For historians, it's an occupational hazard: While others seek guidance in the wisdom of past generations (the Founders, Abraham Lincoln, Franklin Roosevelt, insert favorite wise man here), historians are trained for cynicism. Spend enough time poking around the pantheon of American politics, and the heroes start to look a little less heroic -- and a lot more human.
Still, there's wisdom to be found in history. Let's call it perspective. History can't tell us WWJD (What would Jefferson do?). But it can sometimes tell us why we have a dilemma in the first place. Find yourself in the middle of a bad situation? History can explain how you got there.
These thoughts came to mind while reading a blog post by James Downie of The New Republic. Downie argued that the estate tax might reasonably be allowed to return to its pre-2001 glory, replete with a $1 million exemption and a 55 percent top rate. To those who insist that people with just a measly million are too poor to soak with a rich man's tax, Downie offered nothing but scorn. "It's silly to pretend that people 'get to $1 million pretty easily,'" Downie said (lifting a quotation from Richard Behrendt, an estate planner and former IRS attorney, published in a recent USA Today article). "In 2003, the last time the threshold was set at $1 million, only 1.24 percent of estates were eligible -- the 98th percentile of all American families."
Fair enough. If getting to a million were really all that easy, then more people would make it. It's also worth noting that the lineal forebear of today's estate tax (or more precisely, yesterday's and possibly tomorrow's estate tax, since we don't have one right now) made room for mere millionaires. When first enacted in 1916, this rich man's burden featured a $50,000 exemption -- worth about a cool million in today's dollars, according to Treasury's David Joulfaian.1
How Much Is a Lot?
Or maybe not. Calculated differently, $50,000 in 1916 translates to $14.4 million today. As the fine folks at Measuringworth.com explain, it all depends on how you do the math. Comparing the exemption to changes in the Consumer Price Index yields a current value of $1,010,000. Calculating it relative to GDP per capita (a better measure of economic status, according to the site's authors) yields $4,760,000. Calculated as a relative share of total GDP (the best measure of raw economic power), it comes to $14,400,000.2
There's a case to be made for each of these figures. To some degree, the "right" answer depends on the question you're asking. As a political historian, I'm interested in arguments about the estate tax, most of which hinge on distributional equity and social utility. In 1916 arguments about the distribution of the tax burden were central to adoption of the tax.3 But in every era, arguments about the distribution of wealth have also swirled around the levy. When trying to make sense of these arguments, issues of status and economic power are pivotal, so I prefer measures that get to the heart of them.
But what do these calculations of present worth really tell us? Not much. We get a sense of what the estate tax meant to those who created it in 1916. But what did they know? Their estate tax -- like every other tax ever passed by Congress -- was just a cobbled-together compromise with no inherent virtue other than its ability to command a majority.
And whatever wisdom the taxers of 1916 might have possessed was rendered obsolete the next year. The original tax, replete with its big, fat exemption, imposed rates of 1 to 10 percent. The top bracket began at $5 million -- $1.4 billion in today's dollars. But the next year, lawmakers raised the bottom rate to 2 percent, the top rate to 25 percent, and the top bracket to $10 million.
Subsequent years brought further change. In 1924 and 1925, the top rate jumped all the way to 40 percent, despite the efforts of Treasury Secretary Andrew Mellon to repeal the levy altogether. In 1926, Uncle Andy got the rate cut to 20 percent and the exemption doubled to $100,000. Then the fisc got run over by the Depression bus, and New Dealers lowered the exemption back to $50,000 and then to $40,000. They also raised the top rate to 60 percent in 1934 and 70 percent in 1935. But the top bracket began at $50 million -- $9.7 billion in Warren Buffett terms.
