Ignoring the profitableness of inter vivos gifts which accrues from a reduction of income taxes, reference to the accompanying chart will reveal that in the case of a $5,000,000 estate, for instance, an estate tax liability of $1,901,400 can be reduced to $1,029,455 by making a gift of the entire estate and to $976,059 by making a judicious distribution of the estate between gifts and transfers at death. In these three alternatives, the effective rates of the transfer taxes are respectively 38.0 percent, 20.6 percent and 19.5 percent of the total estate. On a $100,000 estate, the transfer tax liability can be reduced from 4.2 percent to 2.5 percent by disposing of the entire estate through gifts and to 0.25 percent by a judicious allocation of the estate between gifts and transfers at death.

Furthermore, the transfer of property by gift serves to reduce income tax liability. For purposes of illustration, assume that a person with property valued at $10,000,000 and yielding 3 percent per annum disposes of $5,000,000 by gift. The annul income of $300,000 is now divided for income tax purposes between two taxpayers. The result is that the surtax liability on such income (the entire $300,000 assumed to be net income) is reduced from $151,360 to $116,840 (both parties assumed to be unmarried), largely as a result of the escape from the higher brackets of the income tax. Thus, income tax revenues from this particular property have been reduced by $34,520 per annum. Distribution to several donees, rather than to one alone, would enable substantially greater reductions.

Aside from inequity between taxpayers, it should be noted that the advantages afforded by the gift tax as opposed to the estate tax materially reduce the revenue significance of Federal transfer taxes. An estate of $220,000, including $40,000 of insurance, can be transferred by the owner to his wife and three children tax-free by gift distribution over a period of five years and a transfer of the remainder at death. For the Federal Government to provide the means for exempting estates of such size from transfer taxation seems inadvisable in the light of present Federal revenue needs.

Partly as a result of this lack of coordination of the estate and the gift tax and in part because of the structural defects of the present estate tax, previously discussed, transfer taxes occupy a relatively minor role in the American revenue structure. During recent years Federal and State taxes on property transfers accounted for little over 2 percent of all public revenues in the United States, in contrast with 4 percent in Australia, 7 percent in Great Britain, and 10 percent in New Zealand. These comparisons, let it be noted, are particularly significant because we are here concerned with one of the few constituents of the tax system capable of the application of the ability to pay principle.

In theory at least Congress has itself recognized the importance of an effective property transfer tax for it enacted the gift tax in order to defeat the transfer tax evasion made possible by the use of gifts inter vivos. Prior to the passage of the gift tax, it was possible to evade completely the estate tax by the distribution of property through gifts.

It is equally true that in spite of its enactment of the gift tax, Congress did not wish to destroy entirely the incentive for inter vivos gifts. On the contrary, it deliberately made inter vivos gifts attractive for it desired to encourage the distribution of estates during the lifetime of the owners. That is to be inferred from the fact that the gift tax rate structure, as enacted in 1932, 1934 and 1935, has consistently been three-quarters of that applicable to estates.

It is also possible, though not probable, that Congress was fully cognizant of some of the other advantages that go with inter vivos gifts in the present tax structure, and that it had intended to offer these as additional incentives. It is more probable, however, that the advantage accruing from the use of inter vivos gifts is greater than that contemplated by Congress. But whether that be the case or not, it must be maintained that the extent to which the use of inter vivos gifts unduly destroys transfer tax revenue and bestows a varying degree of advantage upon different taxpayers, the present arrangement is undesirable and should be amended. Furthermore, it is undesirable, insofar as it deprives States of that portion of estate tax revenue which they had been led to believe was earmarked for them under the crediting device of the 1926 Act and on the basis of which they have formulated their own inheritance and estate tax policies.

It will be recalled that when the crediting provision was incorporated in the 1926 Revenue Act the States were led to believe that Congress had intended 80 percent of the transfer tax revenue to be destined for State coffers, retaining only 20 percent for the Federal Treasury. Subsequently, the Federal estate tax rates were greatly increased without a corresponding expansion of the scope of the crediting provision. In consequence, the relative importance of credits for taxes paid to States, claimed against Federal estate taxes, declined from 76 percent of total Federal tax liability in 1931 to 18.3 percent of that in 1936. The dissatisfaction which has accompanied this gradual expulsion of the States from the death tax field has added greatly to the existing Federal-State conflict in taxation.

