In September the federal estate tax will turn 90. As lawmakers continue to ponder repealing this aged but inflammatory levy, they should consider its provenance. The tax was not the brainchild of wild-eyed levelers intent on redistributing wealth. Rather, it was a revenue tool, designed to raise money, not remake society. To be sure, economic justice loomed large in the political debate over the Revenue Act of 1916. But Congress adopted the tax to help reallocate the tax burden, not wealth.
Fans of the estate tax usually garnish their argument with some choice historical sound bites. We typically hear from Andrew Carnegie: "Of all forms of taxation, this seems the wisest," the mogul wrote in 1889. "By taxing estates heavily at death the state marks its condemnation of the selfish millionaire's unworthy life." Similarly, we usually get a snippet from Theodore Roosevelt. "The man of great wealth owes a peculiar obligation to the state," Roosevelt told Congress in 1906, "because he derives special advantages from the mere existence of government."1
Such quotations are all well and good. Carnegie and Roosevelt both worried about the pernicious effects of dynastic wealth, and they played an important part in the larger debate over taxation and social reform. But neither had any direct role in the creation of the modern estate tax. Those who did -- the members of Congress who designed and adopted this revenue innovation -- shared many of the beliefs articulated so well by Carnegie and Roosevelt. But when push came to shove, lawmakers were more concerned with immediate issues of tax fairness, especially the distribution of the nation's growing tax burden.
Like all revenue laws, the estate tax had its origins in the murky and often pedestrian politics of Capitol Hill. A close look at the political debate surrounding its adoption reveals a tax that was both less ambitious and more successful than its modern defenders like to suggest -- less ambitious because it was never intended by its creators to be much of a check on inherited wealth, and more successful because it managed to advance and institutionalize the nation's commitment to progressive taxation.
Revenue worries were pivotal to the tax debate in 1916. Europe's descent into war had depressed international trade, and American tariff revenue fell dramatically after 1914. Congress responded with a variety of tax increases, including a much-maligned stamp tax on legal documents and telegraph messages. But the looming prospect of American involvement in the European war soon rendered those modest levies inadequate.
In late 1915 President Woodrow Wilson asked Congress for a controversial and expensive preparedness program. And, determined to avoid large-scale borrowing, he also requested new taxes to pay for it. "In a country of great industries like this, it ought to be easy to distribute the burdens of taxation without making them anywhere bear too heavily or too exclusively upon any one set of persons or undertakings," he declared. "What is clear is that the industry of this generation should pay the bills of this generation."2
Over the objections of many lawmakers, including fellow Democrats, Wilson pushed through his preparedness program. Congress passed two enormous military appropriations bills in late summer of 1916. Rep. Cordell Hull assembled a package of tax increases to help foot the bill. A few years earlier, Hull had led the successful fight for a federal income tax. He now urged his colleagues on the House Ways and Means Committee to endorse another fiscal innovation -- a federal estate tax.
The committee's Democratic majority readily agreed to his suggestion. In their report to the House, they emphasized the severity of the revenue crisis. "The necessity for this legislation grows out of an extraordinary increase in the appropriations for the Army and Navy and the fortification of our country," the panel explained.3 Meeting the cost would be difficult, requiring a painful but inevitable sacrifice for the sake of the common good.
"There was only one question before the Committee on Ways and Means," reported Rep. James W. Collier. "How could this money best be raised with the burden falling lightest upon the American people?"4
That question was certainly important, perhaps even fundamental. But a related question was just as pressing: Who should pay the new taxes? For Democrats, the answer was clear: the rich.
