Mt. Rushmore and a
History of the Estate Tax
by Jim Grote

Reprinted from the June 2000 issue of Planned Giving Today. Copyright © 2000. All rights reserved.

It is ironic in a country as devoted to individual liberty and free enterprise as ours that the most ardent promoters of a federal estate tax have been some of our fiercest patriots and richest capitalists: Thomas Paine, Andrew Carnegie, Theodore Roosevelt and Warren Buffet to name a few. Reviewing the thinking of these four men can only add clarity to the current ideological debate over estate tax reform. One might think of these gentlemen as comprising the Mount Rushmore of the estate tax edifice.

I emphasize the proponents of the estate tax in this brief history because the burden of proof is clearly on the proponents in the current debate (no one in their right mind wants to pay taxes).

Thomas Paine
Thomas Paine wrote the first bestseller in American history: a fiery pamphlet titled Common Sense that successfully encouraged a declaration of independence from England. The 150,000 copies published between January 1776 and July 1776 obviously had the intended effect.

The heart of Paine’s famous pamphlet is his withering criticism of hereditary government. This critique extends through all his works. “All hereditary government is in its nature tyranny.” “Hereditary succession . . . is in its nature an absurdity, because it is impossible to make wisdom hereditary. . . . History informs us that the son of Solomon was a fool.” “To the evil of monarchy we have added that of hereditary succession; and as the first is a degradation and lessening of ourselves, so the second . . . is an insult and an imposition on posterity.”

Later in life, Paine extended his critique of inherited political power to a critique of inherited economic power. (And this critique comes from a man who distrusted governments, disliked taxes and heartily approved of late night tea parties in Boston Harbor!) In two works, The Rights of Man and Agrarian Justice, Paine argued for the adoption of an inheritance tax in England to balance out the unfair distribution of “landed property.” For Paine, it was common sense that God gave “the Earth as an inheritance” to all of God’s children.

Paine proposed that an inheritance tax be used to create a national fund that (1) would give the sum of 15 pounds sterling to everyone turning 21 years old as a compensation for the loss of their “natural inheritance,” and (2) would give a sum of 10 pounds a year to every person over the age of 50 as an early version of Social Security.

Andrew Carnegie
While more suspicious of government intervention than Paine, Andrew Carnegie heartily endorsed estate taxes. The greater part of this steel magnate’s little magnum opus, The Gospel of Wealth, is devoted to a discussion of the three possible ways to dispose of wealth: (1) leave it to the families of decedents, (2) bequeath it for public purposes, and (3) administer it during one’s life. Carnegie abhorred the first, tolerated the second, and encouraged the third.

He asks his reader: “Why should men leave great fortunes to their children?” If it is from affection, then it is a misguided affection because “great sums bequeathed often work more for the injury than the good of the recipients.” The instances of public servants that live off their wealth in order to devote themselves to community service are rare. “It is not the welfare of the children, but family pride, which inspires these legacies.” 

Carnegie sharply distinguishes between the intended consequence of the inheritance tax (to create funds for public purposes) and its unintended consequence (private philanthropy). The unintended effect of the tax is “to induce the rich man to attend to the administration of wealth during his life.” Wealth is a trust fund for the community that helps the rich “dignify their own lives.”

According to Carnegie, philanthropy in a capitalist economy solves the problem of rich and poor alike. “The laws of accumulation will be left free, the laws of distribution free. Individualism will continue, but the millionaire will be but a trustee for the poor.” Carnegie concludes his famous tract with the words: “The man who dies rich dies disgraced.”

Carnegie practiced what he preached and gave away more than 90 percent of his estate before his death, leaving a modest trust fund for his family. He included a trust fund for Theodore Roosevelt’s widow because the government at the time made no provision for the wives of former presidents.

Theodore Roosevelt
Perhaps if Teddy had experienced Carnegie’s largesse he would have liked him more. Roosevelt admired Carnegie’s principles, but personally never got along well with him. And as for Thomas Paine, Roosevelt in typical hyperbole once referred to him as a “filthy little atheist.” (Paine was in fact a deist.) However, the Rough Rider was an avid proponent of Paine’s and Carnegie’s commitment to the inheritance tax.

