Tax Analysts Blog

The Estate Tax Used to Be Sort of Popular – Even With Republicans

Posted on Sep 7, 2016

This Thursday the federal estate tax will turn 100. And that brings to mind one of the most familiar set pieces of modern American politics: Republicans call for repealing the estate tax, and Democrats denounce the idea. This year Donald Trump and Hillary Clinton have dutifully assumed their respective roles. And voters have the pleasure of watching this argument unfold. Again.

Of course, it wasn't long ago that Republicans actually won this fight. They just couldn't keep it won. After repealing the estate tax in 2001, GOP lawmakers assumed it was gone. But for technical and strategic reasons, they had made repeal temporary, and when it came up for renewal, a new Congress (and a new president) had different ideas about whether and how to tax inherited wealth.

All of which brought the estate tax lurching out of its grave. These days, restored to the tax system in somewhat attenuated form, the levy continues to serve as a bone of contention between the parties.

The odd thing about all this arguing is that the estate tax used to be pretty uncontroversial. If you don’t believe me, just try looking for polling data. Americans get asked all the time what they think about income, sales, and property taxes. But questions about the estate tax – at least for most of the 20th century – have been rare indeed.

And that’s probably because the estate tax started its life as a compromise measure – a progressive reform designed to appeal to non-progressives.

The federal government has taxed inherited wealth in various ways since the nation was founded. The first time was in 1797, when lawmakers used a tax on wills and other legal documents to help pay for the nation’s “Quasi-War,” a low-grade, undeclared naval conflict with France. The second time came during the Civil War, when a new federal estate tax helped fund the Union war effort. A third time came in 1898, when the estate tax revenues helped pay for the Spanish-American War.

Notice a theme? The estate tax was a war tax, at least through the end of the 19th century. But in 1916, Congress created an estate tax during peacetime. This anomaly, however, was more apparent than real. The estate tax of 1916 was enacted to help pay for military spending, just like all the estate taxes that came before. With World War I threatening to engulf the United States, President Woodrow Wilson embarked on an ambitious rearmament campaign. Lawmakers used the estate tax to help pay for it.

The decision to impose an estate tax, however, was designed to grease the legislative skids for Wilson’s preparedness program. Many of the president’s fellow Democrats were unhappy with the rearmament program. They were also, however, big fans of soak-the-rich taxation. In a bid to win their support, Wilson agreed to pay for his military spending using (mostly) progressive levies, including the income tax and a new estate tax.

That deal shored up Wilson’s support among Democrats. But he still had to deal with Republicans on Capitol Hill. And many GOP lawmakers were less than enthusiastic about progressive taxation. In particular, they were deeply suspicious of the new income tax, first imposed just three years before. With its high exemption and graduated rates, it struck many conservatives as a form of class taxation – a tool by which the majority could relieve the minority of its wealth.

The estate tax, by contrast, was far less controversial among Republicans. That’s partly because estate taxation had already been embraced by some Republican leaders, including Theodore Roosevelt, who proposed an estate tax in 1906. Industrialist Andrew Carnegie and a few other prominent business leaders had also endorsed the levy.

“Of all forms of taxation, this seems the wisest,’’ Carnegie famously declared in 1889.  ‘‘By taxing estates heavily at death the state marks its condemnation of the selfish millionaire’s unworthy life.’’

To be sure, Carnegie’s view of inheritance was hardly universal among Republicans. But even among more traditional conservatives, the estate tax seemed like the lesser of progressive evils. Money raised by the estate tax allowed Wilson to rely less heavily on income taxes to pay for his rearmament program. That won him a measure of Republican acquiescence (if not much active support).

And at the same time, the estate tax still pleased the left-leaning, pacifist members of his own party. The levy was, in other words, an especially neat compromise, able to raise needed revenue while also drawing support from both ends of the political spectrum.

Things have certainly changed.

For more tax talk follow me on Twitter @jthorndike

Read Comments (2)

Mike55Sep 8, 2016

One question on this: was the estate tax more equitable back when it enjoyed bipartisan support? Or has it always been this bad and only our perception of it has changed?

I personally have no problem with the estate tax in theory: it's progressive and creates less deadweight loss than an income tax, which is a pretty darn powerful combination. My concern is that the estate tax we currently have is rather pathetic, failing to offer any semblance of horizontal equity. I'd be willing to bet that's why the anti-estate tax crowd had done better in recent years..... people tend to dislike laws that appear arbitrary, even if they are unlikely to be directly effected.

Someone out there ought to undertake a serious estate tax reform project. It'd do everyone a lot of good if we had a well designed estate tax that could take some pressure (even if only a tiny bit) off the income tax.

Edmund DantesSep 9, 2016

The problem with the estate tax is that it is largely voluntary, it is a tax on the failure to consult a tax lawyer for estate planning. That's one reason many consider the tax unfair. The original estate tax was imposed at just 10%. At that low rate, it's not worth the cost and effort to do elaborate planning. But today's 40% rate creates ample justification for the planner's fees.

Major support for death taxes comes from the life insurance industry, which has financial products to mitigate the devastating impact that the tax has on family businesses. Death taxes are also favored by those, such as Warren Buffett, who like to buy businesses at distress sale prices. Any businesses with an estate tax cloud over its head is in distress.

A simpler, fairer approach would be to drop the estate tax in favor of taxing all accumulated unrealized capital gains at death. I believe that would be roughly revenue neutral, depending upon whether an exemption was included for small and medium estates.

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