Partnership of State. Still another application of the
principle of benefit is found in the concept that the state
is a partner to the accumulation of wealth, and at the
death of the holder is entitled to its share, rather than
have the whole estate pass to some one who was only
remotely, or not at all, instrumental in its production.
Since it has been through the contributions of society that
large fortunes have grown, society has the right to demand
some return. This return may be secured through a con-
tribution to the government at the death of the holder
of the accumulated fortune. The difficulty of measure-
ment again presents itself in both of these cases. That
the state and society are instrumental in the accumulation
of individual wealth is an outstanding fact, and it is for
such intangible and immeasurable services that taxes in
general are partially levied. The principle of benefit, how-
ever, in tax levies, has been all but discarded.

1 66. The Inheritance Tax Conforms to Modern Fiscal
Concepts. A consideration of justice in taxation reveals
that, through a process of evolution, the most commonly
accepted principle for the levy of taxes is ability to pay,
with perhaps some consideration for the utilitarian prin-
ciple of the greatest good to the greatest number. To
students of fiscal problems, at least, a study of the inheri-
tance tax from this standpoint assumes the role of primary
importance. Many arguments have been advanced to
justify its place in fiscal systems, some of which are
worthy of review.



INHERITANCE TAXES 317

Payment of Back Taxes. One of the earlier contentions
for the tax was that it was but a collection of the taxes
which had not been paid while the fortune was in the
process of accumulation. This is commonly called the
back tax argument. The reasoning has been effective,
and not without foundation, because of the widespread
evasion of personal property taxes. In fact, this argu-
ment, perhaps, has been used more extensively than any
other in securing inheritance tax legislation. From the
point of pure justice, however, the reasoning cannot stand.
The evasion of taxes for different accumulations of wealth
has by no means been the same, and yet it is impossible
to attempt any discriminations on the basis of the extent
that taxes have been evaded. In this respect it is a tax
which falls alike upon the just and the unjust.

A slightly different argument, and one whose force is
somewhat diminished since the extensive introduction of
income taxation, is that the inheritance tax represents the
payment of a tax which should, in justice, have been
levied during the life of the decedent. It is simply ac-
cumulation of past property taxes, or income taxes, which
were never levied and which are collected at the most
convenient time when the individual has no more need
for his accumulations.

Conformity to Ability to Pay. The inheritance tax, in
large measure, conforms to the principle of ability to pay.
The payment of no other tax is perhaps so lightly felt.
It is paid after the property leaves the hands of the de-
cedent, and before it reaches those of the recipient. An
inheritance is a sudden and often unexpected receipt of
property. This additional property creates taxpaying
ability, but never is the ability so great as before the
property enters into the activities of the benefactor. In
a few cases, of course, this increase in ability fails to
materialize, as when a provident husband is taken from
a wife and dependent children. Such situations are the
exception, however, and can easily be cared for by the



318 OUTLINES OF. PUBLIC FINANCE

formulation of the law. The tax may be the source of
much revenue, with a minimum of sacrifice and a small
derangement of enterprise, and in this respect corresponds
to the modern utilitarian ideals of justice.

It is not surprising to find persons who are recognized
as conservative and yet who are ardent enthusiasts for
the inheritance tax. With the constant growth in the
functions of the state, the demands for revenue from the
old sources began to cut deeply, and some relief through
this little-used source is looked upon with pleasure. The
ease with which the burden is carried also makes a strong
appeal. Where to get the funds to carry on many desir-
able state functions is a pressing problem for which the
inheritance tax may be used as a partial solution. Many
believe, further, that a proper use of this tax would cure
much of the Socialistic agitation against wealth, since
there is very little unearned and idle wealth outside of
inheritances.

167. Many Objections to the Inheritance Tax Are Weak.
Blakemore and Bancroft, in their book on inheritance
taxes, say:

Firmly entrenched in a long and honorable history, with the en-
dorsement of the leading economists of ancient and modern times,
and approved by the present practice of most civilized governments,
he would be indeed brave who should attempt to attack the theory
or validity of any sane inheritance tax from an economic standpoint. 1

Professor Underwood has characterized the tax as follows :

A defense of the taxation of inheritances is superfluous. Its exist-
ence in all but a few of the civilized nations, and in all but a few of the
more backward states, is its chief defense. 2

Use as Penalty. These quotations indicate with what
esteem the inheritance tax is looked upon. Most of the
objections arise to some of the reasons for advocating the

1 Blakemore and Bancroft, Inheritance Taxes, p. 9.

2 J. H. Underwood, State and Lqcal Taxation, ypl. i. p. 211.,



INHERITANCE TAXES 319

tax, and because of difficulty in getting a proper adminis-
tration of the law. The use of the tax to penalize fortunes
which have been amassed in an illegitimate or fraudulent
manner, is open at once to the objection that there is no
way of differentiating the rate directly with the amount
of evil connected with securing the estate. Rates have
been made to vary with size of the bequest, and with the
degree of relationship, but neither of these is any indica-
tion of the manner by which the bequest originated.
Many small accumulations involve a larger amount of
dishonesty than many of the larger ones, and to penalize
them properly the rates would necessarily be regressive.
This, however, cannot be used as an objection to the tax,
but only to its use for a particular purpose.

