Tax Analysts Blog

Should We Tax Away Huge Fortunes?

Posted on Sep 18, 2014

Sen. Bernard Sanders wants to rein in the runaway billionaires. In a recent piece for The Huffington Post, the Vermont independent (and apparent presidential candidate) made the case for a progressive estate tax.

“Unless we reduce skyrocketing wealth and income inequality,” he declared, “unless we end the ability of the super-rich to buy elections, the United States will be well on its way toward becoming an oligarchic form of society where almost all power rests with the billionaire class.”

Sanders thinks a new, stronger estate tax could stave off that sort of dystopian future – and help with other problems, too. “A progressive estate tax on multi-millionaires and billionaires is the fairest way to reduce wealth inequality, lower our $17 trillion national debt and raise the resources we need for investments in infrastructure, education and other neglected national priorities,” he argued.

Sanders may be right. But if he really wants to advance the case for remaking the estate tax (and undoing the damage done to it during the 2000s), he should talk less about redistributing wealth and more about shifting the tax burden.

Sanders likes to cast his proposal in grand historical terms, laying claim to a distinctly American tradition of progressive tax reform. “More than a century ago,” he wrote, “President Theodore Roosevelt recognized the danger of massive wealth and income inequality and what it meant to the economic and political well-being of the country. In addition to busting up the big trusts of his time, he fought for the creation of a progressive estate tax to reduce the enormous concentration of wealth that existed during the Gilded Age.”

Sanders offered up some choice excerpts from Roosevelt’s famous “New Nationalism” speech, delivered in Osawatomie, Kansas, in the summer of 1910. “The absence of effective state, and, especially, national, restraint upon unfair money-getting has tended to create a small class of enormously wealthy and economically powerful men, whose chief object is to hold and increase their power,” Roosevelt declared. “The really big fortune, the swollen fortune, by the mere fact of its size acquires qualities which differentiate it in kind as well as in degree from what is possessed by men of relatively small means.” Roosevelt concluded with a call for a progressive estate tax, “properly safeguarded against evasion, and increasing rapidly in amount with the size of the estate.”

Six years after Roosevelt threw down the gauntlet, Congress enacted the federal estate tax. The new levy was a signal achievement of the Progressive movement – not to mention a landmark in progressive taxation.

But we should be careful about claiming too much for that 1916 levy. While it certainly resembled the sort of tax that Roosevelt desired, it was not exactly a death blow for large fortunes. The new tax exempted the first $50,000 of an estate – about $1 million in today’s dollars (although possibly much more, depending on how you measure the changing value of a dollar).

More important, the 1916 legislation taxed estates at relatively modest rates, ranging from 1 to 10 percent. The top bracket only applied to the portion of an estate over $5 million – about $100 million in 2013 dollars.

The 1916 rates were heavy enough to raise meaningful revenue, but they did not pose a serious threat to the existence (and continued growth) of large fortunes. In 1917, under the pressure of World War I, the top rate more than doubled to 25 percent, and by the mid-1920s it was 40 percent. But Congress increased brackets, too, and the top rate applied only to estates worth more than $10 million, about $187 million in today’s money.

The modest effect of the early estate tax shouldn’t be surprising – at least not to anyone who has read the congressional debate surrounding its enactment. While many of the levy’s champions were sympathetic to the sort of anti-dynastic arguments that Roosevelt pioneered, they typically cast their arguments in more prosaic terms.

Yes, the original estate tax was designed to redistribute wealth. But even more, it was intended to redistribute the tax burden. By raising more money with this very progressive tax, the revenue system as a whole would become more progressive.

The tax, according to Rep. William Cox, was “the first successful attempt to make wealth bear its just and proportionate burden of taxation." Rep. Cordell Hull, who sponsored the original levy, agreed. "I have no disposition to tax wealth unnecessarily or unjustly," he wrote in his memoirs, "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."

Asking wealthy Americans to shoulder more of the tax burden is different than using a tax to make those Americans less wealthy. Yes, to some degree, the goals overlap – ask rich people to pay more and you will simultaneously make them less rich.

But the distinction is still vital, especially in political terms: It’s one thing to ask rich people to pay more of the cost of government. It’s another thing entirely to tell those rich people that they are just too damn rich.

Over the past century, both arguments for estate taxation have surfaced repeatedly. But the political history of this aged but endangered tax suggests that smaller arguments do better than grand ones.

In other words, if you like the estate tax, talk more about revenue and less about dynasties.

Read Comments (3)

edmund dantesSep 17, 2014

If you want to enlarge estate tax revenues and reduce domination of society by
billionaires, the obvious choice is to repeal the unlimited charitable
deduction. Neither the Gates nor the Buffett fortunes will be exposed in a
meaningful way to the federal estate tax, as they are funneled through private
nonprofit foundations dedicated not to the general welfare, but to the goals of
their family founders. In effect, we've privatized and outsourced some
government functions to the whims and values of billionaires. You can't get
much more anti-democratic than that.

You'll know Sanders is serious, and not just pandering to the base, if and only
if his reforms include the elimination of charitable deductions. It won't
happen in my lifetime.

amt buffSep 18, 2014

Monte Cristo is correct. Subject charitable deductions to the same limits as
the gift tax. People like Gates and Buffett funnel money to their friends and
buy social status through self-aggrandizing philanthropy. It's all tax-free,
leaving the little people pay the taxes needed to support government.

bubba shawnSep 20, 2014

The estate tax must be abolished! Robbing future generations of their
inheritance is wrong and UNFAIR!

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