The situation has been aggravated further by the manner in which the Federal Government designed its gift tax. The fact that the existing relationship of the gift tax to the estate tax serves to encourage inter vivos gifts, automatically conspires to reduce State revenues, for it reduces the volume of property transfers taxable under State death taxes. In the case of the State of New York, for instance, State fiscal officials estimate this to involve an annual loss in revenue of approximately $40,000,000.

States in their quest for additional transfer tax revenues have countered Federal activity by imposing additional State death taxes frequently much in excess of 80 percent of the 1926 Federal estate tax, thereby undoing what remains of the benefits of the crediting device. In addition, to protect themselves against the loss of revenue through gifts, they have taken to the enactment of gift taxes. Wisconsin, Oregon, Virginia, Colorado, Minnesota, and North Carolina have enacted gift taxes since 1933.

Similar legislation is pending in New York, Connecticut, Delaware, Indiana, and Massachusetts. Thus, a new source of Federal-State conflict is rapidly developing, which can only be expected to gather momentum.

C. Proposal For The Coordination Of The Federal Estate And Gift Tax

In view of the existing conflict between the Federal estate and the Federal gift tax, a coordination of the two is urgently needed. Such coordination can be achieved by viewing inter vivos gifts as instalments of property transfers and viewing the taxes on such gifts as payments on account of transfer tax liability at death. The procedure is theoretically sound. Both taxes are levied on property transfers. Their objective is the taxation of property transfers at death. To prevent an evasion of death taxes through inter vivos gifts, the gift tax is imposed. If such gifts could properly be recorded and if there were an assurance of the adequacy of funds in the residual estate for the payment of taxes on all property transfers, including those made during the lifetime of the deceased, there would be no necessity for taxing gifts at the time of their occurrence. Because of the difficulties involved in complying with these conditions, the practical alternative of taxing gifts, when they take place was adopted. To view these gift taxes, collected by the Government because of expediency, as payments on account of ultimate estate taxes is the logical "next step." The concept is not new, but is already present in the gift tax and follows logically from the Congressional concept of transfer taxes. The existing gift tax statute views the taxes imposed on annual gifts as payments on account of final gift tax settlement. Additional future gifts create a tax liability calculated not only on the amount of the last unit of the gift but retroactively to the amount of the first gift; taxes paid on such foregoing gifts are considered mere pre-payments to be credited against final gift tax liability. (Section 502, Revenue Act of 1932, amended.)

That Congress itself considered the two taxes inseparable is evidenced by the reports of the two committees which considered the gift tax in its first stages in 1932:

"In short, the design is to impose a tax which measurably approaches the estate tax which would have been payable on the donor's death had the gifts not been made and the property given had constituted his estate at his death. The tax will reach gifts not reached, for one reason or another, by the estate tax.

". . . . . Since the gift tax is an adjunct of the estate tax which is not restricted to transfers made within a single year, an effective gift tax must give consideration, so far as the rate of tax is concerned, to transfers made in prior years." (Committee on Ways and Means Report to accompany H.R. 10236, pp. 28-29, and Committee on Finance Report to accompany H.R. 10236, p. 40.)

A similar view was expressed by Justice Cardozo when he observed that "The tax upon gifts is closely related both in structure and in purpose to the tax upon those transfers that take effect at death. What is paid upon the one is in certain circumstances a credit to be applied in reduction of what will be due upon the other." Burnet v. Guggenheim, 288 U. S. 280, 286. (Underscoring supplied.)

Accordingly, it is concluded that the two taxes, those on gifts and those on estates, are mutually interdependent, deriving from identical origins and falling upon interchangeable transactions, and therefore may well be integrated in the interest of coordination.