Tax upon Savings. The objections that the tax will
discourage savings, and that it can be easily evaded by
gifts before death, really have little foundation. In fact,
few taxes tend to discourage savings as little as a tax
which does not come until after death. To most individ-
uals this appears as an event in the remote future, and a
tax at such a time will have little influence on present
property accumulations. It may, on the other hand, in
some cases, be an incentive to greater savings. To the
provident husband and father, who wishes to leave a
certain legacy to wife or children, the certainty of a tax
deduction will necessitate the accumulation of a larger
amount. Until a material change occurs in human nature,
the evasion of the tax by a distribution of property before
death will be insignificant. Most men wish to retain their
property while they are alive, and would rather the state
secure a part of it at death than give up the privilege of
retaining it in their possession while they are yet alive.

Tax of Varying Frequency. The objections that the
tax falls with varying frequency upon different accumula-
tions, and that it falls upon capital rather than upon
income, are no more serious. It is no doubt true that
transfers of property occur more frequently in some fam-



320 OUTLINES OF JPUBLIC FINANCE

ilies than in others, and when this situation exists a greater
percentage passes to the state. The burden, however, is
felt by a different individual with each levy of the tax
it falls upon a newly created ability to meet a tax burden.
Any hardship which may arise in the case of direct heirs
can be alleviated by a system of exemptions, or by allow-
ing a lapse of a certain number of years before a second
tax will be placed upon the same property.

That the burden falls upon capital is sometimes true,
and it often happens that the tax is met from current
income. As long as the receipts go into the general fund,
the demand for revenue from other sources is, to that
extent, lessened. What is paid in inheritance taxes does
not have to be collected from income or other taxes. A
larger amount of income can consequently be saved to
replace or add to the existing amount of capital. Any
tax will directly or indirectly fall upon the accumulation
of capital, and the inheritance tax errs here to no greater
extent than other taxes.

1 68. The Courts Have Strengthened the Position of the
Inheritance Tax. Hundreds of cases involving different
aspects of the inheritance tax have come before state and
Federal courts, and with but few exceptions the decisions
have given this form of revenue a firmer place in fiscal
systems. Nothing more will be attempted here than to
mention a few of the more important aspects of the tax
which have been established. 1

The constitutionality of this form of tax was formerly
an important question. In regard to this Ross says:

The constitutionality of the general principles of inheritance taxa-
tion has been affirmed by a multitude of decisions, so that the com-
petency of Congress, or the legislatures of the several states, to impose
an inheritance tax is universally conceded. The inherent justice and

1 Those who desire to go extensively into this aspect of the inheritance
tax will do well to consult the exhaustive work, Inheritance Taxes, by
Blakemore and Bancroft, and a similar work by P. V. Ross, Inheritance

Taxation.



INHERITANCE TAXES 321

wholesomeness of this system of taxation have so appealed to the
judicial mind that all the assaults that wealth, in its aversion to bear
its just burdens, has conceived, have proved unavailing. The general
doctrine that a state or the United States may raise revenue, and in
bountiful quantities, by levying tribute upon estates in the course of
transmission from decedents to their successors, is no longer doubted,
and most of the attacks now made upon inheritance taxation are upon
other than constitutional grounds. 1

The use of the tax by the Federal government has been
sanctioned by the courts on the ground that it is an
indirect or excise tax, and therefore does not have to fol-
low the rule of apportionment. It has been held further
that this comes under the taxing power of the Constitu-
tion, and is not undertaken for the purpose of regulating
the transmission of property. Since the state govern-
ments are governments of residual powers, there is no
restriction upon their use of the inheritance tax unless
the restriction be imposed by their own constitutions or
statutes. The use of progressive rates has been held not
to infringe upon the uniformity clause of many constitu-
tions that taxes shall be levied uniformly.

Inheritance Not a Natural Right. The courts of nearly
every state those of Massachusetts and Wisconsin being
the principal exceptions have held that the right of in-
heritance is not a natural right, but a privilege created
by the state, and subject to whatever regulations the state
may see fit to impose. It has been frequently held that
the tax is in the nature of an excise or franchise tax on the
succession of the property, and not on the property itself.
As one decision describes it,

it is not a tax upon the property or money bequeathed, but a diminu-
tion of the amount that otherwise would pass under the will, and
hence what the legatee really receives is not taxed at all. It is that
which is left after the tax has been taken off. It is imposed only once,
and that is before the legacy has reached the legatee and before it
has become his property. 2

1 P. V. Ross, Inheritance Taxation, p. 20.

2 7/i re Finncn, 19G Pa. St. 72.



