From 1941 to 1976, for $10 million and more, the top federal estate tax rate was 77%.
Referring to new federal estate tax legislation (1916), Supreme Court Justice Louis Brandeis said, “We can have concentrated wealth in the hands of a few or we can have a democracy.”
Focusing on individual incentive, Calvin Coolidge told us that, “The wise…course to follow in taxation is …to create conditions under which everyone will have a better chance to be successful.”
Our bottom line: Which goal should federal estate tax legislation support?
- Raise revenue or…
- Preserve equality or…
- Encourage capital accumulation and economic growth.
You might want to read these articles, here and here, for current estate tax issues. This econlife post also looked at inheritance dilemmas.
The Economic Lesson
In the colonial U.S. colonial inheritance laws diverged considerably between North and South. Most northern colonies, except for New York and Rhode Island had multigeniture laws meaning that a family’s sons divided its affluence. By contrast, the South, New York and Rhode Island favored primogeniture whereby the oldest son received the inheritance. What about daughters? A dowry was her source of the family fortune.
One economist explains (p. 59) that in the South, the planters who controlled the legislatures wanted to retain larger plantations and the efficiencies of scale.
An Economic Question: Using cost/benefit analysis, explain why you would support a high or low approach to federal estate taxes.
Calvin Coolidge once said, “Nothing is easier than spending the public money. It does not appear to belong to anybody. The temptation is overwhelming to bestow it on somebody.”
The national debt did decrease when Coolidge was President. But then it rose during the 1930s and soared during WW II. John Steele Gordon’s Hamilton’s Blessing The Extraordinary Life and Times of the National Debt provides a wonderful history of the federal debt. While we owed $80,359,000 in 1792, in 1834 and 1835, the debt plunged to $38,000. A lot and a little, though are relative. Just like a $1 million loan is huge to someone earning $100,000 a year and tiny to a billionaire, so too does judging the size of our national debt relate to our nation’s wealth.
Where are we going with all of this? To the debt ceiling. The need to authorize the maximum amount we can borrow was established by Congress in 1917 through the Second Liberty Bond Act. Since 1962, the U.S. has raised its debt ceiling 75 times.
And now, probably by March 31, we have to do it again.
The Economic Lesson
Specifically defined, federal fiscal policy refers to taxing, spending, and borrowing. It involves the federal deficit which is the shortfall between annual spending and revenue. The federal debt is the total amount that the U.S. government owes.
The federal debt is held by the government and the public. For example, the Social Security Trust Fund has excess dollars which are not held in a lock box. Instead, the government loans the money to “itself.” As you know, you and I and other governments and businesses also can purchase the debt.