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Financial Planning > Tax Planning

The Proud History Of Estate Taxes

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Despite strong pressure from Republican leadership in the Senate and urging from the White House, the attempt to permanently repeal the estate tax has failed for now. But, if all reports from D.C. are true, it is an issue that will not die.

Perhaps it is appropriate to again review this issue and reiterate why such taxes are essential to assuring that economic power in this country continues to be broadly based.

Alexander Hamilton, major author of the “Federalist Papers” and our countrys first Secretary of the Treasury, maintained that it was not in the best interests of the United States to create a “leisure class.” Apparently many of todays wealthiest families share Hamiltons view. Working through the “committee for responsible wealth,” many of the nations most prominent billionaires are urging that the tax be retained with some relief at the lower end.

The central thrust of their argument is the same thought that Andrew Carnegie espoused in his day–that “surplus wealth” should be used for the common good through trusts and foundations rather than pass to heirs.

Walter Savage Landor, writing in “Imaginary Conversations,” said, “Wherever there is excessive wealth, there is also in the train of it excessive poverty, as, where the sun is brightest the shade is deepest.”

The period of our history where economic power in this country was vested in a relatively few powerful families is one of the darkest chapters through which we passed. Given the current scenario of abuses at the corporate level, I am not convinced that the greed and lust for power of the 1890s is not alive and well today.

Of the arguments that have been put forth to support repeal, most are specious and will not stand up to scrutiny. There have not been mass forced sales of farms or small businesses to pay estate taxes as claimed by some. In fact, I read one article that claimed there was not a single documented case in recent years. It is always well to remember that it has been estimated that 75% of all major wealth is the result of appreciation that has never been taxed, and never will be if the estate tax is repealed.

Perhaps a more reasoned approach to this issue can be obtained by taking another look at the history of this tax. Simultaneous with the founding of our country, trade relations with France became strained and Barbary Pirates were harassing of our shipping in the Mediterranean. It was obvious if we were to survive and engage in world trade, we needed a strong navy. The first death tax was levied from 1797 to 1802 to provide for that navy and we survived.

From 1862 to 1870, an inheritance tax was imposed to pay for the costs associated with the Civil War. The first estate tax was levied in 1898 to cover the expenses of the Spanish-American War. The tax was repealed in 1902 over the vigorous objections of President Theodore Roosevelt. Recognizing the growing problems created by the undue concentration of wealth at that time (some called it the age of Robber Barons), Roosevelt, in 1902, proposed a progressive tax on all lifetime gifts and death transfers to limit the amount that one individual could transfer to another. The legislation died in Congress.

Our present estate tax was enacted in 1916 to pay for World War One. It was, and is, a progressive tax on both lifetime transfers and transfers at death. Since then, the tax has been tweaked to raise money during the Depression and to fight World War Two. Tax reform acts in the 1970s and 1980s made changes to reflect the need for extended payments and to cover some of the more complex aspects of estate planning.

Despite the long and important history of the present tax, the Joint Committee on Taxation in its “Description and Analysis of Tax Proposals Relating to Savings and Investment,” reported that less than 2% of decedents over the 15-year period prior to 1997 were subject to the estate tax. In 1995, the total estate tax returns filed were 31,584 and not all were required to pay the tax.

The effectiveness of propaganda supporting repeal can be demonstrated in the high percentage of people who think their lifes effort will be confiscated at death. Michael Graetz explains this as a product of American optimism. If so, then our optimism has replaced good judgment.

But perhaps there is a solution to all this that may help cure one of the nations critical problems. I suppose it could be argued that we are currently in a War on Terrorism and no one knows how long it will last or how expensive it will be. Considering the historical use of estate tax revenues, it might seem logical to now use them for the present war. But the problem with this is that when the war is over and the financial pressure gone, the subject of repeal will rise again.

Perhaps a better solution would be to commit the revenue to a more noble cause and one just as critical. The leadership at the Association for Advanced Life Underwriting has proposed an idea that I believe has great merit. They suggest that estate tax revenues be permanently committed to the Social Security trust funds. With all the concern over funding retirement for the boomers in a few years, I am sure the Social Security system is going to need all the help it can get.

I am a firm believer in the adage, “One should never tear down a fence until you know why it was put there.” Estate taxes were put there to serve America in times of critical need. Social Security is in critical, if not desperate need. We do not need the leisure class feared by Hamilton, or the concentration of wealth that worried Theodore Roosevelt.

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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