Democrats refused to consider new consumption taxes. Tariff duties and excise taxes already provided the vast bulk of federal revenue. "No civilized nation collects so large a part of its revenues through consumption taxes as does the United States," complained Ways and Means members in their report, "and it is conceded by all that such taxes bear most heavily upon those least able to pay them."5 In drafting a revenue bill, the panel had cast its gaze on the upper strata of American society. Rep. Charles R. Crisp explained the decision to his colleagues:
The Democratic Party, while having no fight to make on wealth honestly acquired, believes that a man should contribute to the support and maintenance of the government according to his ability to pay; that great wealth should bear its just and equitable proportion of the expense of the government; and Mr. Chairman, the bill we are now considering raises the entire amount necessary to pay the expenses of this preparedness from the wealth of the country.6
Since regressive consumption taxes already provided too large a share of federal revenue, Ways and Means focused exclusively on taxes that would burden the rich. In addition to an estate tax, the panel recommended higher income taxes and a special levy on profits earned by munitions manufacturers, who stood to reap a windfall from the rearmament program. Democrats believed these new taxes would raise most of the money needed to pay for preparedness. At the same time, they would redress the distributional imbalance long embedded in the federal tax system.
The committee managed to blend two distinct principles of tax fairness into a single -- and powerful -- political rationale for taxing the rich: "It is therefore deemed proper that, in meeting the extraordinary expenditures for the Army and Navy, our revenue system should be more evenly and equitably balanced and a larger portion of our necessary revenues collected from the incomes and inheritances of those deriving the most benefit and protection from the Government."7 On one hand, Democrats stressed the importance of ability to pay, an idea much in vogue around the turn of the 20th century, especially with leading tax economists like Edwin R.A. Seligman and Thomas S. Adams. At the same time, they invoked the benefit principle, an idea that still commanded political support, even while fiscal experts increasingly doubted its practical utility and theoretical validity.8
The New Estate Tax
The Ways and Means plan included an estate tax with a rate ranging from 1 percent to 5 percent and an exemption of $50,000. (The value of this exemption in today's dollars is the subject of some dispute. Estimates range from roughly $900,000 to more than $11 million, depending on the method and political agenda at work. Calculations based on the commodity price index -- popular among estate tax supporters -- yield the lower number; calculations based on gross domestic product -- popular among opponents -- yield the higher estimate. For a useful survey of relative value calculations, see the calculator at http://www.eh.net/hmit/compare.)
House debate was heated, but not because of the estate tax. Republicans complained loudly about the Democratic penchant for low tariffs, predicting that American industry would suffer dire consequences after the war. GOP lawmakers also accused Democrats of profligacy, insisting that new taxes would have been unnecessary had Democrats resisted the urge to spend.
Several GOP leaders complained that income tax exemptions -- both those in existing law and those proposed in the new bill -- were too high. By targeting a narrow slice of the population, Democrats had indulged their penchant for "class legislation." Rep. Richard Wayne Parker said the bill had been designed "to enable 99 people to tax the hundredth man and to put the bulk of the taxation upon the thousandth man."9
Those distributional concerns did not generally extend to the estate tax. Several vocal critics of the income tax -- including Roosevelt's son-in-law, Rep. Nicholas Longworth -- were considered sympathetic to the estate tax. Republicans had a history of supporting estate tax proposals, at least in times of national emergency. Roosevelt, of course, had been a champion. So too was President William Howard Taft. And in 1909 a Republican majority in the House actually passed an estate tax (although Senate conservatives were quick to kill it off).
