Federal Taxation of Inheritance and Wealth Transfers

Abstract

For most of the 20th century and at key points throughout American history, the federal government has relied on estate and inheritance taxes as sources of funding. The modern transfer tax system, introduced in 1916, provides revenue to the federal government through taxes on transfers of property between living individuals—inter vivos transfers—as well as through a tax on transfers of property at death. Proponents of transfer taxation embrace it as both a “fair” source of revenue and an effective tool for preventing the concentration of wealth in the hands of a few powerful families. Opponents claim that transfer taxation creates a disincentive to accumulate capital and, thus, is detrimental to the growth of national productivity. Controversy over the role of inheritance in democratic society and the propriety of taxing property at death is not new but is rooted firmly in arguments that have raged since Western society emerged from its feudal foundations. Central to both historic and current debate is the divergent characterization of inheritance as either a “right” or a “privilege.” An understanding of these arguments, and of the history surrounding the development of the modern American transfer tax system, provides a foundation for evaluating current debates and proposals for changes to that system.

... in this world nothing is certain but death and taxes. —Benjamin Franklin