The tax bill that passed the House last night and headed to the president’s desk (he’ll sign it this afternoon, apparently) raises the estate tax to 35 percent on estates over $5 million ($10 million for couples), from zero percent this year. Had nothing been done, however, it would have reverted to what it had been in 2000: 55 percent on estates over $1 million.
The estate tax goes all the way back to 1797, when Congress passed a stamp tax on wills to help finance the new American Navy. It was repealed in 1801. The Civil War and Spanish American War also saw estate taxes that were soon repealed when the wars were over. But the modern estate tax was not enacted as a revenue-raising measure so much as a social engineering one. Theodore Roosevelt was the first major politician to call for an estate tax to prevent the accumulation of great fortunes from one generation to the next. In 1906, he wrote:
As a matter of personal conviction, and without pretending to discuss the details or formulate the system, I feel that we shall ultimately have to consider the adoption of some such scheme as that of a progressive tax on all fortunes, beyond a certain amount, either given in life or devised or bequeathed upon death to any individual — a tax so framed as to put it out of the power of the owner of one of these enormous fortunes to hand on more than a certain amount to any one individual; the tax of course, to be imposed by the national and not the state government.
The colossal fortunes created by the industrialization of the country in the post–Civil War era caused many to worry about the development of a plutocracy, a few families with so much money, and thus power, that they could dictate policy. In 1916, the modern estate tax was passed. It called for a 1 percent tax on estates over $50,000 and going up to 10 percent on estates over $5 million (a very large fortune indeed in 1916). The tax was raised the next year, lowered but not eliminated in the 1920s, and then raised sky-high by Franklin Roosevelt, peaking at 71 percent for estates over $50 million in 1941. FDR made no bones about his reasons: “The transmission from generation to generation of vast fortunes by will, inheritance or gift is not consistent with the ideals and sentiments of the American people.” FDR, it turns out, was wrong.
In the post–World War II era, the estate tax had little to do with revenues, never providing more than 2 percent of total federal income. Nor was it about plutocracy prevention. As I pointed out in a recent article in Philanthropy magazine, unlike European fortunes, American ones just don’t last, thanks to the tradition of dividing them among many heirs, new and larger fortunes being created in each generation, and the grand American tradition of the American rich making massive eleemosynary bequests. Of all names associated with the great fortunes of the Gilded Age, only Rockefeller, Mellon, and Hearst are to be found on the Forbes 400 list today. A considerable majority of the current list created their own fortunes.
Today only the liberal elite still subscribes to the idea of estate taxes. As William McGurn pointed out in the Wall Street Journal the other day, the American dream of getting rich and passing that wealth on to one’s children is very much alive and well. In the 1972 campaign, George McGovern called for a tax of 100 percent on estates over $500,000. The socialist Michael Harrington said to a friend who had been campaigning for McGovern in New York’s garment district that he must have had an easy time selling the idea to the poorly paid workers there:
The friend informed Harrington how wrong he was: “Those underpaid women … were outraged that the government would confiscate the money they would hand down to their children if they made a million dollars.” No matter how he tried to tell these garment workers how unlikely they ever were to see a million dollars in their lifetimes, they couldn’t get past the idea that the government would take it from them if they did.
The liberal elite has been agonizing over the zero-percent estate tax rate this year, as most recently manifested in Bernie Sanders’s socialist cri de coeur in the Senate. But while the estate tax was zero in 2010 (Good timing, George Steinbrenner and John Kluge!), the capital-gains tax applied. Most great fortunes consist of unrealized capital gains, but after the estate tax is paid, the heirs’ cost basis for the stock they inherit is bumped up to the date of death. Not in 2010, when it remained at the decedent’s cost basis, which is often virtually zero. That strikes me as the only estate tax we should have in a country where even the poorest can dream of one day being rich.