The mechanical aspects of the integration here proposed are relatively simple. Let it be assumed that it is desired to encourage transfer by inter vivos gifts to the extent of continuing to grant a 25 percent tax advantage over that incident to property transfers at death. The task then is to design a mechanism which first, will give effect to precisely that tax advantage, not one greater or smaller; and second, which will afford a tax advantage uniformly available to all individuals irrespective of their transferable wealth. These requirements can be achieved by the following arrangement:

(1) Retain the 25 percent differential inherent in the existing gift tax and the estate tax rate structure;

(2) Change the existing net gift tax base to one determined by the amount of the transfer before deductions for taxes, comparable to that used in taxation of estates;

(3) Consider the taxes paid on inter vivos gifts as instalment payments on account of final estate taxes;

(4) Include in the taxable base at the time of death not only the residual estate remaining after gifts, but also the value of property previously reported for gift tax purposes;

(5) Compute a tentative estate tax liability upon all of the property disposed of by the decedent both during his lifetime and at his death;

(6) Credit against this tentative tax liability (a) gift taxes paid and (b) such premium upon these gift taxes as suffices to express the tax advantage the Government desires to afford inter vivos gifts.

Under the existing rate structure, the differential in favor of gift taxes is 25 percent; the estate tax rates are one-third higher than the gift tax rates. Accordingly, a $300 gift tax paid during life would entitle the estate to claim a $400 tax credit ($300 gift tax + 33-1/3 percent premium thereon) against the tentative estate tax liability at death.

D. Operation Of The Proposed Method Of Coordination

The coordinating device here proposed introduces little departure from present taxation of property transfers and implies a tax computation task very similar to that now employed. A specific example showing the operation of both (1) the existing law and (2) the proposed device is here presented:

(1) Tax liability under the existing law:

Case (A)    John Doe has a fortune of $5,000,000.        $1,901,400
            His estate at the time of his death
            will be subject to estate taxes
            amounting to

Case (B)    If, however, he disposes of half of           1,158,762
            his estate by gift and retains only
            half of it in his estate, total estate
            and gift taxes

Case (C)    If, on the other hand, he makes a single      1,029,455
            gift of his entire property while he is
            alive, the gift tax will amount to

Case (D)    If he retains $640,000 in his estate and        976,059
            makes a gift of the rest, the combined
            gift and estate taxes will amount to

(2) The estate and gift tax liability under the coordination device hers proposed and computed at existing estate and gift tax rates, will, in the four cases cited, be as follows:/8/

                                             Case A        Case B
                                             Case C        Case D

Total value of property                    $5,000,000    $5,000,000
                                           $5,000,000    $5,000,000

Total value of gift                                --     2,500,000
                                            5,000,000     4,360,000

Gift tax exemption                                 --        40,000
                                               40,000        40,000

Net taxable gift                                   --     2,460,000
                                            4,960,000     4,320,000

Gift tax                                           --       549,300
                                            1,426,050     1,175,700

Value of estate at death                    5,000,000     2,500,000
                                                   --       640,000

Value of gift reported for tax purposes            --     2,500,000
                                            5,000,000     4,360,000

Tentative estate tax base                   5,000,000     5,000,000
                                            5,000,000     5,000,000

Estate tax exemption                           40,000        40,000
                                               40,000        40,000

Tentative net estate tax base               4,960,000     4,960,000
                                            4,960,000     4,960,000

Tentative estate tax liability              1,901,400     1,901,400
                                            1,901,400     1,901,400


Gift taxes paid                                    --       549,300
                                            1,426,050     1,175,700

Gift tax premium (1/3)                             --       183,100
                                              475,350       391,900

Total credit                                       --       732,400
                                                1,901     1,567,600

Estate tax payable at death                 1,901,400     1,169,000
                                                   --       333,800

Combined transfer tax liability:

Gift tax                                           --       549,300
                                            1,426,050     1,175,700

Estate tax                                  1,901,400     1,169,000
                                                   --       333,800

Total                                       1,901,400     1,718,300
                                            1,426,050     1,509,500

The results of these computations are presented summarily in the following table. It is to be noted that Case C, rather than Case D receives the greatest advantage under the proposed method. Inasmuch as Case C is that of total distribution by gift, it can be readily seen that the proposed procedure is in conformity with the intent of public policy to provide an incentive to inter vivos gifts, the tax advantage depending on the extent to which property is distributed by gift. Of even greater significance, however, is the fact that the preferential treatment accorded inter vivos gifts is uniform throughout, namely, 33-1/3 percent on such amounts as are actually paid in gift taxes.

