A Short History of the Federal Estate Tax

 In Estate and Gift Taxes

Up until the last century, the federal estate tax was imposed during wartime to raise funds for the military and disbanded when peace came. The first tax on inheritances was enacted in 1797 as part of the Stamp Act needed to raise funds for an undeclared war with France. It imposed duties on various papers and licenses, including licenses to practice law and receipts for inheritances. It was repealed in 1802 after the United States and France signed a peace treaty.

The next inheritance tax was enacted in 1862 to help finance the Civil War. It taxed inheritances exceeding $1,000 at rates ranging from 0.75 percent for property passing to issue to 5% for property passing to others. This was increased to a range of 1 to 6% in 1864 in 1864 and then repealed in 1870. (The distinction between an estate tax and an inheritance tax is whether the tax is owed by the decedent’s estate or by the people receiving an inheritance tax. Inheritance taxes generally impose different tax rates depending on the recipient’s relationship to the person who died. A few states have inheritance taxes, but the current federal tax and that of most states are imposed on estates.)

The next inheritance tax was enacted in 1898 to finance the Spanish American War. It taxed estates worth more than $10,000 at rates ranging from .74% to 15%. It was repealed in 1902. This tax came into existence during the Progressive Era and was in part motivated by a wish to prevent dynastic accumulations of wealth from passing from generation to generation. This goal has continued to influence debate on the estate tax.

An early form of our current estate tax was enacted a century ago in 1916 as the United States prepared to enter World War I. It taxed estates over $50,000 (about $1 million in today’s dollars) at rates between 2% and 10%, the highest rate kicking in at $5 million (about $100 million in today’s dollars). Congress quickly increased the rates in an effort to raise more funds, the top rate reaching 25%.

Since then rates and exemption amounts have gone up and down depending on the need for revenue and the politics of using the tax as a wealth-leveling tool. The estate tax has never been a huge part of federal revenue, reaching a peak of 3.49% in 1922. Interestingly, given its history as a method of raising money during wartime, the most recent pullback of the estate tax during George W. Bush’s presidency took place during the Afghanistan and Iraq wars. Here’s a history of the estate tax exemptions and rates.

Federal Estate Tax Exemptions and Rates

Year Exemption Initial Rate (%)
Top Rate (%) Top Bracket
1916 $50,000 1.0 10 $5 million
1917 $50,000 2.0 25 $10 million
1918-1923 $50,000 1.0 25 $10 million
1924-1925 $50,000 1.0 40 $10 million
1926-1931 $100,000 1.0 20 $10 million
1932-1933 $50,000 1.0 45 $10 million
1934 $50,000 1.0 60 $10 million
1935-1939 $40,000 2.0 70 $50 million
1940 $40,000 2.0 70 $50 million
1941 $40,000 3.0 77 $10 million
1942-1976 $60,000 3.0 77 $10 million
1977 $120,000 18 70 $5 million
1978 $134,000 18 70 $5 million
1979 $147,000 18 70 $5 million
1980 $161,000 18 70 $5 million
1981 $175,000 18 70 $5 million
1982 $225,000 18 65 $4 million
1983 $275,000 18 60 $3.5 million
1984 $325,000 18 55 $3 million
1985 $400,000 18 55 $3 million
1986 $500,000 18 55 $3 million
1987-1997 $600,000 18 55 $3 million
1998 $625,000 18 55 $3 million
1999 $650,000 18 55 $3 million
2000-2001 $675,000 18 55 $3 million
2002 $1 million 18 50 $3 million
2003 $1 million 18 49 $3 million
2004 $1.5 million 18 48 $3 million
2005 $1.5 million 18 47 $3 million
2006 $2 million 18 46 $3 million
2007-2008 $2 million 18 45 $3 million
2009 $3.5 million 45
2010 No estate tax
2011 $5 million 35
2012 $5.12 million 35
2013 $5.25 million 40
2014 $5.34 million 40
2015 $5.43 million 40
2016 $5.45 million 40
2017 $5.49 million 40

 

Inflation-adjusted, the current estate tax threshold is the highest it has ever been since 1916. The 1916 threshold of $50,000 would be about $1 million in today’s dollars, less than a fifth of the current threshold of $5.49 million. The amount went up and down over the years, reaching a high of about $1.4 million in 1930 and a low of about $366,000 in inflation-adjusted dollars in 1970. The $600,000 figure set in 1987 was a bit higher than $1 million in today’s dollars and the figure stayed in that range until the increases that began in 2002 as a compromise of President Bush’s efforts to repeal the tax completely.

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