CHAPTER XIV

INHERITANCE TAXES l

161. The Inheritance Tax Is Not of Recent Origin. A
somewhat detailed study of the theory, advantages, and
defects of the inheritance tax is warranted, because so
much importance has been attached to it in recent years,
and because this form of revenue is likely to be of impor-
tance in the future. To the uninitiated, who come upon
its extended discussion in comparatively recent years, this
principle appears as a modern development in fiscal policy.
The great increase in the need for revenue has led fiscal
authorities to attach more importance to taxing inheri-
tances, while the piling up and bequeathing of enormous
fortunes has led many to look upon the principle as a
valuable social weapon. Principally because it can be
used to encourage a social equality, and because it acts
as a means for a fairer distribution of tax burdens, the
inheritance tax has found its most extensive development
in the more democratic countries, such as Great Britain,
Switzerland, and the United States.

Tax in Ancient States. It is an error, however, to con-
sider the taxation of inheritances as belonging exclusively
to modern fiscal systems. As a matter of fact, some form
of levy upon the transfer of property at death dates back
as far as authentic records can be obtained. Some traces of
the use of the principle can be found as early as 2000 B.C.
It appears that a well-defined system of levies on property

1 The material in this chapter is much the same as that contained in an
article by the author in The Annals of the American Academy of Political
and Social Science for May, 1921,



310 OUTLINES OF PUBLIC FINANCE

successions existed in Egypt for a number of years before
the Christian era. The Emperor Augustus, moreover,
used a tax on property transfers very early after the birth
of Christ. He desired to provide a fund for the pensioning
of old soldiers and proposed a tax of one twentieth upon
inheritances, which he secured by the consent of the
Senate only after he threatened to use the direct land tax.
No distinction was made between bequests to relatives
and strangers, and only a low exemption was allowed.
Some of the later rulers somewhat alleviated the strin-
gency of the law by the recognition of family ties and
dependency, exempting in consequence some of the more
direct bequests, such as between mother, father, and
children. Still later these exemptions were removed, and
the law was made even more stringent than it had been
at first, but was again modified before the tax was given
up, probably somewhere near the beginning of the fourth
century.

Tax in Middle Ages. A semblance of the modern in-
heritance tax is found in the system of reliefs which existed
in the Middle Ages. At the death of a tenant, the right
of the tenancy to pass to his heir was recognized, yet some
exaction was made by the landlord. As long as the amount
could be voluntarily determined by the landlord, extor-
tionate demands were often made, which practice led to
the establishment of uniform rates by legislation. These
duties were found in a number of countries, as well as
another class of duties which was levied upon the transfer
of property other than land. After the breakdown of the
feudal system these duties of course went out of existence.
Sporadic attempts were made, however, to use some form
of succession levy, especially in the countries on the
Continent, which finally resulted in the formulation of
permanent inheritance tax laws. It is readily compre-
hended, therefore, that inheritance taxes are not products
of modern minds, but hare had a long course of develop^
ment,



INHERITANCE TAXES 311

162. The Inheritance Tax Was Much Discussed by
Early Economists. In their discussion of ways and means
for obtaining revenue, the early writers on fiscal subjects
generally gave space to a consideration of inheritance
taxes. Adam Smith opposed the tax because it did not
conform to his canons of taxation, and increased the
transfer of capital, which was the basis of productive labor
of individuals, to the use of the state, the most of whose
activities were unproductive. He did admit, however,
that when property descended to others than dependents,
it might be taxed without a feeling of any very great
inconvenience. Ricardo objected to the tax on the ground
that it was a capital levy. His reasoning was that if a
man paid a tax of $100 out of a bequest of $1,000, he
would have no inclination to save the amount of the tax,
but would consider the bequest as one of $900. If, how-
ever, he were allowed the bequest of $1,000, and then
were assessed the amount of the tax on some objects of
consumption, he would retrench expenditures in order to
save the necessary amount.