Comparison of effective transfer tax rates under
existing and proposed treatment

Case             Present method               Proposed method
              Tax      Effective rate      Tax       Effective rate

A         $1,901,400      38.03%        $1,901,400       38.03%
B          1,158,762      23.18          1,718,300       34.37
C          1,029,455      20.59          1,426,050       28.52
D            976,059      19.52          1,509,500       30.19

E. Consideration Of Possible Objections To Proposed Method Of Coordination

The proposal here made for the coordination of estate and gift taxes may be criticized on grounds that it implies a stationary gift and estate tax rate structure; that in the event of future estate tax rate increases, the final tax liability incident to property transfers at death would be increased not only by the extent of the additional tax liability on the final instalment of the property distribution at death, but retroactively on all preceding inter vivos distributions; that under peculiar circumstance the tax liability may conceivably be greater than the value of the residual estate itself: and, conversely, that in the event of future rate reductions, a situation may arise where the tax computed on the final distribution of the deceased's property may be a negative quantity calling for a refund.

With respect to the above-anticipated criticism, it should be noted that the situation which may conceivably develop under the proposed plan does not differ from that already inherent in the existing gift tax, with its cumulative features. There, too, a change in gift tax rates could create the difficulties enumerated. For the purpose at hand, it will suffice to assume that there will be no reductions in the rate of property transfer taxes, or, at least, that before enacting such rate reductions, Congress will consider their implications. Such an assumption would have much theoretical strength, for not only is stability in transfer taxes desirable, but much may be said in defense of arriving once and for all at a satisfactory transfer tax rate schedule and retaining it at that level during periods of prosperity as well as economic inactivity. We are here concerned with one of the two constituents of the tax system susceptible to progressive treatment, and it maybe good public policy to keep that tax at a fixed and optimum level, adding flexibility to the tax structure, as required, through other taxes. At all events, the practice of allowing the rate structure in effect at the time of death to affect the tax burden on all previous property dispositions is valid. Both inter vivos gifts and estate taxes are imposed on the privilege of disposing of property accumulated during life. Since the enforced time of that disposition is time of death, it is valid to tax all such dispositions at rates in effect at time of death.

Coming to another point, it may be suggested that the cumulation of gifts for ultimate inclusion in the residual estate for estate tax purposes is of doubtful constitutionality first, because title to the property distributed through inter vivos gifts is not held by the decedent at the time of his death, and second, because property transfers during life must be taxed independently from those occurring at death.

With respect to the first of these legal objections, attention is called to the fact that the concept of cumulation implied in the proposed coordinating device is not new but is already employed in connection with the existing gift tax. The second involves more controversial problems the final evaluation of which may have to await judicial review. Specific judicial opinion to the contrary lacking, however, it is assumed that those gift taxes, more properly termed anticipatory estate taxes, may logically be considered prepayments on account of estate taxes.

Alternative Plan

In the event that the recommendation for including the value of inter vivos gifts, titles to which are no longer held by the decedent, in the final estate tax base, is found to be unconstitutional, consideration may be given to a reversal of the proposed coordinating device. More specifically, instead of considering inter vivos gifts as instalments on ultimate estate distribution, the procedure may possibly be reversed by considering the property disposed at death as a final inter vivos gift subject to the gift tax under the present cumulative set-up. /9/ Such a procedure would have the merit of eliminating the necessity of stretching the concept of property transfers at death. That advantage, however, is largely offset by several disadvantages, which may be briefly noted.

First, it would involve the use of the principle of penalties in taxation which has many undesirable aspects and, from the point of view of public relations, might well be avoided. Second, it does not solve the difficulty inherent in the gift tax which would come with the downward revision of the rate structure discussed above and which exists both in the present gift tax structure and in the proposed transfer tax structure. Lastly, it would involve the substitution of the net base after deduction of the amount of the tax now inherent in the gift tax, for a base which includes the amount of the tax, used in the estate tax, unless the base used in conjunction with the gift tax itself is also revised.

Accordingly, it is concluded that if the suggestion to consider inter vivos gifts as instalments upon ultimate distribution of the estate, and if the suggestion to consider gift taxes merely as prepayment of ultimate estate taxes is constitutionally valid, then the initial proposal for the coordination of estate and gift taxes is preferable to the alternative proposal just discussed.

F. Advantage Of The Proposed Plan

The imposition of a coordinated system of estate and gift taxation, as described on p. 44 above, would present no additional administrative problems. The record of inter vivos gifts is already being maintained currently for gift tax purposes and its use in connection with the final settlement of estate taxes would represent no additional burden.

