How We Got From Estate Tax To 'Death Tax'

Originally published on December 16, 2010 2:32 pm

Update at 9:15 a.m. ET: We've added some material from Morning Edition's report to this post, as well as an audio clip at the end and a little background on the current proposal.

One sticking point in the ongoing debate over taxes in Washington is the question of estate taxes.

Don Gonyea speaks with Columbia Law School's Michael Graetz (update at 10 a.m. ET: he's also a professor emeritus and lecturer at Yale law School) about the history of the tax for Morning Edition. Graetz is co-author of the book Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth.

Graetz tells Don that the estate tax in its current form was passed by Congress in 1916, just three years after the start of the federal income tax. (Update at 1 p.m. ET: While Graetz said "Teddy Roosevelt ... was the one who got it passed by the Congress," it didn't happen while Roosevelt was president. Roosevelt pushed for the tax, but he left office in 1909. We've corrected the language in this paragraph. We thank the commenters who called this to our attention.)

Roosevelt supported the tax as an instrument for enforcing the equality of opportunity in the U.S. by making it more difficult to pass great fortunes from one generation to another. Graetz says that the public accepted the tax as a another progressive-era reform.

"It was the beginning of the progressive era," says Graetz. "The income tax had just come in, in 1913. So, the public was very interested in progressive taxation and the estate tax was a natural piece of that kind of system."

Significant opposition first appeared in the 1920s when Andrew Mellon of Gulf Oil tried to repeal the estate tax during his stint as secretary of the Treasury during the Coolidge administration. Then, in the 1940s, Graetz says that opponents started labeling it the "death tax" in a bid to gain wider support for the repeal movement.

The movement never succeeded. But the 1990s saw a resurgence in efforts to kill the tax, with an emphasis on how it affects family farms and small businesses.

Graetz tells Gonyea, however, that the estate tax has rarely affected these types of small family operations and that opponents eventually fell back to the position of advocating a complete repeal.

In the end, Graetz says the debate over the tax seems more symbolic than anything else in light of the fact that it has never produced more than 2 percent of federal revenues in any individual year since World War II.

The estate tax was repealed for 2010. But if nothing happens, it will return in 2011 -- individuals who inherit estates valued at $1 million or more would see them taxed at a 55 percent rate; couples who receive estates of $2 million or more would also pay that rate.

But under the framework of the deal struck between President Obama and Congressional Republicans, the first $5 million of an estate would be exempt -- the rest would be taxed at 35 percent.

Many House Democrats would like to see a 45% tax on individuals' estates worth more than $3.5 million and couples' worth more than $7 million.

Still, "it is an issue that generates a lot more heat than the revenue it produces would require," says Graetz. "On the other hand, it is the most progressive tax in our tax system. And as a result, I think it plays a special role in terms of a number of people's views about a fair distribution of the tax burden."

Here's a clip from his conversation with Don:

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DON GONYEA, Host:

Thanks for joining us.

MICHAEL GRAETZ: Thank you for having me.

GONYEA: So remind us first about the history of the estate tax. How long have we had one?

GRAETZ: Well, we've had an estate tax since 1916 in its current form. So it's almost 100 years. Teddy Roosevelt was a great supporter of the estate tax, and he was the one who got it passed by the Congress.

GONYEA: And what was the original intent behind this tax?

GRAETZ: Well, Roosevelt was very much of the view that equality of opportunity was crucial to the American dream, and that the accumulation of large, dynastic wealth was not part of the American system. And so he wanted to break up large inheritances of wealth that would be passed from generation to generation.

GONYEA: And generally speaking, how did the public view that back then?

GRAETZ: Well, the public was accepting of it. It was the beginning of the Progressive Era. The income tax had just come in in 1913. So the public was very interested in progressive taxation and the estate tax was a natural piece of that kind of system.

GONYEA: And when did the idea of an estate tax start to become really controversial in this country?

GRAETZ: Well, it was controversial originally in the 1920s. Andrew Mellon of the Gulf Oil Company and the Mellon fortune was secretary of the Treasury during the Coolidge administration and tried to repeal it. But when the repeal forces began to muster their efforts to repeal the tax back into the '40s at least, they decided that labeling it a death tax instead of an inheritance tax or estate tax would produce a great deal of sympathy among the American people.

GONYEA: What happened in the 1990s, when we saw kind of a renewed push to repeal estate taxes?

GRAETZ: Well, the first thing Congress did was to try and exempt farms and small businesses from the tax in some fundamental way. This was a failed effort. It turns out that farms and small businesses have always accounted for a very small portion of the revenues from the tax but a great portion of the anxiety about the tax. And by the late '90s, the coalition that was pushing for estate tax change decided that repealing the tax was the only thing they could agree on.

GONYEA: So I spent a lot of time out on the campaign trail this year covering congressional races. A lot of candidates signed the No Death Tax Pledge, or the Repeal the Death Tax Pledge. But I would talk to voter after voter who would say they feared the estate tax would cause them to lose the family business, that a family farm might be lost because of it. Are those kinds of fears warranted?

GRAETZ: Well, they're not warranted by the vast majority of people. There are a handful - I think the estimate is about 100 family farms and small businesses - who would be affected by the tax. But mostly the estate tax applies to large holdings of portfolio wealth.

GONYEA: Do you feel like this topic takes up a disproportionate amount of the overall tax debate in this country?

GRAETZ: Well, it's certainly become a very important symbolic debate over an issue that has never produced more than one or two percent of federal revenues in any particular year, at least since the Second World War. It is an issue that generates a lot more heat than the revenue it produces would require. On the other hand, it is the most progressive tax in our tax system, and as a result I think it plays a special role in terms of a number of people's views about a fair distribution of the tax burden.

GONYEA: Thanks for joining us. Transcript provided by NPR, Copyright NPR.