Views of Mill and Bentham. While many other early
writers found objection to the principle, John Stuart Mill
and Jeremy Bentham were advocates of inheritance taxes
in the extreme. Mill took the view that inheritances,
other than to near relatives, should be abolished; that the
amount which could be received by bequest should be
strictly limited, and that rates should be progressive. He
denied any right of inheritance, and contended that both
individuals and society would be better off if no one were
freed from the necessity of working by the receipt of a
large fortune.

Bentham favored the plan because he thought it would
produce revenue with the minimum of sacrifice. He ex-
pressed his position in the form of a paradoxical question :
"What is that mode of supply, of which the twentieth
part is a tax, while the whole would be no tax and would
not be felt by anybody?" He contended that this situa-



312 OUTLINES OF PUBLIC FINANCE

tion would be accomplished if the power of bequest of
persons having no direct heirs were regulated, and that
all cases of intestacy descent of property when no will
had been made be abolished, except in an immediate
family. A person who had expected no inheritance would
feel no burden if the state took the entire amount. If,
however, an estate had been given to him, and then a
part taken for taxes, the burden at once would be ap-
parent. These opinions are but representative of many
expressed by early writers on economic topics.

163. The Inheritance Tax Is Widely Advocated at Pres-
ent. It is not necessary, however, to turn to an earlier
age to find a defense of the inheritance tax. Much of the
earlier opposition has broken down, and ardent supporters
may be found among all classes among those interested
in social as well as fiscal reform, and among the rich as
well as among the poor. It is but natural that those who
are socialistically inclined should be its ardent champions,
for the tax easily can be made a method for the reduction
of large fortunes. Those who are concerned with securing
a more equal distribution of the tax burden in accordance
with the ability to pay, and who are only secondarily in-
terested in social consequences, have come to look upon
the inheritance tax as a valuable addition to the fiscal
system. Fiscal authorities, both Federal and state, in the
severe pressure for funds which has continually arisen
within recent years, have been glad to turn to this pre-
viously little used source of revenue to replenish an empty
treasury. Still others sanction the use of a severe taxa-
tion of inheritances, not primarily for an equalization of
wealth per se, nor as a source of revenue, but because of
the good effects which a limitation of fortunes would have
upon the recipients.

Views of Andrew Carnegie.* An interesting example of
an advocate of the extreme use of inheritance taxes to

1 Mr. Carnegie's views on inheritances are elaborated in his book, Th c
Gospel of Wealth.



INHERITANCE TAXES 313

secure the result just indicated, was the late Andrew Car-
negie. He held, in his numerous speeches and writings,
that it was a mark of misguided affection for parents to
leave great fortunes to their children, especially to sons.
To do so deadens the talents and energies, and results in
a less useful life than would otherwise develop. A man,
he thought, should be prevented from handicapping his
son by bestowing great wealth upon him. He believed,
further, that the proper use of great riches was to benefit
society from which they had been taken. If, then, men
persisted in amassing fortunes without making a just
social return, the state should make sure of its proper
share by the use of an inheritance tax. He advocated a
steeply progressive tax to as high as 50 per cent, and
believed that a large part of the needed revenue could be
secured from this source, with the feeling of very little
burden.

Labor organizations of various kinds, as might be ex-
pected, as well as the members of the more radical political
parties, have been enthusiastic supporters of this principle.
Theodore Roosevelt is an example of a national states-
man and leader who thoroughly believed in the justice
of the tax.

164. Some Justify the Inheritance Tax as a Regulator
of Fortunes. There is no part of any fiscal system which
has had so many and diverse arguments advanced in its
favor as a tax upon the transfer of property at death.
These range all the way from arguments of a purely social
nature to those justifying the principle as a part of the
fiscal machinery. The social arguments, for the most
part, look to the limitation of fortunes, and follow closely
the ideas of Bentham and Carnegie.

