TAXATION PROBLEMS-II WHO SHOULD PAY THE TAXES ? BY DANIEL C. ROPER Former Commissioner of Internal Revenue INASMUCH as the Federal Estate Tax Law is yielding little more than $100,000,000 annually for the support of the Federal Government, it would seem that the call for its repeal would be confined to a few wealthy taxpayers. Upon several of such, it would make a costly exaction at death. While conceding this, it is strange that popular agitation should take the form of a vigorous opposition to the Estate Tax Law out of proportion to the demand for reduction in the Income Tax Law which is yielding nearly $2,000,000,000 per annum and is of vital interest to every citizen whose income exceeds $2,000 a year. Public comments on recent court decisions in general indicate a surprising misunderstanding of the present Federal Estate Tax Law as to the fundamental purpose of its passage and its retention in our taxing system. It is generally alleged that this method of assessing and collecting revenue is ephemeral, that it was invoked as a mere temporary expediency for war purposes and that Congress never intended that it should remain upon the statute books as a continuing method of raising revenue. There is no foundation for this allegation. The contrary is the truth. The amount which the Federal estate tax yields in money is not large enough to make it of very great value as a temporary expedient in time of war. At the time of the enactment of the September 8, 1916, statute, the modern Federal Estate Tax Law, the United States was not at war and in my opinion the several amended reënactments of that law have never been regarded by Congress as essentially emergency tax measures. On the contrary, it has been found highly necessary to discover methods of acquiring permanent revenue which would not impose too great a burden upon any. For one thing, in 1919 there had to be found some method of taxation to fill the gap created by the passage of the Eighteenth Amendment and the anticipated loss in revenue from the tax upon alcoholic liquors. This fact was in the mind of Congress when it retained this inheritance tax upon the statute books. Death duties in England have so long been an integral part of their tax system and have proven upon the whole so acceptable, as compared with the other forms of taxation, that no Englishman now questions the retention of them as a permanent part of the English system. England now has three forms of death duties which are imposed on every estate within certain limitations. The first one, a legacy duty with its several amendments enacted originally as long ago as the time of George III; the second, a product of the early Victorian period, the Gladstone Act, as amended, imposed a graduated tax upon both real estate and personal property based upon consanguinity; and the third, enacted as a part of the Finance Act of 1894, a typical transfer or mutation duty, levied on the passing of an estate from the deceased to the beneficiaries. It is this latter law which has been largely copied in America by the Federal Government and by some of the States. But revenue alone is not the sole reason for the enactment of the Federal death duty. There have been in this country for many years warm adherents to the belief that something must be done to discourage rapid growing fortunes, that some limit must be placed upon the possibility of a few individuals acquiring so much money that the Government itself is menaced by the power it brings them. Furthermore, death duties go far toward creating an offset against non-taxable investments of the creators of such estates. They, therefore, seem to return to the Government only a deferred payment and to supply a part of that vital income required for its support. As a happy medium between confiscatory legislation on the one hand and the uninterrupted and unrestricted right to accumulate millions on the other, death duties constitute an ideal compromise. There is no special importance in the rate, but it should not be too high. Personally, I believe that a maximum tax of 25 per cent. in the highest bracket is ample, but the last Congress in passing the Act of 1924 took the view that 40 per cent. was not unreasonable. Most of us are willing to defer to the wisdom of Congress in this matter since very few need have any anxiety about the tax in its maximum as applied to their own fortunes which must be transferred at the time of death. Comments upon the late decisions of the Supreme Court in the Frick group and other cases would indicate that there is a prevailing idea that in these decisions our highest legal authority has in some way indicated a resentment against this form of taxation. Nothing could be further from the truth. The Supreme Court in none of its decisions since the passage of the Act of September 8, 1916, has dealt in any broad way with the fundamental theory of death duties except in the case of New York Trust Company vs. Collector, referred to below. In notable cases, the Supreme Court has made epoch-marking decisions as to this or that phase of the estate tax law, as to this or that detail of its administration. In the case of Schwab vs. Doyle, 258 U. S., 522, and three kindred cases, it dealt with the retroactive features of the law with reference to transfers and other features when not clearly and expressly covered by the language of the Act. In Woodward's Executors vs. Collector, 256 U. S., 632, the matter of deducting from income tax the amount paid for Federal estate tax was resolved in favor of the taxpayer. In one of the Frick cases it dealt with the retroactive features of insurance contracts, and in the group of Frick cases under the Pennsylvania law it dealt with the right of States to measure excise tax by property not within its jurisdiction; but none of these cases made