With an estimated 99.8 percent of all estates exempt from taxes, the Congressional Budget Office reports that in 2014, estate tax revenues only amounted to $19 billion. Considering that the IRS collected $1.4 trillion in income taxes that same year, it is not hard to imagine a reversed, but equally sustainable, system: What if a $5.43 million exemption applied to accumulated income, and no such exemption existed for estates? Making a change like this revenue-neutral would require some working out, but it would send a message that the country promotes equal opportunity, and distributes rewards based on contribution and work.
Today, estates represent an immense potential tax base, yet there is little political will to tap them. This is not some American tradition but in fact a departure from it: As The Economist has noted, America’s early state governments threw out laws that encouraged the accumulation of wealth over generations, following the example Thomas Jefferson set with the Virginia legislature in 1777. They got rid of the English legal precedents of primogeniture and entail—under which titles and property were inherited in their entirety by the oldest male heir—forcing families to divvy up their wealth among more children. Jefferson cited Adam Smith, who called the idea that people should control their estates well beyond their death “manifestly absurd.” Jefferson insisted that “the earth belongs in usufruct to the living.”
Similarly, Alexis de Tocqueville identified the breaking-up of estates as one of the cornerstones of the young country’s success. “What is most important for democracy is not that great fortunes should not exist,” he wrote, “but that great fortunes should not remain in the same hands. In that way there are rich men, but they do not form a class.”
The estate tax that exists today was enacted in 1916. In the years since, the tax’s critics—who, unsurprisingly, tend to be wealthier than its proponents—have cleverly labeled it a “death tax.” But when did it come to carry a negative connotation? Bill Gates Sr., a philanthropist and Bill Jr.’s father, co-authored a book arguing for a strong estate tax called Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes. Gates attributes some of the resistance to the estate tax to a well-funded public-relations campaign and lobbying efforts prior to 2001.
That was the year when a major tax-reduction bill was passed and signed by President George W. Bush. This legislation, the Economic Growth and Tax Relief Reconciliation Act of 2001, decreased income-tax rates, lowered capital-gains taxes, and allowed for a phasing-out of the estate tax with yearly increases in the exemption, along with a yearly lowering of the top estate-tax rates. Gates describes how a myriad of wealthy families have funded efforts to fight the estate tax in advance of this legislation, including members of the families behind Mars Chocolate, Gallo wines, L.L. Bean, and Campbell Soup. Meanwhile, Gates writes, Frank Blethen, a fourth-generation publisher of The Seattle Times who vehemently opposed the estate tax, encouraged other independent newspapers to run editorials advocating repeal.