Articles

The Estate Tax—A Controversial History - by Vaughan de Kirby

The history of the estate tax is a fascinating one—or as fascinating as any discussion of taxes is likely to be, anyway. It is also invariably controversial. In fact, the history of the estate tax is nearly as controversial as the tax itself. Or, more accurately, the history of the estate tax is itself part of the controversy. Today’s opponents and proponents of the tax each have their own historical narrative that supports their argument. As we will see, both versions of the story capture important details about the estate tax’s history.

At the core of this historical dispute is the question of the tax’s purpose. Those who support the tax maintain that its intended function was always to prevent the accumulation of great economic power—power acquired by birth, not by merit. Supporters argue that inherited economic power—passed from generation to generation in the form of large estates—is no less inconsistent with America’s democratic ideals that inherited political power. They claim that the primary historical function of the estate tax was to ensure that an economic aristocracy was not allowed to develop.

Those who argue in favor of the tax point out that the contemporary estate tax was part of a wave of reforms during the progressive era (1900-1918). Having experienced the great economic disparities that resulted from America’s rapidly expanding industry, many Americans wanted to ensure that workers were protected and that economic expansion benefited the nation as a whole. The estate tax, supporters argue, was one such reform. On the basis of this historical argument, proponents conclude we should continue using the estate tax to achieve what it was created to do: redistribute wealth in a way that is consistent with American democratic values.

On the other side of the debate, those who seek to abolish the estate tax argue that its primary function was, not to redistribute wealth, but to generate revenue for the federal government, and only in times of great need. They argue that the estate tax was only implemented as a last resort, and that we should use it as such. Making this historical argument helps critics make the case that the estate tax should be abolished, and reinstated only when our federal government is in dire financial straits.

The critics of the estate tax also have a point: the earliest taxes on inheritances were apparently enacted to generate revenue. The first estate tax was established in 1797 to help fund America’s growing navy. The next estate tax was levied in 1862 in order to pay for the Civil War. The third was imposed in 1898 to pay for the Spanish-American War. Opponents of the tax point out that each of these estate taxes was abolished when there was no longer a need for revenue. They argue that the early history of the estate tax—or, we should say, “estate taxes”—supports the idea that the primary function was to generate revenue in times of need, rather than as a means of combating extreme economic inequality.

One of the most interesting facets of the debate about the history of the estate tax is that both sides share an important assumption: the purpose and function of the tax should remain the same. Supporters ague that the tax was always meant to promote economic democracy, and that it should continue to do so. Critics claim that the tax was always an emergency measure, and that we should only use it as such.

One might question the assumption that our efforts to determine it proper role should be so bound to the past. Our nation’s fundamental values may not have changed, but the America we live in is changing every day. Regardless of what we as a country decide about estate tax, it seems wise to keep one eye on where we’ve been, and the other on where we’re going.