2018: The Dawn of America’s Hereditary Aristocracy? by Tom Timberman

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Contrasting Great Britain with America in 1776, Tom Paine said it’s the difference between “hereditary rights and the rights of man” and again, between “the privileges of class versus the equality of all before the law”

Introduction:

The tax legislation pending in the US Congress, scheduled for possible passage before the end of December, reflects a curious change in “democratic” America’s attitude towards wealth, class and their relationship to political power. This legislative path also contrasts markedly to that of the monarchical United Kingdom.  The British Government’s use of inheritance (and income) taxes to slow and then halt the continuation of a hereditary aristocracy would seem to depart sharply from that chosen by the present Congress.

United States

          President Teddy Roosevelt, son of rich parents, was a strong supporter of instituting a US inheritance tax, which he characterized as “…an instrument for enforcing equality of opportunity in the United States by making it difficult to pass great fortunes from one generation to another.”  In 1916, seven years after he left office, Congress passed an income tax and what are called “transfer taxes”, i.e. (1) inheritance, (2) gift and (3) generation- skipping (grandchildren and beyond). In 2017, they still exist,, but substantial restructuring may await.

Through the decades after 1916, efforts were made to repeal the inheritance tax, most notably by Andrew Mellon, the Secretary of the Treasury and one of America’s wealthiest citizens. It was defeated then and again in the 1940’s during Franklin Roosevelt’s Administration, who like his cousin Teddy, inherited wealth and a country estate (Sagamore Hill and Hyde Park respectively).

Congressional legislation introduced major changes to the inheritance tax in 1976 and 1987 when first 7% of estates paid taxes and then 11 years later, .03% did. In 2016, 2.6 million Americans died and 5219 or .02% of their estates qualified to pay the Federal Inheritance Tax.  The total revenue it produced was $19.1 Billion. The following table tracks the evolution of America’s “transfer taxes”.

YEAR ESTATE EXEMPTION ESTATE TAX RATE
1997 $600,000 55%
2000 675,000 55%
2002 1 Million 50%
2007 2 Million 45%
2010 5 Million 35%
2013 5.25 Million 40%
2018??

House and Senate Bills

11 or 22 Million (couples/parents) 40%

House bill full repeal 2024

United Kingdom

Those who watched the multiple TV seasons of “Downton Abbey” may recall that Lord Grantham’s constant worry was money: making his large agricultural estate profitable, finding an heir among his relatives, wealthy husbands for his three daughters and maintaining a large domestic staff. His challenge regarding the last became more formidable during and after World War I, when there was a huge exodus of people from domestic service.

The British Parliament recognized early the usefulness of an inheritance tax to pay off deficits and various wars.  In 1796 it passed Death Duty legislation on estates in England and Wales, but interestingly, not Ireland.  An earlier estate tax passed in 1694 was levied only on the deceased’s personal property and was subsequently repealed.

Great Britain’s early inheritance taxation philosophy was to target just the wealthy when national needs arose, and to charge the heirs, not the deceased’s estate.

Returning briefly to Downton Abbey itself, owners of similar enormous country seats started destroying them in the early 20th Century, culminating after World War II, with one in six gone  There were sound reasons to do so: they were expensive to maintain, cheap staffs were no longer available and their heirs didn’t want/couldn’t afford them.

Happily in 1923, the 5th Earl of Carnarvon’s heirs, the new owners of Highclere Castle (aka Downton Abbey) were able to pay the 500,000 pound Death Duty ($40 million in 2017).  Thus, it remains standing and is owned by the 8th Earl.

In addition to the practical reasons listed above, there was also an important socio-emotional reason for obliterating the structures.  The image the original builders wanted projected to the masses – wealth and power – no longer impressed and intimidated, quite the contrary.

YEAR ESTATE EXEMPTION ESTATE TAX RATE
1694 Tax only on personal property, wives and children exempt 1-2%
1796 Levied temporarily to pay for Napoleanic Wars, then repealed
1799 Income Tax (repealed frequently, reinstated permanently in 1841 10%
1894 Death Duty on capital value of land. Repealed after a government deficit was paid. 8%
1896 Possible to avoid all Death Duties through gifts made up to 1 year prior to death.
1919 Finance Act raised Death Duties on estates worth over 2 million L Sliding scale up to 40%
1945 Labor Party came to power and death duties raised substantially. 80%
1974 Bill passed giving exemptions for bequests given to spouses and charities
2008 Death Duties raised 4 Billion L
2014 Great Recession reduced take to 2.4 Billion L 28,000 estates of which only 5% paid Death Duties
2015 New 100,000 L Death Duty exemption for principal residence
2016 Only pay Death Duty if estate worth more than 325,000
2020-21 Only pay Death Duty if estate worth more than 500,000 or 1 million for married couple.

 Is American Society about to Embrace a Hereditary Aristocracy?

If the House/Senate Reconciliation bill passes, with or without the 2024 Inheritance Tax repeal, the estates that will benefit from the new, higher exemptions will equal .02% of the US population. The legislation also gives these wealthiest Americans substantial income tax reductions as well. Assuming the bill is successful in both Houses, the social structure of the United States will eventually resemble Great Britain’s  circa 1830. All that’s missing are the titles – and who knows?

 

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Letters to Editor

  1. Jim Reeves says:

    We already have hereditary aristocracy: the Kennedy family comes to mind. The current estate tax situation still allows–via vehicles designed by family offices with banks of attorneys who have friends in both parties–mechanisms to set up trust funds with the sole purpose of avoiding taxes. As an example, a Kennedy family trust sold the Chicago Merchandise Mart in the 1990’s with over $200 million in profits that avoided the Treasury thanks to the trusts set up to do so. These machinations have been allowed for years so that the uber wealthy can avoid the taxes while smaller estates get hit. The New York Times was passed down from generation to generation in the same family and I find it particularly hypocritical for their editorial staff to rail on and on about aristocracy. These aristocrats are everywhere–even Kent County. Doing away with the estate tax only hits tax attorney incomes; it will not lead to any more aristocracy than currently exists.

  2. James Nick says:

    “I think not having the estate tax recognizes the people that are investing, as opposed to those that are just spending every darn penny they have, whether it’s on booze or women or movies,” – Sen. Chuck Grassley (R-Iowa)

    “I spent most of my dough on booze, broads and boats and the rest I wasted.” ― Elmore Leonard

    Which kind of people are more apt to stimulate the everyday, local economy and which is more apt to just amass money, take it out of the economy, and pass it on to their heirs?

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