322 OUTLINES OF PUBLIC FINANCE

Some courts have held, however, that the tax is on the
right to receive property rather than on the permission
or the right to transmit it.

Properly understood, it is not the right to transmit, but the right and
privilege to receive, that is taxed. ... It is clear that the right is dis-
tinct and separate from the property itself, and the state may tax
this right to receive property. 1

This brief summary of a particular line of decisions in-
dicates how firm a legal footing the inheritance tax has
attained. Litigation involving inheritance tax laws still
arises at times, but it seldom has to do with the consti-
tutionality or the power to impose such a tax. Many
technicalities have arisen, but none of the decisions have
vitiated the principle of inheritance taxes. As far as any
difficulties may have existed in the past from the legal
viewpoint, they may now be considered as practically
settled, and legislative bodies may feel themselves free to
make an extended use of the tax if they have not already
done so.

169. Problems Arise in Formulating Inheritance Tax
Laws. The principle of the inheritance tax may be con-
sidered just, and the conclusion may be drawn that it
unquestionably deserves a place in fiscal systems. This,
however, does not preclude the appearance of serious
problems in its adoption and use. Some of the questions
which immediately present themselves are: What shall be
considered an inheritance for the purpose of taxation?
What exemptions shall be allowed? What distinction
shall be made between near relatives, distant relatives,
and strangers? What rates shall be applied? Shall they
be progressive, and to what extent? What provisions
shall be used to prevent evasion, or to prevent the tax
from becoming unduly harsh upon particular estates?

Deductions and Exemptions. The first of these questions
raises the problem as to what should be deducted from the

1 State vs. Ferris, 53 Ohio St. 314.



INHERITANCE TAXES 323

gross amount of an estate in order to determine the
proper base for the levy of the tax. All just obligations
against the estate, for example, should be deducted. Other
deductions, however, which are sometimes permitted, are
not always so easily justified. Payments from life insur-
ance policies are usually not considered a part of an es-
tate, yet very frequently the payment of insurance premi-
ums is looked upon primarily as an investment with the
payment at death as the return. This is more true of the
extremely large policies, and no good reason appears for
allowing their deduction.

Closely connected with the proper deductions is the de-
termination of the amount of exemption to be allowed,
and differentiation according to the degree of relationship.
The soundest approach to a solution of these problems is
through an attempt to measure the relative abilities con-
ferred by the estate. In the case of a small amount left
to a widow or dependent child, there is evidently no in-
crease in ability to meet burdens, and consequently no
tax should be levied. Where the estate is large, however,
a tax may be levied, and no appreciable hardship will
result. In the case of distant relatives and strangers in
blood, the income is much more of an accidental nature,
and consequently less reason exists for allowing an exemp-
tion. The nature of the recipient has also, at times, justly
received consideration. Bequests to public, religious, and
charitable institutions, for example, have not been con-
sidered as subject to the inheritance tax.

Inheritance Tax Rates. The question of the rate which
shall be levied is also of importance. Shall it be low or
'high, proportional or progressive, and to what degree
should it vary for direct and collateral heirs? As to the
size of the rate, there has been absolutely no uniformity.
In some countries it has been high, and in others very
low, while many variations exist in parts of the same
country. The rate will be governed somewhat by the
purpose which the tax is designed to accomplish. If it is



324 OUTLINES OF PUBLIC FINANCE

designed to prevent the succession of large fortunes, the
rate will doubtless be high. If it is considered that the
state should exercise little interference with property
transfers, the rates will be low, as they will be, also, if it
is feared high rates will cause evasion.

There has been little question concerning the advis-
ability of progressive rates, but much discussion has arisen
over the steepness of the rate of progression, and how it
should be affected by relationship. Those who would
limit the amount of wealth which can be transferred to a
comparatively small amount, would have the rate steeply
progressive to 100 per cent. Others would have it only
moderately progressive on bequests to direct heirs, steeply
progressive on bequests to near relatives, and still more
steeply progressive on bequests to others.

It is important, too, when a progressive rate is levied,
whether the base for the levy be considered the estate, or
the individual share in the estate. Suppose that in an
estate of $100,000 one individual is to receive $10,000,
another $40,000, another $30,000, and still another $20,-
000. If the tax were a proportional rate of 5 per cent it
could make no difference whether it were levied upon the
entire estate or upon each individual share. If a progres-
sive scale were in force, say, with an exemption of $10,000,
a 5 per cent tax on amounts between $10,000 and $50,000,
and a 10 per cent tax on amounts between $50,000 and
$100,000, the difference between considering the estate,
and each individual share as the base, becomes at once
noticeable. Only a few attempts have been made to use
the size of the estate as the base for the tax, and these
have either been refused by the courts or given up for
other reasons.