Being a member of the equestrian class himself, Roosevelt paid dearly for his ideas. In a letter to Marshall Stinson, he lamented: “The great bulk of my social friends violently disagree with me on this point. Now I do not intend to refuse to associate with them because of this disagreement, nor yet to give up my own views on the subject.” 

Roosevelt formally proposed a federal inheritance tax in a message to Congress on December 4, 1906. His reasoning is quite different from Carnegie’s. Carnegie thought that the wealthy had a particular obligation to the poor. Roosevelt thought that the wealthy had a special obligation to the government itself. “The man of great wealth owes a peculiar obligation to the State, because he derives special advantages from the mere existence of government.” The wealthy individual needs to pay for the “protection” that the State provides for his or her property ¾ a military force that defends private property from foreign threat and a legal system/police force that protects private property from domestic theft. Roosevelt is echoing Adam Smith’s observation in the Wealth of Nations: “It is only under the shelter of the civil magistrate that the owner of valuable property can sleep a single night in security.”

Like all of the other members of the estate tax Mount Rushmore club, Roosevelt had no intentions of taxing small estates. “It is most desirable to encourage thrift and ambition, and a potent source of thrift and ambition is the desire on the part of the breadwinner to leave his children well off. This object can be attained by making the tax very small on moderate amounts of property.” Roosevelt’s estate tax was aimed at enormous fortunes like those of the Rockefellers, Vanderbilts, Astors and Morgans.

Warren Buffett
A contemporary person of enormous fortune, Warren Buffett, is perhaps the greatest defender of the inheritance tax today. His biographer, Roger Lowenstein, relates the following story about Buffet’s position. “Once, at a Q & A at Cap Cities, Buffett was asked how he would rewrite the tax code. ‘If I really could do it, it would shock you,’ he said. He’d tax the hell out of personal consumption – at progressively higher rates – and impose an ‘enormous’ inheritance tax.” 

On another occasion, when asked what the right amount to leave one’s children was, Buffett retorted, “a few hundred thousand ought to do it.” And he sticks to his word. He never gives his own children more than the gift exclusion amount every Christmas – currently $10,000 (indexed for inflation). And he plans on leaving the lion’s share of his fortune to the Buffett Foundation.

Buffett’s critique of inherited wealth is reminiscent of Thomas Paine’s acid-penned diatribes. To quote Buffet: “The DuPonts might believe themselves perceptive in observing the debilitating effects of food stamps for the poor, but were themselves living off a boundless supply of privately funded food stamps. . . . The idea that you get a lifetime of food stamps based on coming out of the right womb strikes at my idea of fairness.”

Like Paine, Buffet argues that if talent can’t be passed down to later generations, neither should money. “Warren explained that if he were the quarterback of the Nebraska football team it wouldn’t be fair of him to pass down the job to a son or daughter, and that he felt the same about his money.”

Over a two-hundred-year history, estate tax proponents have focused on two arguments: the fairness issue (inherited wealth is not fair to the poor) and the productivity issue (inherited wealth is not beneficial for its recipients). Recent empirical studies have confirmed the productivity argument. In The Millionaire Next Door, researchers Thomas Stanley and William Danko conclude that lifetime and testamentary family gifts are both a disincentive to work as well as a disincentive to save. Their findings show that the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more.

Furthermore, they find that the giving of such gifts (which the authors call “economic outpatient care”) is the single most significant factor that explains the lack of productivity among the adult children of the affluent. Their advice: teach your children to achieve, not just to consume. Stanley and Danko propose a declaration of independence for children of the affluent akin to the one Thomas Paine proposed for the American offspring of the British.

While ethical arguments and empirical studies may not prove ultimately persuasive in the current acrimonious debate over estate tax reform, at the very least the words of these patriots and capitalists provide an interesting historical perspective.

ESTATE TAX CHRONOLOGY

Jim Grote is director of development for Boys’ Haven in Louisville, Kentucky. He has taught business ethics at local universities in the Louisville area and has recently co-authored Clever as Serpents: Business Ethics and Office Politics (Liturgical Press, 1997). He is currently completing coursework for the CFP designation.

Reprints of this article are available from PGT (800-KALL-PGT).