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.
Death usually means some money for Uncle Sam and the rest for the real relatives (and unrelated heirs). As a result, when John D. Rockefeller died in 1937, his heirs received 30% of his fortune and the U.S. government got the rest. During March, 2010, however, Dan Duncan, the 74th richest man in the world died and his family inherited everything because the estate tax had lapsed for just one year.
Rewind to 1889.
Supporting an inheritance tax, Andrew Carnegie said, “I would as soon leave to my son a curse as the almighty dollar…” Bequeath great wealth to charity? “No,” because a disappointed family will probably contest the decision. Instead, according to Carnegie, a man of wealth should, …”set an example of modest…living…, provide moderately [for] those dependent upon him…” and then use the money for the good of the people. How? Invest in universities, free libraries, hospitals, parks, meeting halls, and church buildings. Saying that it created liars, Carnegie opposed an income tax.
Do you agree with Andrew Carnegie?
The Economic Lesson
In descending order, the individual income tax, the payroll tax (social security/Medicare), and the corporate income generate most of the U.S. government’s revenue. Typically, even though rates fluctuate with new legislation, still, revenue tends not to exceed 19% of GDP.
Reading J.D. Salinger’s obituary, I thought about the estate tax and then beyond to a Mark Helprin interview last June.
Have you wondered, with the 2010 suspension of the estate tax (called by some the “Throw Momma From the Train Act”), what J.D. Salinger’s heirs will avoid paying? Then, though, as Floyd Norris discusses in his blog, how would his heirs and the government value the unpublished manuscripts he left if Congress creates a retroactive tax?
Writer Mark Helprin discussed the topic last summer when he suggested that copyrights should be extended. He says it is unreasonable that heirs should receive tangible property but cannot have similar rights to literary property.
The Economic Life:
Taxation can be perceived as wealth redistribution. The question we as a society face is how much we want to redistribute wealth from those who have more to those with less.