"Death Tax" Politics

INTRODUCTIONWhat I will say today is largely based on my book with Yale political scientist Ian Shapiro, Death by a Thousand Cuts: The Fight Over Taxing Inherited Wealth, and the events since 2010.1 Our book reveals-with far greater texture and nuance than I will be able to describe today-the drama and the politics of the bizarre 2001 repeal of the estate tax that was delayed and then effective only for one year in 2010.Taxes on inherited wealth have an ancient pedigree. Historians claim that Egypt imposed a tax on death-time transfers of wealth as early as 700 B.C. and that such a tax was levied in ancient Rome by Augustus Caesar. Beginning in 1797, our federal government began imposing such taxes in a variety of forms to fund wartime government revenue needs. Through the nineteenth century, these taxes were routinely repealed after the wartime exigencies had passed.The modern estate tax dates from 1916, when it was enacted to fund the first World War. Then, the exemption was $50,000, which based on the Consumer Price Index, would be over $1 million now. But if one looks instead to GDP per capita as a measure of relative wealth, that number translates to nearly $5 million today, pretty close to where the exemption currently stands. The top tax rate started off small at 10%, but that did not last long. By the 1920s, it reached 40%, despite the efforts of Treasury Secretary Andrew Mellon to re peal the levy. In 1926, the rate was cut to 20%, but by 1934 it was raised to 60% and was raised again in 1935 to 70%. The top bracket then did not hit, however, until estates reached $50 million-more than $1 billion today.During the 1940s, to finance the second World War, Congress increased the top rate to 77% and set the exemption at $60,000-where those numbers stood for nearly thirty-five years. By 1975, however, the inflation of the 1970s had eroded the exemption's value so that-instead of the 1% or 2% of decedents who had typically paid the tax each year-the tax hit 6.5% of that year's decedents and was estimated to apply to more than 10% in the next few years.I. THE ORIGINS OF THE FIGHT TO REPEAL THE ESTATE TAXAfter three decades of neglect, the Tax Reform Act of 1976 adopted a series of changes intended to return to about two percent those affected by the tax and to move toward a more structurally coherent tax, typically to be imposed once a generation without huge disparities due to decedents' patterns of lifetime giving. The 1976 legislation unified the gift and estate tax rate schedules, created one lifetime exemption level, expanded the marital deduction, and established a new tax on generation-skipping trusts. While the 1976 changes were expected to lose revenue in the short run, principally due to the increase in the size of tax-exempt estates from $60,000 to more than $175,000, this loss was to be offset in the long run by the new generation-skipping tax and the enactment of a carryover of basis for assets transferred at death. That carryover basis provision, however, never came into effect, having been delayed in 1978 and repealed in 1980 due to a combination of technical glitches and remarkably effective opposition-of which the most amusing were the testimony of former Harvard Law School Dean and Solicitor General Erwin Griswold about the difficulties of knowing the basis of each of the stamps in the extensive stamp collection he had accumulated since childhood, and the often hilarious lecturing of the Ways and Means Committee by a pig farmer about the difficulties of knowing the basis of each of his baby pigs.Not only did Congress repeal the carryover basis, but after Ronald Reagan took office in 1981, it phased in a further increase in the exemption level to $600,000 by 1987 (ten times its 1975 level), reduced the top rate from 70% to 50%, eliminated all limitations on the marital deduction, and increased from $3000 to $10,000 the amount which could be transferred annually to any donee free of gift tax. …