Federal Estate Tax History: Temporary to Permanent

We often hear of “temporary taxes” so it may be of interest to learn that the federal estate and gift taxes started out as temporary measures. Before 1916, estate and gift taxes were implemented only during wartime on three occasions (1797, 1862, 1898) to increase military funding; the taxes were then repealed once the war effort concluded. In the lead-up to World War I, estate and gift taxes were enacted once again in 1916, but this time they were never repealed.

Writing in the Florida Tax Review, Professor Jeffrey Cooper writes that the 1916 enactment of estate and gift taxes “embodied loftier ambitions…becoming the core element of the nation’s increasingly progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. system as well as an element of social change designed to help reverse the inequitable division of wealth.”

Many social progressives saw America’s wealthy as a reservoir for potential taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. revenue. Rep. C. William Ramseyer (R-IA) pushed for heavy estate and gift taxation throughout the 1920s, although it wasn’t until 1932 that Congress adopted his ideas. That year, President Herbert Hoover signed into law a series of tax increases, which included an increase in the top estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. rate to 45% and cut the exemption level in half to $50,000. The new federal tax crowded out state-level estate taxes, a move Cooper describes as “a stunning reversal in the federal government’s attitude toward state tax regimes.”

Check out “The Ghosts of 1932: the Lost History of Estate and Gift Taxation” by Jeffery A. Cooper.

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