The point is this: We can't learn much from the original estate tax because it didn't stay original for very long. It was a new tax in 1916, and lawmakers were just beginning the process of figuring out what sort of tax it should be. In fact, it took them more than 20 years to settle on an answer. But settle they did. In the 1940s, lawmakers pushed the top rate to 77 percent and the exemption to $60,000. And there the numbers stood for almost 35 years. As the IRS notes in its recent history of the tax, "After 1948, the Congressional Record remained relatively free of references to the estate tax and the entire transfer tax system until the enactment of the Tax Reform Act (TRA) of 1976."4
That's a nice way of saying that Congress ignored the estate tax. And that inattention made for good politics, at least for a while. Gradually, however, the value of the exemption eroded. The number of estates paying the tax remained low -- under 2 percent -- for most of the period, but in the 1960s and 1970s it began to creep upward until it reached almost 8 percent in 1976.
Congress responded to the growing scope of the estate tax with a flurry of changes that lasted a decade or so. The overall effect of these revisions was to push the number of taxable estates back below 2 percent (apparently the sweet spot for estate tax viability). It remained below 2 percent until the last few years of the 20th century.
When trying to explain the unpopularity of the estate tax in recent decades, I've always been partial to the eroding exemption argument. The scope of any tax is crucial to its political viability. Not always in the same way, mind you. Some taxes, like the income tax, need to be broad to remain popular. Other taxes, like the estate tax, need to be narrow to avoid the voters' wrath.
The estate tax was best tolerated when it was someone else's problem. Keep the vast majority exempt, and complaints are manageable. Let the base expand a bit -- even a little bit, it turns out -- and a still small but very vocal new constituency for repeal (including people who wouldn't conceivably pay the tax but still think they might) will develop.
To be sure, the 1990s movement for estate tax repeal drew strength from many political and economic factors (the best analysis of which can be found in Death by a Thousand Cuts, by Michael Graetz and Ian Shapiro). But the eroding exemption was certainly a key element in the mix.
But back to the original question: What can history teach us about today's estate tax? It certainly can't provide specific guidance about how to structure the tax. While estate tax foes routinely invoke the original $50,000 exemption (and its $14 million descendant) when arguing for a smaller (or extinguished) estate tax, that number holds no special meaning in the current debate.5 It didn't even hold special meaning for lawmakers of the 1920s, who ditched it within a decade.
Indeed, if we're going to do some historical cherry-picking to bolster contemporary arguments about the estate tax, we might just as well regard the New Deal figures -- including its special billionaire rates -- as foundational.
But in fact, we should stop looking for foundational moments altogether. Trying to imbue a particular legislative compromise with historic moral authority is a fool's errand. Instead we should look for trends that might explain how and why the estate tax operates.
The history of the estate tax is marked by short periods of change followed by long episodes of not-so-salutary neglect. The great inattention of the postwar era sparked estate tax reform in 1976. By 1984, things had settled down again, and the beginning of the second inattention helped drive the move for repeal in 2001.
So that's how we got to this sad, sad point in the policy process, replete with lapsed levies and the looming prospect of retroactive taxation. What a mess.
If policymakers want a lesson from tax history, it's this: Pay attention to the estate tax, even when voters aren't. Complacency is no virtue, at least if you want to keep a tax viable. Old taxes might be good taxes, as the hoary saying goes. But old taxes become dead taxes when lawmakers stop watching.
1 David Joulfaian, "The Federal Estate Tax: History, Law, and Economics," July 27, 2010, pp. 6-7, available at http://ssrn.com/abstract=1579829.
2 Samuel H. Williamson, "Seven Ways to Compute the Relative Value of a U.S. Dollar Amount, 1790 to Present," MeasuringWorth, 2010, available at http://www.measuringworth.com/uscompare/.
4 Darien B. Jacobson, Brian G. Raub, and Barry W. Johnson, "The Estate Tax: Ninety Years and Counting," available at http://www.irs.gov/pub/irs-soi/ninetyestate.pdf.
5 Gary Robbin, "Estate Taxes: An Historical Perspective," Heritage Foundation, Jan. 16, 2004, available at http://www.heritage.org/Research/Reports/2004/01/Estate-Taxes-An-Historical-Perspective.
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