The principle of the inheritance tax may be considered 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 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 insurance policies are usually not considered a part of an estate, yet very frequently the payment of insurance premiums 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.
1 State vs. Ferris, 53 Ohio St. 314.
Closely connected with the proper deductions is the determination 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 conferred by the estate. In the case of a small amount left to a widow or dependent child, there is evidently no increase 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 exemption. The nature of the recipient has also, at times, justly received consideration. Bequests to public, religious, and charitable institutions, for example, have not been considered 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 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 advisability 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 progressive 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.
Evasion and Injustice. - The gradual increase in the use of the inheritance tax, together with an increase in the rates, has increased the likelihood of evasion, and has magnified any injustices which exist in the system. With the increase in rates, the temptation to dispose of property before death increases. Cognizance has been taken of this, and in many cases " transfers of property in contemplation of death" have been made subject to the tax. The courts have rather consistently held that the burden of proof in such cases rested with the state, which resulted in few proofs being attempted. A more recent development has been legislation to the effect that all transfers of property within a certain period previous to death shall be considered as transferred in contemplation of death, and hence subject to the tax. In Wisconsin the period is six years. Recognition is sometimes made of the fact that some successions may be made more rapidly than others. If a son should die, for instance, and leave an estate to his father, it is likely a second bequest will follow much sooner than if the transfer had been in the opposite direction. Laws sometimes provide that a second tax will not be exacted if one has been paid within a certain number of years.
Taxation of Gifts. - The attempt to tax gifts in contemplation of death has led to much litigation and injustice. The length of time one lives after he disposes of property has little to do with the ability of the recipient to meet the tax burdens. Neither is there any assurance that one year or ten years will measure the time within which death will be contemplated. Any length of time decided upon must be arbitrary, and much injustice will result.
But why attempt any such measurement? Since inheritance taxes are justified on the basis of ability to pay, there is no good reason for treating a gift, whenever made, any differently from a transfer of property after death. The case is strong, indeed, for the levy of a tax upon gifts whenever made at the same rate as one levied upon the transfer of property at death. The time element has little to do with the situation. A gift at one time is just as much a fortuitous income as at some other time; it may be just as much unexpected at one time as another; just as much taxpaying ability exists in a gift before death as in the receipt of property after death; as in the case of an inheritance, an ability has been created which will never again be so great. A tax upon gifts, therefore, conforms closely to the ability to pay principle.
The taxation of all gifts would simplify present inheritance tax administration, and would be conducive to a greater degree of justice than where an attempt is made to tax only those gifts made in contemplation of death. The same rates should be placed upon gifts as are levied upon inheritances, with the same exemptions as well as the same differences for near and distant relatives or strangers in blood.