The positive advantages of the proposed method of coordinating the estate and gift taxes may be summarized as follows:

(a) It will increase revenue from the estate and the gift tax by increasing the effective transfer tax rate.

(b) The Federal Government will be enabled to accord precisely that encouragement to inter vivos gifts which is required by public policy, and which at the same time will be equally available to all individuals, irrespective of their wealth.

(c) The proposed treatment of property transfers will be a logical corollary of the cumulative tax base and cumulative tax credit concept already employed in connection with gift taxes.

(d) It will make the bases of the estate tax and gift tax identical.

(e) It will eliminate the double use of exemptions in connection with property transfer taxes.

(f) It will eliminate the double use of the lower brackets of the transfer tax rate structures.

(g) It will provide the machinery for eliminating the inequitable effect of gift taxes upon the estate and inheritance tax revenues of State governments without any reduction of Federal revenues, since the additional revenue obtained from the proposed coordination will be adequate to supply the additional funds diverted to the States. (See discussion under Part III.)

(h) It will forestall the present movement toward independent State gift taxes and thus will stifle a new and potent conflict which is arising between the Federal Government and the States.

Lastly, it will be observed that the device here proposed for the coordination of estate and gift taxes fulfills the requirements of a set of complementary taxes discussed in the introduction and at the same time eliminates all but one of the deficiencies now existing. The exception referred to is the unpredictable advantage inherent in inter vivos gifts which emanates from the multiple use of the lower brackets of the income tax.

G. Gift Tax Annual Exemption

The present practice of exempting from gift taxes $5,000 gifts made annually to each of any number of individuals, as provided by Section 504 of the Revenue Act of 1932, amended, is excessively generous. It enables one individual to dispose of $200,000 tax-free to four children in ten years, in addition to the specific exemptions provided in the gift and estate tax, and in addition to the $40,000 of tax-exempt insurance payable to specified beneficiaries. The plea that an exemption of that amount is required to exclude from consideration small Christmas gifts, birthday gifts, etc., is hardly valid since a gift of $5,000 is more than a mere expression of affection or good will. In this connection, it is of interest to note that the Ways and Means Committee Report on the 1932 gift tax proposed merely a $3,000 exemption which was subsequently raised by the Senate Committee to $5,000, and remained at that level even after the other exemptions were reduced. It is recommended that in line with the proposed reduction of the specific transfer tax exemption, and in line with the proposed use of the vanishing exemption, the present annual exemption be replaced by a maximum donor's annual exemption of $5,000, irrespective of the number of donees.

Part III: Coordination Of Federal And State Taxes On Property Transfers

1. Introduction

The simultaneous taxation of ostensibly identical tax bases by two separate and sovereign Jurisdictions requires coordinate action. In the absence of coordination, undesirable economic and social consequences are inevitable. That in the United States such coordination is lacking and has of necessity produced "undesirable consequences" is apparent on all sides and requires no demonstration.

Speaking to the Conference of Mayors, meeting in Washington, D.C., on November 19, 1935, the President observed that Federal, State and local "taxes have grown up like Topsy in this country." Three years earlier Ogden Mills, then Secretary of the Treasury in an address before the City Bar Association of New York remarked that:

* * * if we view our Federal, State and local taxes as a whole we do not find anything that faintly resembles a logical and coordinated plan, last rather a number of unrelated systems, frequently overlapping and existing in a state of confusion that gives rise to all manner of maladjustments, duplications and irregularities.

There is a growing conviction, which I share, that the time has ceased when the Federal and State governments may safely chart separate and unrelated courses over the troubled financial waters which they must now all traverse. The time for drifting has passed. The time for considerate and conscious coordination has arrived. (New York Times, April 30, 1932.)

During recent years both the States and the Federal Government have passed through several years of fiscal stringency which brought in its wake a flood of new tax laws, adding to the existing incoordination. As a result Mr. Mills' indictment may have even more validity today than it had five years ago.

