Death taxes, and political arguments over such taxes, rival death itself as one of life’s certainties. In 21st Century America, of course, the federal estate tax is a perennial political hot potato in most national elections.

But didn’t we just resolve the federal estate tax issue by making the last round “permanent?”   Not so – the debate has just been resurrected.   Professor Paul L. Caron, author of the very popular tax blog (the Tax Prof Blog) along with Professor James R. Repetti, have published an article destined to become much read and debated called “Occupy the Tax Code: Using the Estate Tax to Reduce Inequality and Spur Economic Growth.”[1]   In this article, they use empirical data to demonstrate that inherited wealth reduces economic growth.

Profs. Caron and Repetti bring a new look at a very old argument:   that estate taxes serve a useful social good.   The history of death taxes and the arguments about them stretch across continents, indeed stretch across centuries:

Death taxes are ancient taxes.   They were known to the Egyptians, as well as the Romans and Greeks.   Even the complaints against them have a venerable pedigree.   Pliny the Younger provides as good an example as any.   He is among the earliest critics who have left us summaries of their complaints.   Pliny eloquently argued that a tax on the shares of direct heirs “was an ‘unnatural’ tax, augmenting the grief and sorrow of the bereaved.”   Almost two thousand years later the same argument was still being heard.   For in 1898 Senator Allen forcefully inquired whether it was right “to stand with the widow and the children at the grave side of a dead father to collect a tax,” and then he sympathetically referred to the widow “in weeds” and the children “in tears.”[2]

In the United States, the first imposition of a federal death tax was designed to raise funds to build the Navy in anticipation of war.[3]   Early iterations of the tax were imposed due to war or the threat of war and ceased to exist with the termination of hostilities.[4]   Essentially the federal death tax came into being to fund these wars or other financial crises because of Congress’ aversion to debt.[5]

In the 20th Century, however, the basis for the tax shifted somewhat to social policy.   Teddy Roosevelt put it in its most radical terms:   “He recommended ‘the adoption of some such scheme as that of a progressive tax on all fortunes, beyond a certain amount, either given in life or devised or bequeathed upon death to any individual – a tax so framed as to put it out of the power of the owner of these enormous fortunes to hand on more than a certain amount to any one individual… Our aim is to recognize that Lincoln pointed out: The fact that there are some respects in which men are obviously not equal; but also to insist that there should be an equality of self-respect and of mutual respect, an equality of rights before the law, and at least an approximate equality in the conditions under which each man obtains the chance to show the stuff that is in him when compared to his fellows.'”[6]   In other words, the trust-busting Teddy Roosevelt said inherited wealth was not only squeezing out opportunity for all by concentrating the wealth of the nation in the hands of a few, but was also retarding the self-reliance of those inheriting large fortunes:

Many years ago John Stuart Mill made a proposal which we would do well to borrow and revise.   The estate tax should fix a limit on “what anyone may acquire by the mere favour of others without any exercise of his faculties.”   If “he desires any further accession of fortune, he shall work for it.”   Or in Theodore Roosevelt’s exuberant language, he should “show the stuff that is in him when compared with his fellows.”   When inheritance does much more, it gravely and inexcusably augments inequality of opportunity.   It then becomes hereditary economic power, which is no more tenable than hereditary political power.   As Roger Babson so succinctly put it, “I do not see why the control of ten or twenty thousand men should descend by inheritance through the death of some manufacturer, any more than the control of a city or a State should pass on to the son of a mayor or a governor.”   If we genuinely believe in a substantial equality of opportunity, then we should cheerfully desire an estate tax which truly levels.   We cannot have one unless we also have the other.[7]

The case against an estate tax, even one limited to a tax on large wealth, focuses on the disincentives such a tax would have on the entrepreneurial spirit.   A tax is seen as necessarily having a depressing effect:

The Under-Secretary of the Treasury felt compelled to make a grave prediction.   “We shall have more golf players,” he said, “and fewer Henry Fords and Thomas Edisons.”   “Are we not fooling ourselves,” he asked, “when we think we can defeat economic laws?”   And then he promptly answers that retribution was certain.   “We are now selling our seed grain and will have nothing to sow when next Spring comes.”[8]

The case for outright repeal of the federal death tax appeared to win with the convergence of the election of President George W. Bush and a Republican Congress.   Instead of seeking “stand-alone” estate tax repeal, however, Congress wrapped such repeal into its larger ambition of broad-based tax reduction.   The Bill as finally passed (the Economic Growth and Tax Relief Reconciliation Act of 2001 or “EGTRRA”) effectuated “repeal” for one year only – in 2010 – with the old law reappearing for year 2011 and thereafter.

The estate tax reduction scheme under EGTRRA, which first phased in higher exceptions, then pushed for total repeal for one year, then reverted both to the old law, is a legislative curiosity.   The purported reason for this structure was that it was necessary because of the arcane reconciliation process in the U.S. Senate.   Yet estate tax repeal, through a stand-alone Bill could probably become law without tying it to an omnibus bill, thus avoiding the reduction issues and, in the scheme of things, the lost revenue from total repeal could have been absorbed easily elsewhere.   Why, then, tie estate tax repeal to the omnibus Bill thereby forcing the phase out/repeal/resurrection mode?   One interesting, albeit quite cynical, theory is that the omni-bus approach benefits the politicians.   A popular view of modern politics is that “special interests” dictate their constituent members’ policies onto the legislators.   Yet this view may underestimate the manipulation of the system by Congress in its Members’ pursuit of campaign funds. [9]

As noted, the 2001 Act impacted the estate tax as well as a broad band of other taxes. The highpoints of that Act related to the estate and gift tax, however, were dramatic by themselves. First, the Act increased the threshold at which estates were exposed to the tax from $675,000 (the threshold as of enactment of the Act) to $1 Million immediately with increases jumping up to $3.5 Million for decedents dying in 2009. Moreover, for decedents dying in 2010 there was no federal estate tax. The trade-off for no tax in 2010 was a “carry-over” basis for the assets transferred at death (instead of a basic step-up allowance).[10] Although technically a “unified” system of tax, the gift tax did not track the phase-out of the estate tax but stayed at a $1 Million threshold. The generation-skipping tax exemption more or less tracked the estate tax phase-out. During the phase-out period, the effective tax rate dropped until it came to rest at 45% for 2007 and thereafter.

