There was no more frustrating feature of George W. Bush’s tax cut enacted last month than what happened with the death tax. Those who fought to get rid of this unfair extraction are hopping mad — and they should be. The new law phases out the death tax from its current 55 percent rate down to 45 percent in 2009, then repeals the entire tax in 2010, then reinstates this onerous tax at 55 percent in 2011.
This is a tax that penalizes people for saving; has compliance costs that are about has high as the dollar amount collected; and does so much damage to the economy that it may actually lose overall revenues for the government. Americans generally know all of this.
That’s why roughly 2 of every 3 Americans wants this tax abolished pronto even though very few will pay this tax directly themselves.
The left-wing supporters of the death tax understand full well that they and their redistributionist cause have survived to fight another day.
One of the leading pro-death tax groups, called “Responsible Wealth,” declares gleefully on its web site: “The Battle Isn’t Over Yet.”
Unfortunately, they are right. The Republicans have seized defeat out of the jaws of victory. This is a major disappointment for taxpayer advocates, because the pro-death tax forces had been circled and were defenseless with no means to avoid the slaughter. The votes were there in Congress to kill the tax immediately and forever, if the Republicans in the House and Senate and President Bush would have simply pressed their case and carried on the fight, rather than agreeing to a hollow victory.
Over the whole history of the United States, the estate tax has been a Dracula tax — it simply will not stay dead. The first U.S. death tax was enacted in 1797 to provide funding for the military but was soon abolished.
Other death taxes, enacted during the Civil and Spanish-American wars, were also quickly repealed — but always subsequently resurrected.
Our modern day death tax was enacted in 1916. Proponents, including the pro-tax group, Responsible Wealth, contend that entrepreneurs a century ago were responsible for its enactment. “Then as now,” the group claims, “wealthy people took the lead in arguing for estate taxes.” Responsible Wealth cites industrialist Andrew Carnegie’s book, “Wealth,” which opposes the creation of vast estates. This interpretation of the tax’s origin overlooks the key role of another group: the socialist movement.
In fact, the continued existence of the death tax in the current federal tax code is one of the most visible sign of the influence of the socialist movement on the U.S. policy scene. Karl Marx was also a huge proponent of the wealth tax approach to private property confiscation and in fact, the wealth or estate tax was one of the leading policy recommendations contained in the “Communist Manifesto.”
The writer Edward Bellamy was another leading socialist in his day. In his book, “Looking Backward,” Bellamy describes a future utopia, where there is “no private property to speak of, no disputes between citizens over business relations, no real estate to divide or debts to collect.” Nor is there inherited wealth. Bellamy writes, “When we made the nation the sole trustee of the wealth of the people, and guaranteed to all abundant maintenance, on the one hand abolishing want, and on the other checking the accumulation of riches, we cut this root, and the poison tree that overshadowed your society withered, like Jonah’s gourd, in a day.” This book about a utopian socialism is actually cited by Responsible Wealth as presenting a persuasive case for the death tax.
The first reference to the death tax in a U.S. political platform occurred in 1892; the Socialist Labor party demanded a “progressive income tax and tax on inheritances; the smaller incomes to be exempt.” The party repeated its demand in 1896. By 1904, the Socialist Party platform pledged to “work in both the economic and the political struggle” for the “graduated taxation of incomes, inheritances, franchises and land values.”
Milton and Rose Friedman observed, “In our opinion, the Socialist Party was the most influential party in the United States in the first decades of the 20th century.” The Socialists held the balance-of-power in nearly 225 congressional elections, including 120 lost by Democrats, and had 1,000-plus officeholders at their peak. In 1912, Democrat Wilson lost 22 electoral votes in states where Socialist Eugene V. Debs held the balance-of-power. Wilson’s signing of the death tax prior to the 1916 election was a pragmatic attempt to co-opt the Socialist vote by taking over a key component of the socialist agenda.
The death tax was originally set at below 10 percent, but it quickly climbed to well more than 50 percent a confiscatory rate that somehow remains in place today. It remains in place despite the fact that 92 percent of Americans who are rich today earned their wealth, they did not inherit it.
Reps. Dick Armey, Texas Republican, and Pat Toomey, Pennsylvania Republican,have introduced legislation to make the death tax repeal in 2010 permanent. But for now, the death tax is still robbing our graves and this perpetual fight between free-market capitalists and left-leaning income redistributors rages on.
One thing is for sure, until this tax is entirely extinguished with a stake driven firmly through its heart, the legacy of the socialist movement in America will continue to be a central feature of the American tax system.
Stephen Moore is president of the Club for Growth. Greg Kaza is executive director of the Arkansas Policy Foundation.