To be sure, the problem represented by conflicting Federal-State taxation is of more vital significance to the States than to the Federal Government, and the latter may conceivably direct its attention to more pressing matters. R. M. Haig puts the case well when he observes:

It is obvious that despite the interest of national leaders, the movement for change in the existing arrangement is primarily a movement of and by the States. The Federal Government does not seek additional taxing power. Moreover it possesses a great tactical advantage in that, speaking generally, it can first formulate its tax program, and fold its hands, while the States struggle to conform their programs to it. At most there is some concern in Washington lest the nuisance and waste of the dual administration of certain types of taxation, which constitute important elements in the Federal system, may discredit these taxes and render them unavailable. (N. T. A. proceedings, 1932, p. 223.)

If the Federal Government were content with pursuing a policy as narrow in its scope as that characterized above, the present discussion would obviously be out of order. However, the Federal Government should and, in fact, is seriously interested in sound fiscal practice in all levels of government and is thus eager to contribute to the elimination of Federal-State tax conflict. (Address of Henry Morgenthau, Jr., Secretary of the Treasury, before the Tax Revision Council in Washington, D. C., on June 7, 1935.)

2. The Existing Federal-State Conflict In Death Taxation

The problem insofar as it concerns Federal-State conflict in the field of death taxation is not new, although, as will be shown below, it emanates in part from the ineffectiveness, and in part from the narrowness of scope of the crediting provision initiated by the Federal Government in 1924 and modified in 1926.

The controversy surrounding Federal and State taxation of property transfers had its origin in 1907, at the time when President Theodore Roosevelt urged a heavy Federal tax on Inheritances. His proposal was countered on the part of State officials with the plea that death duties be considered State rather than Federal sources of revenue, among other reasons because some States have relied upon this source of revenue for almost a century. The Federal Government's enactment of the estate tax in 1916 and, more particularly, its failure to repeal that levy after the war, rekindled State opposition to the Federal levy and culminated in two conferences on inheritance and estate taxation held in 1925 under the auspices of the National Tax Association. These conferences resolved that the Federal Government should withdraw from the field of death taxation within six years and in the interim should afford the taxpayer a maximum 80 percent credit against Federal tax liability for taxes paid to States. No doubt that resolution was in part instrumental in the reduction of Federal tax rates and in the increase of the scope of the crediting provision incorporated in the Revenue Act, which became law on February 26, 1926.

The crediting device incorporated in the 1924 Act and subsequently expanded in 1926, implied a willingness on the part of the Federal Government to share its transfer tax revenue with States, first in a ratio of 3 to 1 and later in the ratio of 1 to 4. On the strength of that implication some of the States have made an attempt to bring their death tax structures into conformity with that of the Federal Government. The post-1926 activities of the Federal Government, however, have been a steady swing away from that early pattern. In 1932, 1934, and 1935 Federal estate taxes were increased without a corresponding increase in the scope of the crediting provision, with the result that the States' share of total death tax revenues has been steadily diminishing. While the recent revisions of the Federal estate tax have reduced the specific exemption from $100,000 to $50,000 and later to $40,000, the crediting provision has remained unchanged. In consequence, no estate credit is at present permitted for taxes paid to States on the bulk of the estates -- those amounting to less than $100,000. Furthermore, since the recent rate increases were more marked in the upper than in the lower brackets of the estate tax rate schedule, the relative share of death taxes subject to State credit steadily diminish as estates become larger. The result is that the States are deprived of the tax credit at both ends of the scale. Between 1931 and 1936 the percentage of Federal estate tax liability represented by credits claimed for taxes paid to States declined from 76 percent to 18.3 percent.

To add to the disturbance, the Federal Government enacted a gift tax in 1932 which is so constructed as to encourage the distribution of estates during the lifetime of the owners and thus reduce correspondingly the amount of the estate subject to Federal and, of course, State death taxes. This is apparent from the fact that between 1931 and 1936, the percentage of total Federal transfer tax liability, including both the estate and the gift tax, represented by credits claimed for taxes paid to States declined from 76 percent to 11 percent.

In their efforts to counteract the Federal Government's persistence to expel them from the field of property transfer taxation, States have resorted to the obvious -- to the enactment of independent death and gift taxes -- adding thereby to Federal-State conflict. That no attempt has previously been made by the Federal Government to rectify the situation is probably due in part to the fact that students of the problem have been inclined to exaggerate the remedial effects of the crediting device and to underestimate the extent of existing conflict. It is generally held by Shultz, Lutz, Walradt and others that the crediting device has served to bring death taxes in the various States in close conformity with each other and with those levied by the Federal Government, with the result that the total imposition upon any estate is largely limited to the amount computed under Federal rates. It may therefore be well to concern ourselves first with the extent of existing interstate variations with respect to the taxation of property transfers. An examination of the pertinent data will reveal that the optimistic generalizations of the type referred to are not substantiated by the facts.