The 2001 Tax Act was structured to sunset in 2011. Thus, estate tax repeal was only slated to be repealed for one year. Thereafter, the pre-2001 Tax Act regime resumed. In December 2010, Congress worked out a compromise that “extended” much of the 2001 Tax Act until the end of 2012, including the estate and gift tax provisions. The threshold amount was raised to $5 Million (indexed), and the estates of decedents dying in 2010 could elect the no-tax-carry-over-basis regime of the 2001 Act. The estate tax and the gift tax were unified, thereby permitting lifetime gifts of $5 Million. The generation-skipping tax threshold matched the estate tax threshold and both were indexed for inflation. Additionally, any unused estate tax credit of a deceased spouse became “portable.” All of these changes, like the extension of the income tax rates of the 2001 Tax Act expired at the end of 2012 making planning a guessing game for 2011 and 2012.   This extension and modification of the 2001 Tax Act has now been made “permanent.”

Now the estate tax has returned to a “permanent” law with a threshold for federal purposes of $5 Million, indexed (which is $5.25 Million for 2013).   “Permanent,” of course, means until Congress looks at it again.   Professor Caron’s and Professor Repetti’s article, especially given the wide readership, and influence, of Tax Prof Blog may be the first significant event in resurrecting the debate.   Given its history, however, there should have been no real doubt that the debate ever went away.


[1] 40 Pepp. L. Rev. 101 (2013).   The Internet has pushed seemingly arcane tax debate into the mainstream.   Professor Caron’s blog ( ranks high in traffic and called a “must read” blog by the Wall Street Journal.

[2] Louis Eisenstein, “The Rise and Decline of the Estate Tax”, 11 Tax L. Rev. 223 (1955).   This article is one of the best, if not the best, treatment of the history of the federal estate tax.   To the extent that Congress has institutional memory (a dubious proposition), it forms part of that canon: this article was prepared at the request of the Subcommittee on Tax Policy of the Joint Committee on the Economic Report in the 84th Congress (1955).

[3] David Frederick, “Historical Lessons from the Life and Death of the Federal Estate Tax”, 49 Am. J. Legal History, 197, 199 (2007) (“The first incarnation of the federal death tax was passed in 1797 to raise revenue for the Undeclared War with France.”).

[4] Id. 200 (“The central historical lesson from these forerunners to the modern estate tax is simple: a death tax can be an effective and relatively uncontroverted tool for raising substantial revenue in a time of financial crisis, especially war.”

[5] Jeffrey A. Cooper, “Ghosts of 1932: The Lost History of Estate and Gift Taxation”, 9 Fla. Rev. 875, 889 (2010): “Members of Congress were unified in the belief that a balanced budget was an essential step towards recovery.   Speaker of the House Garner repeatedly advocated that theory, urging his colleagues that ‘the worst taxes you could possibly levy would be better than no taxes at all….’ When Garner implored any member of the House who didn’t wish to balance the budget to stand up and be recognized, not a single Congressman stood.   Across the Capital, members of the Senate Committee on Finance unanimously agreed that the budget had to be balanced without additional borrowing.   Excess debt had devastated the economies of other nations, and the Congress simply would not follow a similar course.”

[6] Eisenstein at 228-9.

[7] Eisenstein, 258-9.   Mr. Eisenstein clearly was a proponent of the federal estate tax.   This passage is essentially his closing remarks to the Congressional Subcommittee in 1955.

[8] Eisenstein, 233.   The quoted material is part of the debate over the 1924 Act, although it could easily be part of the Laffer/Reagan support for lowering taxes.   Interestingly, the 1924 Act sought to impose at 25% death tax on estates exceeding $10 Million in 1924 dollars!   The Secretary of Treasury at the time, Andrew Mellon, saw the 25% tax as “very heavy.”   Mr. Eisenstein comments: “Those who are unilaterally opposed to the leveling of wealth would cheerfully welcome a top rate of 25 percent on net estates over $10 Million.”   Eisenstein at 232.

[9] Edward J. McCaffery and Linda R. Cohen, “Shakedown at Gucci Gulch: The New Logic of Collective Action”, 84 N.C. L. Rev. 1159 (2006); Edward J. McCaffery, “Through the Looking Glass: The Politics of Estate Tax Reform”, 35 ACTEC J. 121 (2009); “A deeper, more reflective look at the landscape of the estate tax shows that something important has held steady throughout the years (of tax “reform”).   It’s one of the oldest professions: making money.   Money is at the root of all estate tax reform.   The key, however, is to consider not the government’s money, for the gift and estate taxes have long been small changes at best in the federal fisc, but rather the politician’s money.   Estate tax repeal or reform debates have been good for the business of being an elected official.”

[10] Another “trade-off” was the decoupling of the piggy-back state estate tax. Many states reacted by adopting a decoupled state estate tax. In Maryland, a Maryland estate tax is imposed at a threshold of $1 Million.