any reference to nor in any way indicated any criticism on the part of the members of the Supreme Court of the underlying principle of raising Federal revenue by death duties. In that remarkable opinion which Chief Justice White handed down back in 1900, in the case of Knowlton et al. vs. Collector, 178 U. S., 41-110, upholding the constitutional right of the Government to raise revenue by death duties, a full exposition of the law in its constitutional aspects was expressed with that clarity of language for which the great Chief Justice was so supremely notable, and this decision is now the chief authority for the enactment of such a tax law. It has never been disturbed by any later decision. If I may be pardoned for quoting a short passage from his exhaustive opinion, which covered sixty pages and reviewed the history of death duties from ancient Egypt to the present day, I submit this extract: The review which we have made exhibits the fact that taxes imposed with reference to the ability of the person upon whom the burden is placed to bear the same have been levied from the foundation of the Government. So, also, some authoritative thinkers, and a number of economic writers, contend that progressive tax is more just and equal than a proportional one. In the absence of constitutional limitation, the question whether it is or is not is legislative, and not judicial. The grave consequences which it is asserted must arise in the future if the right to levy a progressive tax be recognized involves in its ultimate aspect the mere assertion that free and representative government is a failure, and that the grossest abuses of power are foreshadowed unless the courts usurp a purely legislative function. If a case should ever arise, where an arbitrary and confiscatory exaction is imposed bearing the guise of a progressive or any other form of tax, it will be time enough to consider whether the judicial power can afford a remedy by applying inherent and fundamental principles for the protection of the individual, even though there be no express authority in the Constitution to do so. That the law which we have construed affords no ground for the contention that the tax imposed is arbitrary and confiscatory is obvious. The Chief Justice, it seems to me, spoke here with the voice of Marshall, and his ringing assurance that the Supreme Court would not hesitate to deal with arbitrary or confiscatory laws if and when they might arise, carries confidence and the conviction to all who lend an ear to his words, that our rights are safe in the hands of our Supreme Court. The New York Trust Company and Pross, Executors vs. Collector, 256 U. S., 345, which upheld the constitutionality of the Federal Estate Tax Act, is interesting in this connection because Justice Holmes adopts the conclusions of the Chief Justice in the Knowlton case in the following language: Knowlton & Moore, 178 U. S., 41, dealt, it is true, with a legacy tax. But the tax was met with the same objection; that it usurped or interfered with the exercise of State powers, and the answer to the objection was based upon general considerations and treated the "power to transmit or the transmission or receipt of property by death" as all standing on the same footing. After the elaborate discussion that the subject received in that case we think it unnecessary to dwell upon matters that in principle were disposed of there. The same may be said of the argument that the tax is direct and therefore is void for want of apportionment. It is argued that when the tax is on the privilege of receiving, the tax is indirect because it may be avoided, whereas here the tax is inevitable and therefore direct. But that matter also is disposed of by Knowlton vs. Moore, not by an attempt to make some scientific distinction, which would be at least difficult, but on an interpretation of language by its traditional use on the practical and historical ground that this kind of tax always has been regarded as the antithesis of a direct tax; "has ever been treated as a duty or excise, because of the particular occasion which gives rise to its levy". Upon this point a page of history is worth a volume of logic. As a matter of fact, the several States in enacting inheritance tax laws may have placed undue burdens upon estates of decedents, and it is upon this weak aspect of the matter that the enemies of all death duties direct their attack. However, their criticisms are largely theoretical and while the States, with a few notable exceptions, tax their citizens by way of death duties, no estate has actually had to suffer the extreme oppression that those who discuss these laws find possible, if not imminent. The relatively small amounts collected by these taxing laws are themselves an answer to the charge that they are confiscatory. There is another angle to the question of death duties that is interesting and not generally understood. Assume an estate of $10,000,000-dealing only in round numbers. Such an estate should yield an annual income, let us say, of $600,000, which is subjected to income tax annually of $200,000. At death the deceased person's estate of $10,000,000 becomes subject to a death duty under the Federal law of approximately $3,500,000. Upon a showing to the Commissioner of Internal Revenue that it would constitute an undue hardship to pay this sum at one time, an extension of time for payment of the tax can be secured, under the existing law, which would permit the payment over a threeyear period of approximately $1,150,000 each year. The amount paid for estate tax is deductible from income tax for the in which it is paid, so that for the three-year period over which the estate tax is being paid, all income taxes due from the estate are wiped out and the net revenue to the Government at the end of year |