3. Interstate Variations In Death Taxation

The extent to which the crediting provision has failed to eliminate interstate variations in estate and inheritance taxation is remarkable, particularly in view of the widely accepted notion that it has fulfilled its function. In many respects there is probably as wide a diversity in State death duties today as prior to the adoption of the crediting provision by the Federal Government in 1924.

(A) Types Of Death Taxes

In the first place, there is no uniformity in the types of death duties imposed by States (page 54). Despite the recommendation of the National Conference on Estate and Inheritance Taxation in 1925 that the States adopt the estate tax form of levy, progress in that direction has been comparatively slow. Seven States impose only inheritance taxes. Twenty-nine impose inheritance taxes together with differential estate taxes designed to absorb the maximum credit provided by the Federal Revenue Act of 1926. In some of these the differential levies are inoperative because the State inheritance taxes alone are in excess of 80 percent of the 1926 Federal schedule. Three States levy estate taxes entirely independent of, and in no way corresponding to, the Federal estate tax. Three follow the Federal estate tax in every detail, providing specifically that the amount of the State Tax shall be equal to 80 percent of the tax imposed by Title III of the Federal Revenue Act of 1926. Two States follow the Federal law except that variations therefrom are made in the specific exemption provided or in the rates imposed. One State combines an independent estate tax with a differential estate tax; another an inheritance tax with an independent estate tax, the latter apportioned among the beneficiaries; and a third combines an inheritance tax with both an independent and a differential estate tax. One State levies no death duty at all. Greater diversity is hardly conceivable.

(B) Definition Of Gross Estate

Secondly, there remain wide variations among the States with respect to the definition of gross estate for tax purposes. Seven States follow the community property concept and, with minor variations, include in the gross estate at the time of the husband's death only half of his community property. The other forty States that levy death taxes include in the gross estate subject to the tax at the death of the husband all of the property acquired by him during marriage.

Further variations exist with respect to valuation of estates. Five States depend in the main upon the locally assessed values. Four give considerable weight to the locally assessed value, but use other standards of measurement as well. Four accept the valuation placed upon the property by the Federal Government. The remainder of the States attempt to arrive at the "fair market value" of an estate by taking an average of a number of determinants such as bona fide sale, opinions of local real estate men, opinions of adjacent landholders, capitalization of the income from the property, purchase price, sales of similar property and value of property similarly situated. It may readily be appreciated, therefore, that the appraisal for tax purposes of two properties, located in neighboring states and having identical actual values, may be affixed at two widely divergent points.

A still further factor tending to increase interstate variation in valuation is the practice followed in the various States with respect to the date of valuation. Three States fix the date of valuation as of one year from the date of decedent's death, or at the date of distribution, should it occur before the expiration of one year. Two States follow the present Federal law in allowing the executor an option as to the date of valuation -- fixing the value either as of the date of death or as of one year from the date of death. The remaining forty-two States levying death duties affix the value as of the date of death. This variance as to the date at which the value is fixed introduces the time factor as another variable in the determination of the gross estate, which acquires particular significance and makes for interstate variations in times of changing prices.

(C) Definition Of Net Estate

The third variation is to be found in definitions attached to net estate in the various States. The deductions allowable from the gross estate in the determination of the net estate vary. Thus, the items generally allowed as deductions are funeral expenses, administration expenses, claims against the estate and an allowance for maintenance of the widow and children during the settlement. In some States limitations are placed upon the amount allowable as deductions. In others, a reasonable amount is allowed. In still others, the amount that may be claimed, if proved, is unlimited. An allowance for the value of the homestead is allowed in approximately ten States. Twenty-four States allow the amount of the estate tax paid to the Federal Government to be deducted. Twenty-four States allow no deduction for death duties paid to other States; twenty-three allow either a full or a partial deduction on that score. Eighteen States allow a deduction of property previously taxed from the gross estate in determining the net estate subject to tax. The pattern, to say the least, is heterogeneous.

