that the higher estate tax can be eliminated for the uber-wealthy.

    "The beginning of thought is in disagreement -- not only with others but also with ourselves." - Eric Hoffer

    by Thinking Republican on Mon Jun 26, 2006 at 12:20:36 PM PDT

  •  I'm a geologist, Jim, not an accountant! (1+ / 0-)
    Recommended by:

    But your points seem unecessarily philosophical to me.

    Not that I disagree with them, but I always felt the primary justification of the estate tax is to not let income from capital gains go untaxed forever.  It's unfair to those who earn their income from their labor, who have every nickel taxed.

    Without an estate tax, a billionaire could accrue millions if not billions in assets through stock appreciation, die, and send it on to his/her heirs.  Those capital gains would never have been taxed.  

    Or am I wrong?

    •  Partly right (0+ / 0-)

      Keep in mind that when Jefferson and some of the others quoted wrote, their was no income tax. In fact one of the accomplishments that Jefferson was proudest of was getting VA to abolish primogeniture - the entire estate going to the oldest male heir - because abolishing it broke up concentrations of wealth.

      With an income tax, eliminating tax avoidance becomes an additional justification.

      People want to be part of governance, but what they want from government is respect for their ways of living. - Jack Balkin

      by badger on Mon Jun 26, 2006 at 01:16:15 PM PDT

      [ Parent ]

  •  Taxation based on income and assets (2+ / 0-)
    Recommended by:
    badger, Eddie Haskell

    Tax revenues can be raised from either earned income or the possession of assets, including their increase. To tax only earned income, as is the GOP wont, put the burden of taxation on workers and business and leaves the rentiers virtually untaxed since their primary increase in wealth comes from increase in assets. Moreover, business has the political clout to gain preferential treatment and the financial base to afford good advice and even defense if necessary.

    The argument that the increase in assets should be exempt from taxation ignores several economic facts. First, asset value increases not as a result of anyone's individual contribution to the economy as does income but rather as a result of improvements in the economy as a whole. In fact, this is often the primary factor. The asset tax is therefore partially a fair contribution to the society for use of infrastructure and other improvements for which the entire community is responsible.

    Secondly, progressive taxation and the taxation of assets even out the "luck of the draw." Those profiting the most from unearned wealth are inheritors, who have enjoyed maximum "luck of the draw." So it's their ante in the game.

    Thirdly, wealth tends to multiply and great wealth to multiply more since it is relatively impervious to downturns and even as the liquidity to profit from them. To prevent an asset class from becoming an oligarchy to whom the government is beholden, a leveling process is instituted. First and foremost is the rule of law before which all are equal, even though in fact the ability to afford good lawyers overwhelmingly favor the wealth, as does the privileged access their connections enable. Another check on wealth is the asset tax which evens the playing field somewhat from generation to generation.

    If not now, when? When they come for you, then it will be too late. Shout it from the rooftops, take it to the streets.

    by tjfxh on Mon Jun 26, 2006 at 12:32:28 PM PDT

  •  Very Good Diary (0+ / 0-)
    Good points.

    A curious point: The GOP never proposes to end the Gift Tax nor the Social Security Tax. Have any ideas why?

  •  Bad Framing (0+ / 0-)

    It's not the estate tax, it's the "Inheritance Tax".

    Make it clear that it's the tax on those who won the genetic lottery, not on death, and not on estates.

    6/24/05: Charlie the Tuna Creator Dies En lieu of flowers, please bring mayonnaise, chopped celery and paprika.

    by LunkHead on Mon Jun 26, 2006 at 02:25:09 PM PDT

  •  The reason the 'death' tax is to the fore is that (0+ / 0-)

    a very well funded lobby has been instituted by the wealthy and it's been operative for some time. This has been pushed hard and it was picked up big-time by Tom Delay. The fact that it's still seriously on the table shows that the GOP remains very much committed to the culture of corruption.

    The reason that the SS tax isn't going away is because the financial industry wants this "forced savings" to be put in their bucket in the form of private account similar to 401(k) plans. When you do the math on it, the financial industry pockets the bulk of the so-called gains.

    If not now, when? When they come for you, then it will be too late. Shout it from the rooftops, take it to the streets.

    by tjfxh on Mon Jun 26, 2006 at 02:28:20 PM PDT

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