A Wealth Tax: Taxing the Estates of the Living

INTRODUCTIONThe estate tax was first passed in 1916.1 Congress's concern in passing the estate tax is made clear in the House Committee report: "What taxes can be levied that will be sufficient to meet the needs of the Treasury and at the same time place the least burden upon the people who are compelled to pay them and keep the burden of taxation equitably distributed?"2Congress was looking to make the tax burden "equitable." At that time, over eighty-five percent of federal collections consisted of consumption taxes: import duties and various excise taxes including taxes on tobacco and liquor, and stamp taxes, including taxes on playing cards.3 The Committee report added that "[n]o civilized nation collects so large a part of its revenues through consumption taxes as does the United States, and it is conceded by all that such taxes bear most heavily upon those least able to pay them."4 After noting that Great Britain collected more than half of its revenue from income and inheritance taxes the Committee added:It is probable that no country in the world derives as much revenue per capita from its people through consumption taxes as does the United States. It is therefore deemed proper that, in meeting the extraordinary expenditures for the Army and Navy, our revenue system should be more evenly and equitably balanced and a larger portion of our necessary revenues collected from the incomes and inheritances of those deriving the most benefit and protection from the Government.5Congress's solution was an inheritance tax.6 But once the United States entered World War I, even the inheritance tax was not enough of a supplement to the consumption taxes to finance the war, and the United States turned to a much broader income tax than it imposed previously.7 It is worth appreciating, however, what led Congress to impose the estate tax in 1916. Congress, as expressed in the Committee report, was concerned with the equity of the tax system, and was looking for a way to impose the tax burden on "those deriving the most benefit and protection from the Government." 8With that in mind, it is fair to ask what Congress concluded best measures the benefits and protections derived from the government. Applying the tax to estates suggests that those who have died in the current year (or their heirs) best fit that category. But presumably Congress did not conclude that the best indicator of someone's benefiting from the government was his or her death in the current year. It would seem that Congress introduced the estate tax because it felt that those with large holdings of wealth had benefitted from protection from the government in the past. This suggests that the estate tax was a surrogate for a wealth tax.9 The visceral argument for a wealth tax remains to this day. When Warren Buffett criticizes our current system because he pays tax at a lower rate than his secretary, he may well be appealing to the idea that wealth, rather than income, is a fairer way of gauging who should support our government.10 The "Buffett Rule" is a tax on income, but it is phrased as a tax imposed on millionaires, a term traditionally based on wealth.11In any event, when the needs of government escalated dramatically with the entrance of the United States into World War I, Congress expanded the individual income tax that it had first passed in 1913.12 Presumably it relied on the income tax, rather than any form of wealth tax, because it appears much easier to measure income than to determine each individual's wealth.After more than one hundred years of experience with the income tax, that presumption is worth reexamining. Although it may still seem difficult to evaluate everyone's wealth, the growth in size and complexity of the federal income tax suggests that measuring income may not be as easy as was first believed. That is not to suggest that measuring wealth would be easy. The point of this exercise is to compare the complexity of the wealth tax with the complexity of our income tax. …