• Article
• • October 16, 2018

A Brief History of the Estate Tax: From War Efforts to Social Equalizer – Fall 2018

Did you know that the federal estate tax dates back to 1797 as a means to raise revenue for war efforts? That it evolved to a progressive measure to redistribute wealth? Whether you are opposed to the estate tax or consider it a civic duty to pay, you may find its history interesting.

The Stamp Act of 1797 was enacted to support the Quasi-War with France. Federal stamps, applied at graduated rates, were required on wills submitted for probate, inventories, and letters of administration, as well as receipts and discharges from legacies and intestate distributions of property. The stamps raised little revenue, the conflict with France ended, and the law was abolished in 1802. Similar laws ensued to raise revenue for subsequent wars.

The Revenue Act of 1862 was an effort to raise revenue for the Civil War. This new tax, in addition to a graduated stamp tax, included an inheritance tax on personal property and later also taxed the legatee’s relationship to the decedent, with different rates applying to ancestors, descendants, siblings, distant relatives, and non-relatives. Exemptions applied to small estates and to bequests to the surviving spouse.

The War Revenue Act of 1898 passed into law to support the Spanish-American War. Tax was imposed only on the personal property of a decedent. In 1901 the law was amended to exempt gifts to charities. The following year when the war ended, the tax was repealed.

Though short lived, the War Revenue Act of 1898 galvanized opposition against the estate tax, seen as an impediment to economic growth. Opponents derided the estate tax as a “death tax” to gain support for its repeal, but the movement failed to gain wide support. The estate tax was embraced as an equalizing force to break up the concentration of wealth amassed in the economic boom of the post-Reconstruction Era and to make it difficult to transfer wealth to next generations. As the United States entered World War I, Congress passed the Revenue Act of 1916 to increase funds needed for the war. To raise more funds, it passed the War Revenue Act of 1917, which increased rates and lowered exemptions. The Revenue Act of 1916 came into law three years after the ratification of the Sixteenth Amendment to the U.S. Constitution authorizing the federal income tax. Progressive reformers advocated for the income tax and the estate tax as means for reducing wealth inequalities.

The 1990s saw a resurgence of opposition to the estate tax. This time the movement appealed to protect family farms and small businesses whose inheritors may be forced to sell their farm or business to pay the tax.

The federal estate tax was repealed for one year in 2010. A highly publicized death that year was that of George Steinbrenner, the famed owner of the New York Yankees, whose estate was reportedly $1.1 billion. His fortune passed to his surviving widow and four children without being subject to the 40% estate tax. The timing of his death was mused as a home run.

Following the enactment of the estate tax in 1916, the law has undergone changes. Among these changes are the addition of the gift tax for lifetime gifts, the generation-skipping transfer tax, unlimited marital deduction and charitable deduction, and special valuation and payment rules for small businesses and farms. The most recent change, under the Tax Cuts and Jobs Act of 2017, has escalated the estate tax exemption amount to $11.18 million for individuals and $22.36 million for couples, to be adjusted annually for inflation.

Among states the tide has turned against the estate tax. In 1916, 43 states imposed an estate or inheritance tax. Presently, 14 states impose an estate tax, five states impose an inheritance tax, and one state (Maryland) imposes both. Since the 1920s Florida has touted its lack of an estate or inheritance tax to attract non-residents, and with more states having abandoned these taxes we are seeing a migration of taxpayers to more estate-tax friendly states.

In reality, the federal estate tax only affects a fraction of 1% of estates each year. It has not raised more than 2% of the federal revenues in any year since World War II. The number of estate tax returns filed decreased 67% from 38,000 in 2007 to 12,411 in 2016 due to the increase in exemption amounts. In 2016, the total net estate tax reported was $18.3 billion.

Yet the estate tax continues to draw the attention of politicians, economists, and academics, and the debate over wealth tax versus death tax persists. Proponents regard inherited wealth as exacerbating the growing inequality gap and view the estate tax as a mitigating remedy. Opponents denounce it as double taxation, penalty against savers, and an infringement on personal liberties, and undermine the assertion that the tax promotes equality by citing countries like Sweden that have abolished estate and inheritance taxes. Interestingly, even as more countries are repealing these taxes, data illuminating the severity of inequalities in the U.S. economy as uniquely American has heightened the relevance of the estate tax at home in the public discourse.

Warning bells that a concentration of wealth threatens the nation by breeding a plutocracy that wields corrupt power over laws and political systems in favor of a select few and their offspring were sounded by progressive reformers as they championed the estate tax on the heels of the Gilded Age. The old debate resonates today.