Extension of Escheat. One common argument for the
inheritance tax is known as the extension of escheat. This
is based upon the ground that there is no natural right of
inheritance that the state has gone a long way in allow-
ing an individual to have control over property while



314 OUTLINES OF PUBLIC FINANCE

alive, but would be going entirely too far to allow him to
have control over it after death. The disposition of
property after death, then, is really a state function, and
it is a matter for the state to decide to what extent prop-
erty shall be inherited. Under this theory there is little
basis for the justification of collateral inheritance 1 while it
becomes the duty of the state to decide to what extent, and
under what conditions, direct inheritance shall be permitted.

Diffusion of Wealth. The argument which has branded
the inheritance tax as " Socialistic " has been what is
usually known as the diffusion of wealth argument that
is, the use of the principle to break up large fortunes.
Many proposals have been made, and some laws have
been enacted with this idea in mind. It has been proposed,
for example, to fix a maximum amount beyond which
inheritance would not be permitted, while the rate of
progression which has been used more or less reflects the
limitation which is intended to be put upon inherited
fortunes. The use of the tax for this purpose need not,
however, be condemned as a Socialistic measure, for it
may be desirable to limit the size of fortunes for other
reasons than the mere diffusion or equalization of wealth.

If, as Mr. Carnegie contended, the moral, social, and
economic efficiency of the state is impaired because the
succession of large fortunes destroys the initiative of the
recipient, then it becomes the duty of the state to impose
regulation. Inheritance taxes, from this viewpoint, would
properly come under the jurisdiction of the police power
when levied by the commonwealths. Since, moreover,
the right of inheritance is not considered a natural right,
but one granted by the state, any limitation which the
state may see fit to impose must be considered justifiable,
and not an encroachment on the right of private property.

1 By a collateral inheritance is meant the devolution of property to non-
relatives and distant relatives, as cousins, nephews, and nieces. A direct
inheritance refers to one in the immediate family, as between husband,
wife, son, daughter, and sometimes brother and sister.



INHERITANCE TAXES 315

165. The Benefit Theory Has Been Applied to Taxing
Inheritances. Some advocates of the inheritance tax
claim that it is only because of the action of the state
that, in the first place, there is an accumulation of wealth,
and in the second place, that a transmission of this wealth
is allowed; consequently, the state is justified in exacting
a part of the wealth of the decedent.

Expense of Service. The mere transmission of wealth
at death inevitably places some burden upon the state,
with an accompanying expense. Court officials must be
maintained for the purpose of making the transfer in a
proper manner, and of guaranteeing the title to property.
While these are maintained primarily for the benefit of
the public, yet at the same time a special benefit is con-
ferred for which it is perfectly proper to make some exac-
tion. From the nature of the case, and in comparison
with other similar court services, the payment required
would be no more than the cost of rendering the service.
This would be a fee payment and could scarcely be classed
as a tax. The payment would necessarily be small and
there would be no place for progressive, nor even pro-
portionate rates. A uniform charge for a bequest of any
size would be the most logical, since the cost to the
court would vary but little with the size of the estate.
This principle is the chief consideration in some of our
states in their laws relating to the levies placed upon
inheritances.

Value of Service. A more strict application of the
benefit theory is found when it is claimed that a state
should exact an amount based upon the value of its serv-
ice to the recipient of the transfer. The argument goes
back to the principle that there is no natural right to
transfer property after death. Since this is true, the state
has conferred a benefit upon the recipient by establishing
the institution of inheritance, and thereby making it pos-
sible for the transfer to exist. A valuable benefit has
thereby been conferred, and payment should be exacted

for this benefit. The state furthermore looks after the
safe transfer of the property, and places the title securely
in the hands of the recipient, which enhances the value of
the benefit. The difficulty with this argument is the diffi-
culty with the whole theory of benefit as a base for taxes.
To measure accurately the value of these benefits in each
particular case would be impossible, and the justice of the
tax would then vary according to the accuracy of the
measurement.