(D) Treatment Of Life Insurance

The Federal estate tax exempts the first $40,000 of insurance payable to specified beneficiaries other than the executor, under policies taken out by the decedent upon his own life. All other life insurance is taxable under the Federal law.

The treatment of life insurance in the death tax laws of the various States ranges from virtually complete exemption to complete taxation. At one extreme is Arkansas, which exempts all insurance payable directly or passing through the estate to direct descendants, ascendants and widows. At the other extreme is Wisconsin, which taxes all insurance. One group of twenty-seven States, including Massachusetts, New Jersey, and Pennsylvania, exempts insurance payable to named beneficiaries and taxes insurance payable to the estate of the decedent. Nine States tax insurance payable to the estate, exempting only limited amounts of insurance payable to specified beneficiaries. These limited amounts range from $10,000 in Kentucky to $75,000 in Colorado. New York and Tennessee combine the taxability of insurance payable to estates with a qualified exemption of insurance payable to named beneficiaries. Montana, Washington and the Carolinas restrict taxability to specified types of heirs. Kansas exempts insurance payable to named beneficiaries as well as insurance payable to the estate, except when such insurance is distributed from the proceeds of the estate to beneficiaries whose total share exceeds their respective specific exemption. Idaho and Vermont statutes do not touch upon the point, but the general indications are that insurance payable to the estate is taxable but insurance payable to the named beneficiaries is exempt.

Thus, it will be readily seen that the State death tax laws respecting insurance depart not only from the Federal practice but vary also from State to State. National uniformity is non-existent.

(E) Amount Of Specific Exemptions

The fifth type of variation is that which concerns specific exemptions allowed in the various States. The type of the exemption, its amount, and the manner in which it is taken, have each their own complex patterns. In Maryland, Massachusetts, and to a limited extent in New Jersey, the exemption is conditional, disappearing entirely when the size of the legacy exceeds the amount of the exemption. Kentucky and West Virginia employ the vanishing type of exemption. The remainder of the States levying death duties use the constant type of exemption. As to the manner of taking the exemption, twenty States specifically provide that the exemption be deducted from the first bracket, twenty-one permit the exemption to be taken from the last or highest bracket. As to the amount of the exemption, that allowed a widow does not exceed $10,000 in twenty-two of the States, ranges from $10,000 to $25,000 in fourteen States, between $25,000 and $40,000 in two States, and in excess of $40,000 in seven States. With respect to other categories of heirs, the variations are no less marked.

(F) The Rate Structure

The sixth type of variation lies in the rate structures employed in the various States. Of the eleven States levying an estate tax type death duty, the rates of four (Alabama, Florida, Georgia, and Mississippi) are fixed at 80 percent of the rates imposed by Title of the Federal Revenue Act of 1926. New York's rate structure is fixed at 100 percent (e.g., 25 percent above the maximum credit) of the 1926 Federal estate tax rate structure. North Dakota's rates range from 2 percent on net estates of less than $20,000 to 23 percent on net estates of more than $2,000,000. Oklahoma's rates range from 1 percent on the first $10,000 to 10 percent on estates above $10,000,000. Oregon's rates run from 1 percent on the first taxable $15,000 to 15 percent on estates in excess of $1,500,000. Arizona's rates range from 2 percent on the first $25,000 to 20 percent of the amount in excess of $5,000,000. Rhode Island levies a flat 1 percent rate on the value of the net estate in excess of $10,000, together with a graduated rate ranging from 1/4 percent on the value of the net estate in excess of $250,000 and not exceeding $300,000 to 14.92 percent on net estates in excess of $10,000,000. Utah's rates range from 3 percent on the first taxable $15,000 to 10 percent on estates in excess of $125,000. Thirty-eight States levy inheritance taxes either in addition to or in lieu of an estate tax. In each of these States the rates vary according to the relationship of the beneficiary to the decedent, and in all but three the rates are progressive. The lowest maximum rate applicable to the widow is Nebraska's 1 percent. The highest maximum rate applicable to the widow is 16 percent, levied by Kentucky on legacies of more than $2,000,000 and by New Jersey on legacies of more than $3,700,000. The maximum rates applicable to persons not relatives of the decedent range from but 6 percent in Wyoming to as much as 60 percent in Minnesota.