Monday, July 11, 2005

History of the estate tax

As you follow the estate tax debate cited below, you'll need a crib sheet on the history of the tax. I pinched this one from the National Center for Policy Analysis.
The first estate tax -- enacted July 6, 1797, to help pay for naval rearmament -- required only the purchase of federal stamps for wills and estates, but was terminated four years later because the need for the revenue passed.

A direct tax on inheritances imposed in 1862 during the Civil War ranged from 0.75 percent to 5 percent.

The top rate was raised to 6 percent in 1864; but the tax was then abolished July 14, 1870.

In 1898, an estate tax with a top rate of 15 percent on estates over $1 million was imposed to pay for the Spanish-American War -- then repealed on April 12, 1902.

America's fourth estate tax, enacted in 1916, set a top rate of 10 percent on estates over $5 million. It was raised to 25 percent in 1917, but this rate applied only to estates over $10 million. Unlike its predecessors, it was not repealed after the war, although the top rate was dropped to 20 percent in 1926.

President Franklin Roosevelt raised the top rate to 60 percent in 1934, and to 70 percent in 1935. The same bill increased the top income tax rate to 75 percent and increased corporate taxes. Altogether the law raised just $250 million annually.

Today [2005] the estate tax goes up to 47 percent. It exists only to redistribute income, since its revenue yield is negligible. But estate planning makes the tax virtually voluntary, according to estate tax experts.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 19, 2000.

The original modern estate tax, circa 1916, sounds good to me. Ten percent rate, $5 million exemption.* Why can't Congress learn to leave well enough alone?

* February 2010 update. I miswrote here. The ten percent rate only kicked in at $5 million, but lower rates, starting at one percent, applied to estates over $50,000.


2 comments:

Jim Gust said...

Thanks for the useful history lesson.

Congress won't leave well enough alone because they have to run for re-election. Historically, nothing raises campaign funds like the prospect of tax changes, whether going up or coming down.

Although, that was before the internet ...

JLM said...

The obvious question, of course, is, What's today's equivalent of a $5,000,000 exemption back in 1916?

Answer: About $86,000,000.