PrintDecember 18, 2010
Why Did Teddy Roosevelt Support the Death Tax?
What's so awful about the "death tax"? If you were to listen to various tax devotees, such as Michael Graetz, co-author of Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth, you would think that present-day resentment of a tax on money passed from one generation to the next is an irrational and novel thing. After all, Graetz points out, whenever given a chance Theodore Roosevelt championed the estate tax as a means to keep wealth from being concentrated in dynastic fortunes. That's the Republican Teddy Roosevelt, the guy on Mount Rushmore, the guy who charged up San Juan Hill. An early progressive, TR may ahve sought to shape society along utopian lines.
Those who oppose the estate tax, dubbing it the "death tax" instead, point out that such a tax represents a level of double taxation. If a person amasses a fortune of $100 million through excellence at baseball, success in business, or dumb luck in the stock market, that money will have already been subjected to income taxes. In our progressive tax system, the wealthiest people will have paid the highest percentage of their income already. Presently, the top marginal rate stands at 35%, meaning that our $100-million case study had to earn some $158 million in order to pay the tax bill. Having paid that bill, our example's heirs would, starting in January when the estate tax returns, get to pocket a cool $1 million tax-free. They would then hand over 55% of the remaining $99 million, or $54,450,000. In other words, after paying income and estate taxes, our millionaire's heirs will get to keep about $45 million of grandpa's $158-million earnings. That's ignoring state and local income taxes, sales taxes, personal property and real estate taxes, and any other "revenue enhancement" our various layers of government can imagine.
Put like that, a person can understand the resentment, but what about Teddy Roosevelt? Why would the great Bull Moose have promoted a tax that seems so obviously excessive? Well, maybe he didn't.
When the estate tax first appeared in 1916, permanent income taxes were only three years old. Those moguls of the pre-World War I era, the Carnegies, Mellons, and the like, had gathered their fortunes in a world largely free from income tax. Yes, income taxes (and estate taxes) had been imposed during times of war, but during most of American history, the millionaire could earn money without concern for tax implications.
And what did the first income tax look like? It took 1% out of incomes over $3,000 per year. That would be the equivalent of one percent from an income of around $60,000 today. If you made half a million dollars in 1913, today's equivalent of about $10 million, then you'd be socked with an additional tax of 6% on the amount over half a million. I'm sure the people back in 1913 resented that little scoop out of their income. By today's standards, these people got off very easily.
The 1916 estate tax kicked in at $50,000 (about a million in 2010 dollars) and claimed a whopping 1% of the estate. At $5 million, the equivalent of $100 million today, the rate rose to 10%. Again, I would not feel good about handing over one out of ten of grandma's millions, but by any stretch of the imagination, the 1916 rates were a piece of cake compared to the 55% lug that kicks back in on January 1.
This takes us back to Teddy Roosevelt. Did the former president really think that a 1% cut of significant fortunes and a 10% cut of the Vanderbilt strata would seriously redistribute wealth? Would it keep dynastic fortunes from traveling down the ages? Obviously, by itself, it wouldn't. Let's take a comparative look at a billion-dollar fortune being subjected to both the 1916 and 2011 estate taxes. For simplicity purposes, we'll assume that the fortune passes to a single heir at thirty-year intervals. In 1916, a billion dollars would have been reduced to $890 million in the first transfer; in 2011, it would shrink to 450 million. If we assume that the resulting fortune would increase by 5% per year after taxes, the 1916 fortune would swell to $3.6 billion after thirty years. The 2011 fortune would grow to $1.8 billion. Either of these seems like a splendid sum of money, but when we factor in inflation and the possibility that our billionaire might want to spend or give away some of the money, we see that the 2011 estate tax keeps the fortune at bay. When the second generation passes the funds over, the 1916 rules leave $3.2 billion; the 2011 rules leave $835 million. Clearly, the 1916 rules did not prevent the concentration of family wealth to the same extent that the 2011 rates do. And to be fair, I should note that 2011's 55% rate looks generous compared to the top rate of 77% seen during the 1920s through 1940s.
The real question to be asked on this matter is not whether we refer to inheritance tax, estate tax, or death tax. The real question should be, "Whose money is it?" From a less individualistic perspective, we could ask, "Who can do the most good with this money?"
Let's imagine that Howard Hughes, who inherited his family fortune in 1924 just before the rates headed dramatically higher, had lost 77% of that fortune to the IRS. Would Hughes Tool have survived? Would the groundbreaking films have been made? Would the airplanes have flown?
Andrew Carnegie did not wait until his death to put his fortune to good use. Like Bill Gates and Warren Buffet today, Carnegie did not put his trust in the government to use his money wisely.
And had the IRS received that enormous check, where would the Hughes legacy be? What good would be done by the Carnegie or Gates or Buffet fortunes had they been thrown into the government slush fund? That money would have paid some government bills and been gone. That's the problem with the inheritance/estate/death tax: it takes significant financial resources that can be used by clever people to create and grow things that bureaucrats would never imagine. It takes those resources and drops them into the insatiable maw of government spending.
In Wendell Berry's novel Jayber Crow, a farming family has kept a stand of fine timber intact for decades, knowing that, when needed, it will be there. Financial resources, in the hands of private citizens, are like those trees. Once they're cut down and sold, they're gone forever.
That's what is so awful about the death tax.
