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What's the Estate Tax Supposed to Do, Anyway?

The estate tax has a vital but prosaic role: it redistributes the tax burden. By focusing on the lucky souls at the top of the economic ladder, it makes the tax system fairer and more progressive -- a significant political achievement.
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As Congress stands poised to gut the estate tax at the behest of a Democratic president, let's try a short quiz: We all know the estate tax is a vital instrument of redistributive taxation. But what, exactly, is it supposed to be redistributing?

If you said wealth, you're right. For almost a hundred years, the estate tax has been striving to limit the concentration of wealth, power, and privilege. Which is quite a job for any tax, if you ask me.

But the estate tax also has a second, more prosaic role: it redistributes the tax burden. By focusing on the lucky souls at the top of the economic ladder, it makes the tax system fairer and more progressive -- another vital achievement.

This distinction is more than semantic. It's profoundly political. Over the past century, arguments about shifting the tax burden have done better among voters than calls to remake society along more egalitarian lines. As defenders of this beleaguered levy get ready for a last stand in the House of Representatives, they should take a page from history and make the case for fairness.

Their fair share

Historically, proponents of the estate tax have usually framed their arguments in terms of revenue needs and tax fairness. In 1916, for instance, when Congress created the tax, supporters stressed its role in balancing tax burdens.

"It is the first successful attempt to make wealth bear its just and proportionate burden of taxation," declared Rep. William Cox. Rep. Cordell Hull, who sponsored the levy, agreed. "I have no disposition to tax wealth unnecessarily or unjustly," he recalled in his memoirs, "but I do believe that the wealth of the country should bear its just share of the burden of taxation and that it should not be permitted to shirk that duty."

Occasionally, champions of the estate tax have endorsed broader social goals. During the 1930s, for instance, President Franklin Roosevelt made wealth redistribution central to his case for raising estate taxes. "Great accumulations of wealth cannot be justified on the basis of personal and family security," he declared in 1935. "In the last analysis such accumulations amount to the perpetuation of great and undesirable concentration of control in a relatively few individuals over the employment and welfare of many, many others."

Stirring stuff. And generally successful in the short term: Roosevelt convinced Congress to boost estate taxes substantially in the so-called Wealth Tax Act of 1935. But even FDR had trouble making the argument stick. In a 1939 poll, only 35 percent of Americans said they were certain that government should use taxes to take from the rich and give to the poor; 54 percent were pretty sure it shouldn't.

Roosevelt, no fool, knew which way the wind was blowing. For the rest of his presidency - and especially during the crucial years of World War II -- he defended progressive tax reform as a way to bring fairness to the tax system, not society in general.

In the decades since, most defenders of the estate tax have followed suit. When, that is, they bothered to defend the estate tax at all. For many, many years, it was one of the least controversial elements of the tax system.

But supporters also failed to raise exemption levels in step with inflation. As a result, the tax moved gradually down the economic ladder, ensnaring not just plutocrats but professionals too (at least the highly compensated ones). That failure to modernize the tax gave Republicans their opening, lending plausibility to claims that it burdened small businesses and family farms.

The Kyl-Obama Plan

Which brings us to this week's tragedy, when Democrats seem poised to truly gut the estate levy at the behest of President Obama. The tax package pending in the House of Representatives would raise the estate tax exemption from the $1 million currently on the books for 2011 to fully $5 million. At the same time, it would cut the rate from 55 percent to just 35 percent.

Compared to current law, the proposed changes would lose $68 billion over ten years. In Washington terms, that's not chump change, but it's not big money either. And compared to the plan supported by most Democrats, it's only a little more irresponsible: the Democratic alternative would still lose $33 billion.

Still, some reform is necessary and certainly expedient. Inattention, after all, is what made the estate tax vulnerable in the first place. But the current "compromise" would leave the estate tax a shell. Left untouched, the tax would only burden 2 percent of estates. Under the pending plan, it would reach just 0.2 percent of estates., according to the Tax Policy Center.

Nonetheless, the end game seems clear. After a lot of huffing and puffing, Democrats will give Obama what he needs. Republicans, meanwhile, will clap themselves on the back, thinking they've dodged a bullet.

Snatching Victory

But progressives should not lose heart. There's a modicum of good news in this deal. By preserving the outline of a genuine estate tax, the Obama compromise leaves the door open to second thoughts. It's much easier to raise a tax than create one. When revenue needs make tax hikes unavoidable, the estate tax will still be on the books, blessed with a remarkably low rate just begging to be raised.

And when that time comes -- and it surely will, given the nation's long-term fiscal outlook - progressives should take their cue from Cordell Hull and focus their arguments on burden sharing rather than social reform.

Joseph J. Thorndike is director of the Tax History Project at Tax Analysts and a Visiting Scholar in History at the University of Virginia.