Still, a few Republicans objected to Hull's levy when it came to the floor in 1916. Rep. Charles Henry Sloan complained that Democrats were using class legislation to hide the general failure of their economic doctrine. "If they cannot reduce the cost of living they demonstrate to the public their ability to raise the cost of dying," he said.10 Other Republicans insisted that all efforts to soak the rich and spare the poor were doomed to failure. "No taxation, whether direct or indirect, can in the end be levied which will not be a burden upon the whole people," contended Rep. Edward Cooper. "Taxation, like water flowing downstream, some day will seek its level and cover those who have and those who have not, and the very people upon whom you are attempting to place the burden of taxation will shift the proper share to the people whom you are attempting to make believe you are relieving from taxation."11
Several members objected to the estate tax as an infringement on state rights. In 1916, 42 states had adopted some sort of succession tax. State opposition had helped sink previous efforts to impose a permanent federal tax on estates, and many lawmakers restated their concern that federal authorities were once again encroaching on a traditional preserve of state fiscal authorities. But estate tax supporters beat back those arguments, insisting that the federal and state levies could function together effectively. Some supporters even went as far as to suggest that succession taxes were better when administered at the federal level, since the states seemed unable to raise much revenue from this promising source of funds.12
In responding to critics, a few Democrats dared to suggest that estate taxes should be used to reverse, or at least slow, the concentration of wealth in American society. Even then, however, they generally framed the tax as a tool for raising revenue, with social reform a happy but secondary concern. "Many of the enormous fortunes of this country far exceed any service the recipients of these swollen fortunes have ever rendered society," said Rep. Clement C. Dickinson, "and the time is ripe and opportune to levy graduated income and inheritance taxes for needed revenues." (This quotation, incidentally, demonstrates the loose terminology at play during the estate tax debate; while tax experts distinguished between inheritance taxes and estate taxes in their technical writing, most popular debates over succession taxes conflated the two terms.)13
But at least one member of the House was ready to make redistributive arguments in bold fashion. Rep. Meyer London, a Socialist from New York City, insisted that power was the issue, not revenue. The vital purpose of the estate tax was to check dynastic wealth, he declared:
It is difficult to see how, in a democracy, men will with indifference contemplate the inheritance, through the mere accident of consanguinity, of large estates, of tremendous power in the shape of capital. While we object to the power of making laws being transferred from father to son by inheritance, we do permit the acquisition by inheritance of a financial power which confers the right to legislate for industry, commerce, finance, and to shape the life of the country. As a matter of public policy, and not only as a source of revenue for the support of the government, the tax on inheritance should be increased.14
Those claims for the estate tax were dramatic but unusual, at least in Congress. While many observers fretted about the perils of concentrated economic power, lawmakers were more worried about the fair distribution of the tax burden. And the pending revenue bill promised to make a bad system more than a little bit better. "It is the first successful attempt to make wealth bear its just and proportionate burden of taxation," said Rep. William Cox.15 Rep. Collier insisted that Americans were finally getting the sort of tax reform they had long sought from a reluctant GOP. "They looked to the Republican Party in vain," he said, "for the party of protection has never believed that the wealth of the country should contribute anything except campaign contributions."16
The most important defense of the revenue bill, including the estate tax, came from Hull. Long a vocal champion of progressive tax reform, he framed the tax debate in dramatic terms. "An irrepressible conflict has been waged for thousands of years between the strong and the weak, the former always striving to heap the chief tax burdens upon the latter," he declared. "That conflict still continues."17 According to Hull, middle-income Americans had been saddled with burdensome consumption taxes for too long. In confronting the revenue crisis occasioned by the preparedness campaign, lawmakers had a choice to make. "Shall the masses be mulcted for the remainder of the taxes needed?" he asked. "Or shall the additional taxes required be equitably imposed upon the larger owners of income-producing property, and from a small graduated estate tax, and a tax upon the profits from the sale of munitions? The latter course will square with every principle of justice and equity in taxation."18
Hull did not shrink from observations about the concentration of wealth. But to his mind, holders of large fortunes were most important for their taxpaying ability. He favored arguments for progressive reform that emphasized efforts to improve the tax system, not society. As one of his biographers later recalled:
His income tax was a revenue measure. It was not intended to redistribute the nation's wealth, to make the accumulation of large fortunes impossible, to punish anybody, or to accomplish any of the other "social ends" which the younger pilots of the early New Deal sought to accomplish under the revenue powers granted by the Constitution to the federal government. . . . The same consideration governed his approach to the inheritance and estate taxes which he advocated.19
