Tax Analysts®Tax Analysts®

Article Archive

July 18, 2005
Historical Perspective: Redistribute What?
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM

In today's political climate, redistribution is a dirty word. Across the ideological spectrum, politicians pay lip service to some vague notion of "progressivity," draining the word of meaning and using it to defend radically divergent policies. By contrast, "redistribution" has retained its ideological edge. Even most liberals avoid it, wary of the "class warfare" charges that seem to besiege the word every time it crops up in political discourse.

Nowhere is the sorry state of redistribution more evident than in today's estate tax debate. Opponents of the "death tax" (a moniker, incidentally, that was once used as a description, not an insult) insist that efforts to redistribute wealth are unjust and unwise. What's more, they're downright un-American, as economist Bruce Bartlett argued in the summer of 2000:


    During debate, supporters of the estate tax attempted to distort history, making it seem as if using the estate tax to redistribute wealth is as American as apple pie. Nothing could be further from the truth. The clear history of the estate tax is that it has existed solely for revenue purposes. It is only since the 1930s that it has taken on a role in wealth redistribution. The idea that this was the original purpose of the estate tax is simply liberal mythology.

Bartlett is right, although he overstates the popularity of redistributive rhetoric among estate tax supporters. While taxes on inherited wealth are as old as the Republic, they have been used principally to raise money, not redistribute it. Certainly, ardent fans of the estate tax have periodically pointed to the perils of accumulated wealth. But legislators have generally taken a more modest view, using transfer taxes for revenue, not reform.

But to say that estate taxes have always been about revenue is not to banish the subject of redistribution entirely. For more than two centuries, inheritance taxes have been used for a different sort of redistribution: the reallocation of fiscal burdens. Used in this more limited sense, redistribution has enjoyed a long -- and successful -- political career. Indeed, it has been a driving force in the development of our modern tax system.


Our Progressive Founders

Progressive taxation is not a new invention. As Northwestern University Law Professor Charlotte Crane has observed, "several of the earliest tax measures enacted by the early Federalist Congresses had distinctly progressive features." In a paper for the UCLA Law Review symposium on "Rethinking Redistribution," held earlier this year, Crane argues that many of the founders thought taxes should be levied with an eye towards ability. "Those with more were expected to pay more, those with less, to pay less," she notes. "Those with the least, in most jurisdictions, were not expected to pay at all."

Crane is careful to point out that those early progressive taxes were not designed to remake society. "These federal measures do not demonstrate that the framers would have tolerated a strong redistributive tax by the federal government, at least if done solely for the sake of equalizing wealth," she writes. "But it does clearly indicate an expectation that those who were better off would contribute more, and not just proportionately more, to support the federal government."

Among the various progressive elements of this first American tax regime was a modest inheritance levy, imposed through a documentary stamp tax on wills. Scaled according to the size of the estate, this early inheritance tax was modestly progressive, taxing larger bequests at higher rates than small ones. That progressivity was not designed to limit the transfer of large estates, nor to effect any redistribution of wealth. But it was intended to ensure that fiscal burdens were allotted to those best able to pay.


The Genuinely Progressive Era

In another paper delivered at the UCLA symposium, Ajay Mehrotra, a professor at Indiana University School of Law -- Bloomington, outlines the intellectual history of American taxation during one of its most vibrant episodes: the aptly named "Progressive Era." Mehrotra seeks to explain the rise of the modern income tax, focusing on the importance of fairness arguments. "This shift in U.S. tax policy towards the direct and progressive taxation of income marked the emergence of a new fiscal polity," he writes, "one that was guided not simply by the functional and structural need for government revenue but by concerns for equity and economic and social justice."

Many historians have stressed the failures of Progressive tax reform. New federal levies, including the income tax, did little to ameliorate inequality, they argue, leaving the distribution of wealth largely intact. Some critics have even insisted that the income tax was designed to deflect reform, not advance it. In the view of historians like Robert Stanley, the tax was a pallid half-measure, sapping the political vitality of more progressive alternatives.

Mehrotra insists that those accounts obscure the real achievements of Progressive Era tax reform. "The new fiscal order that emerged at the turn of the century was by no means a radical system of wealth redistribution, nor was it merely a conservative bulwark against more radical reform," he writes. "Instead, the modern American fiscal state that emerged in the early twentieth century dramatically altered the distribution of fiscal burdens, both along class and regional lines. By replacing the nineteenth century structure of regressive indirect consumption taxes with a direct tax on income and other forms of wealth, the new fiscal polity shifted the burden of financing a modern state on to those segments of society that had the greatest tax paying ability, namely wealthy citizens in the North and Northeast."

Mehrotra judges that transition "a qualified achievement," noting that while "it did not go as far as some reformers had envisioned, that new fiscal polity laid the foundation and held out the promise of a new, more progressive American tax regime." The estate tax played a limited role in this new fiscal polity, at least until World War I. And even then, it was principally defended as a means of redistributing tax burdens, not wealth.

To be sure, many Progressive reformers had grander visions for the estate tax. Theodore Roosevelt, among others, believed that tax could be used to check the growth of large fortunes. But lawmakers continued to view the tax more modestly, using it to balance other, more regressive elements of the federal revenue system, including excise taxes and tariff duties.


The Heyday of Redistribution

The history of federal estate taxation does include at least one episode in which wealth redistribution played a starring role. In 1935 Franklin Roosevelt championed a new federal inheritance tax -- intended to supplement, not replace the estate levy -- as a means to slow the growth of large fortunes. "Great accumulations of wealth cannot be justified on the basis of personal and family security," FDR declared. "In the last analysis such accumulations amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others."

Such rhetoric notwithstanding, Roosevelt was careful to defend his new inheritance tax as a tool for rebalancing the tax burden. He urged Congress to use the proceeds solely for the repayment of federal debt. "By so doing," he argued, "we shall progressively lighten the tax burden of the average taxpayer." Over the course of his presidency, Roosevelt returned to those arguments regularly. While his experiment with "soak the rich" taxation had run its course by the mid-1930s, efforts to ensure that every taxpayer contributed his "fair share" remained a hallmark of Roosevelt tax policies for the rest of his presidency.

Today, Congress seems poised to strike a compromise on the estate tax. To the dismay of ideologues on both the left and right, lawmakers seem ready for reform, not repeal, of this aged but unpopular tax. Conservatives should be glad to get so close to repeal, especially given the dismal long-term fiscal outlook. And liberals should count themselves lucky to walk away with any sort of estate tax at all. After all, it will almost certainly be easier to raise the rates than it would be to reenact it completely when the fiscal chickens finally come home to roost.

Defenders of the estate tax have bungled their case for retaining that bulwark of progressive taxation, first by resisting reasonable reform and later by offering many unconvincing arguments after the battle was already lost. But sometime in the not-so-distant future -- when political leaders can no longer ignore the looming fiscal disaster -- liberals will get another chance. And let's hope they remember the resonance of a certain kind of redistributionist rhetoric.