In his memoirs, Hull made much the same point, stressing the importance of equalizing the tax burden: "I have no disposition to tax wealth unnecessarily or unjustly, 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."20
Hull's argument -- emphasizing the importance of using progressive taxes to compensate for regressive ones -- had ample support among tax experts. Seligman, for instance, believed that inheritance taxes -- and graduated taxes, in particular -- were important if the overall burden was to remain proportional. "For even granting that proportion is the ideal to be kept in view, it may be said with some measure of truth that our existing taxes fall with less severity on the wealthier classes," he wrote in Progressive Taxation in Theory and Practice. "A progressive rate in the succession duties, especially where personalty is concerned, would simply tend to reestablish the desired proportionality." Seligman called this the "special compensatory argument" for progressive death taxes.21
Many experts agreed with Hull that graduated estate taxes were best justified by the principle of ability to pay, not by some grandiose notion of regulating the distribution of wealth. A special tax commission for the state of New York, for instance, had concluded that "a graduated inheritance tax is defensible, not so much on the ground that large fortunes are a menace to the public, as on the theory that the ability to contribute to the support of government grows more rapidly than the amount of the fortune or the size of the estate."22
Indeed, tax experts generally maintained that estate taxes were best used to raise revenue, not remake society. "In general it is unwise to mix revenue and reform," warned Adams in 1915. If Carnegie ever managed to get the steep inheritance taxes he so earnestly sought, then the gradual dispersion of large fortunes would ultimately render the tax useless as a revenue device; "the more reform his inheritance tax accomplished," Adams pointed out, "the less revenue it would yield. The inheritance tax which he lauds would consume itself in time."23
Better, Adams argued, to use the inheritance tax as a means to improve the tax system, to relieve the regressive burden on various consumption taxes. Reformers eager to change the world should look elsewhere. "If swollen fortunes are evil," he advised, "let us not beguile our common sense by indirection. Let us go after them with something better than a lath painted to look like iron."24
The House passed the revenue bill after four days of vigorous debate, and Democrats got most of what they wanted. The Senate, however, took its time. After a month of preparation, the Finance Committee reported a version of the bill that largely mirrored the House measure. On the estate tax, the committee asked for higher rates on the biggest estates, even more eager than their House colleagues to shift the tax burden upward.
In floor debate, the estate tax again proved relatively uncontroversial. Sen. George Oliver mounted a strong but unsuccessful attack. "The trouble with this bill is that it aims to extort as large an amount of money as possible out of the pockets of as few people as possible," he declared, targeting the income tax as well as the estate tax. "It aims to make a few people bear the entire expense of running the government and to exempt at least nine- tenths of our citizenship from contributing anything. It is an injustice to those whom it aims to punish and an insult to those whom it aims to favor."25
The Senate was unconvinced. The bill passed easily in early September, and conference negotiators on the legislation retained the higher Senate rates. The law imposed a graduated tax of 1 percent to 10 percent on all estates exceeding $50,000. The top bracket began at $5 million, making it a narrow tax, especially at the top. But still, the tax remained principally a revenue device, not a tool for social engineering. Historian Sidney Ratner neatly encapsulated the 1916 debate, including its emphasis on fiscal pragmatism and redistribution of the tax burden. The guiding principles behind the federal estate tax, he wrote, were productivity of revenue in the face of a fiscal emergency, ease and simplicity of collection, and placement of the preparedness tax burden on the wealthy rather than the poor. To be sure, the tax was considered a victory for advocates of broader redistributive issues, including those who sought to reverse the concentration of private wealth. But in 1916, legislative debate over the estate tax relegated those issues to a secondary role.26
The history of the 1916 revenue act is instructive, providing a glimpse of the ideas behind our modern federal estate tax. But it is not, of course, the whole story. The United States soon joined the war in Europe, and rates for all taxes, including the estate tax, rose dramatically. Later, after the armistice, lawmakers reconsidered the need for an estate tax. Their arguments continued for a decade, with Treasury Secretary Andrew Mellon nearly succeeding in his campaign to get the tax repealed in the 1920s. (For more on Mellon's effort, see Susan Murnane, "Andrew Mellon's Unsuccessful Attempt to Repeal Estate Taxes," Tax Notes, Sept. 5, 2005, p. 1177.)
It was not until the Great Depression that the estate tax found a truly secure spot in the federal tax system. And when it did, it came with a more dramatic rationale. In 1935 President Franklin Roosevelt asked Congress to raise estate tax rates, emphasizing the dangers of dynastic wealth and refusing to shrink from the ideological controversy surrounding the tax. The mid-1930s were good years for advocates of "class legislation," and Franklin Roosevelt got much of what he sought.
Still, most advocates of the estate tax continued to justify it as a means to raise revenue and redistribute the tax burden. These were limited goals, at least when compared with the wholesale redistribution of wealth. But they were also important ones. Until the 1910s, the burden of federal taxation fell heavily on the nation's lower classes. Poor Americans suffered for the sake of trade protection (in the form of high tariffs) and easy revenue (in the form of sumptuary taxes, like those on alcohol and tobacco).
The progressive campaign for the income and estate taxes helped bring an end to this era. It established ability to pay as the touchstone of good tax policy. If the ambition of the campaign's advocates was relatively modest, their success was dramatic. Never again would lawmakers accept a revenue system based principally on consumption taxes. Indeed, over the next several decades, they would go on to reject proposals for broad-based sales taxation, refusing to challenge the new orthodoxy of ability-based taxation. The 1916 debate over estate taxation was a pivotal moment in the history of progressive tax reform. And one with enduring results.
1 Andrew Carnegie, "Wealth," North American Review, June 1889, 653-664; Theodore Roosevelt, sixth annual message to Congress, Dec. 3, 1915, available through the American Presidency Project at http://www.presidency.ucsb.edu/ws/index.php?pid=29547.
2 Woodrow Wilson, third annual message to Congress, Dec. 7, 1915, available through the American Presidency Project at http://www.presidency.ucsb.edu/ws/index.php?pid=29556.
3 H.R. Rep. No. 64-922, at 1 (1916).
4 53 Cong. Rec. 11, 10582 (1916).
5 H. Rep. 64-922, supra note 3, at 3.
6 Cong. Rec., supra note 4, at 10532.
7 H. Rep. 64-922, supra note 3, at 3.
8 For an introduction to Seligman's thought -- and an argument stressing the importance of efforts to balance the fiscal burden in political debates of the early 20th century -- see Ajay K. Mehrotra, "Edwin R.A. Seligman and the Beginnings of the U.S. Income Tax," Tax Notes, Nov. 14, 2005, p. 933, Doc 2005-22080, 2005 TNT 219-43 ; also available in the "Readings" section of the Tax History Project's Web site at http://www.taxhistory.org.
9 53 Cong. Rec. 15, 1499 (1916).
10 Cong. Rec., supra note 4, at 10594.
11 Cong. Rec., supra note 9, at 1499, 1542.
12 Sidney Ratner, Taxation and Democracy in America (New York: John Wiley and Sons, 1967), 354-355. On the desirability of a federalized estate tax, with some portion of the revenue refunded to the states, see Edwin R.A. Seligman, "A National Inheritance Tax," New Republic, Mar. 25, 1916, 212-214.
13 Cong. Rec., supra note 4, at 10602.
14 Cong. Rec., supra note 9, at 2030.
15 Cong. Rec., supra note 4, at 10731.
16 Id. at 10583.
17 Id. at 10652.
18 Id. at 10655.
19 Harold B. Hinton, Cordell Hull: A Biography (Garden City, N.Y.: Doubleday, 1942), 143.
20 Cordell Hull, The Memoirs of Cordell Hull, vol. 1 (New York: Macmillan, 1948), 58.
21 Edwin R.A. Seligman, Progressive Taxation in Theory and Practice, in Publications of the American Economic Association 9, no. 1-2 (1894), 321.
22 Report of the Special Tax Commission of the State of New York, 1907, 10-12, quoted in Seligman, supra note 21, at 322.
23 Thomas S. Adams, "Effect of Income and Inheritance Taxes on the Distribution of Wealth," 5 Am. Econ. Rev. 234, 242-243 (1915). See also Max West, "The Theory of the Inheritance Tax," Political Science Quarterly, vol. 8, no. 3. (September 1893), 426-444 at 437.
24 Adams, supra note 23, at 243.
25 53 Cong. Rec. 13, 13297 (1916).
26 Ratner, supra note 12, at 357-358.
END OF FOOTNOTES
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