Public Finance

TAXES ON SUCCESSIONS
*22

BOOK IV, CHAPTER IX

§ 1. One large and productive form of taxation which actual legislation often combines with the transfer and stamp duties, but which is of such increasing importance as to require separate treatment, must now be considered. This is no other than the duties imposed on succession to property after death—in well-known English phraseology the ‘death duties,’ but also often described as inheritance taxes. Though such charges are undoubtedly levied on the transfer of property, and are usually—in part at least—collected by means of stamps, they yet possess peculiar features that mark them off from the imposts discussed in the preceding chapter. In the first place, they are not the result of ordinary commercial operations, and differ even from gifts in the circumstance that they are, in a sense, forced or compulsory. Again, the incidence of the duty is distinct from that in the case of ordinary exchanges, while, most significant of all, they amount to, and indeed are by some deemed to be, the best mode of carrying out a general tax on property. All these characteristics fully justify us in devoting some space to an examination of the growth and operation of the various taxes on successions.

The origin of these duties may be traced to the claim of the ruler to take possession of goods that had no owner, or with even greater probability to the feudal dues that were payable to the lord at each change of tenancy.
*23 But in any case the full establishment of the State made the employment of any form of taxation possible. Recent discoveries have revealed the existence of an inheritance tax in Egypt under the Ptolemies and it may be of even older date.
*24 Almost at the establishment of the Empire in Rome, we find the policy of death duties adopted by Augustus, who imposed a five per cent. tax on the inheritances of all Roman citizens except those passing to very near relatives,
*25 a charge which extended with the widening of citizenship until it came in the third century to include all freemen. Modern States, more particularly in recent years, have largely developed the system with very varied scales and grades of duty, so that it has come to be almost universally regarded as an essential constituent in any well-arranged scheme of finance, and seems to be equally approved by popular sentiment and by the larger part of scientific opinion.
*26 In spite of this weight of authority, both theoretical and practical, the difficulties to be encountered are by no means trivial and are such as to deserve attentive consideration.

§ 2. Succession duties first of all possess the grave economic fault of tending to fall on capital or accumulated wealth rather than on income; they therefore may retard progress. The force of this objection no doubt varies greatly with the economic position of the society and the habits of the people, but it is, nevertheless, always more or less in operation. The distinction between capital and revenue is not indeed so rigid as Ricardo seems to have supposed, and there is some transference of taxation between these two categories of wealth.
*27 But this in no wise invalidates the proposition that the levy of duties directly on capital tends to reduce the amount of that aid to production. To take a part from a given mass of wealth at the moment of acquisition leads the new possessor to look on the remainder as all that ever existed.
*28 How far evil will actually result depends on the extent to which the accumulation of wealth has become automatic, and also largely on the amount of the duties levied. By placing succession duties at a sufficiently high point the process of saving would be stopped even in the most thrifty of modern countries. There is, therefore, a pressing need for observing due limits in the rates of charge in order to avoid such a danger.
*29

A second and more strictly financial difficulty arises from the risk of evasion that high duties are likely to cause. Unless gifts and sales are taxed at the same rates as inheritances there is a strong inducement to resort to transfers
inter vivos, or special legal devices by which the liability to duty would be escaped. Here, again, the social and economic conditions are important. The disposition to avoid taxation even by legal means varies in different countries, and so do the forms of property to be dealt with. Thus the great increase of immaterial wealth, much of it of an international character, that has taken place in the last fifty years, supplies readier means of evasion should the possessors desire to use them. The attempt to guard the succession duties by a comprehensive taxation of all transfers is too obstructive to trade and commerce to be lightly adopted, but in case of difficulty it seems the only effectual mode.

So far as the smaller successions are affected, heavy taxation is objectionable in another way, inasmuch as it often presses very hardly on the payers at a time of need. This applies more particularly to inheritances by wives and children, but even in the case of collaterals it is sometimes a grievance. The dissolution of a household is a time of special demands, and the claim of the State may violate that canon of convenience which should govern the application of every form of taxation.

All these circumstances tend to support the proposition that duties on inheritances should not be carried beyond a moderate limit. There is hardly any form of taxation that would be more injurious in its ultimate effects, while at the same time the evils produced by it may not for a long time be attributed to their real cause.

§ 3. The true place of the succession duties in a developed tax system has given rise to much debate, and been the occasion for the promulgation of many ingenious theories.
*30 We might choose between the application of the protection or
quid pro quo theory, by which taxes on inheritances are merely the compensation of the State for the trouble of securing the due devolution of property, the essentially opposite one which regards the public power as a bandit levying the highest charges possible on those estates which have fallen into its hands, and the connected theory of the State as the rightful successor to all property, a portion of which it graciously surrenders to those who claim by will or the ordinary rules of distribution in the case of intestacy. But to those who have followed the exposition of principles contained in earlier chapters, none of these one-sided doctrines will appear even plausible. Taxation on transfers after death is but one part of a general system designed to provide the funds needed for the maintenance of the State. It must conform to the general canons that govern the tax system, and it should be adjusted to the other component parts with which it has to make an harmonious whole. Assuming that we have a rule of distribution, the burden of succession duties should be so adjusted as, together with other taxes, to secure its observance.
*31 From this point of view the chief difficulty with the succession duties is their necessarily irregular levy. Human life is uncertain in its duration, and, as Gladstone once asserted with his wonted impressiveness, ‘no man can die more than once.’
*32 Taking the average, however, we find that a fairly constant proportion of property passes annually by death, and we are thus led to regard the death duties as a capitalised income-tax levied only on accumulated wealth, and sparing those comparatively temporary parts of income that result from personal exertion.
*33 So regarded, they may be progressive as to their rate on the larger inheritances without losing the features that we have just described, and they may even be looked on as a partial realisation of the taxation of one form of accidental or unmerited advantage. Whether they should be employed in this way, or for the furtherance of any wider social ends, such as the better distribution of wealth, is a question, not of public finance, but of economic policy, though it may be said that the result of mixing up social and financial aims is not beneficial.
*34

§ 4. As applied in practice, the many taxes on succession present at first sight a bewildering variety that makes it almost impossible to regard them as being the outcome of scientific or administrative foresight, or indeed anything else than the result of temporary convenience or fiscal necessity. Closer investigation reveals the fact that they have been usually graduated on two different principles, viz. (1) that near relations should pay less than remote ones or total strangers, and (2) the later idea that large successions should pay a higher rate of duty than small ones, or progression in the usual sense. The former, which is found in nearly every system, rests on very old and long established sentiments. The feeling that the wife and children are, in a sense, joint-owners of the deceased’s property, or at least have the best moral claim to succeed to it, is still powerful.
*35 There is, besides, the already noticed fact that the death of the owner is a time when special outlay is required, so that heavy taxation would involve sacrifice and cause much irritation, and it would, moreover, form the strongest stimulus to efforts at evasion. Hence the complete agreement as to the principle of lower rates in the case of successions by near kin, with at the same time very great differences in the allowances actually made in different financial systems.

Of much greater interest at present is the principle of progression as applied to succession duties. We have already considered the general question,
*36 but, as in the case of the income tax, some special points are best noticed here. The hope of promoting a better division of wealth has led some opponents of progression to approve of its use in this case.
*37 Some of the technical difficulties that make progression unsuitable in the case of the income tax are not found here. A return of the total wealth of the deceased must in any case be made, so that the assessment of the duties is comparatively easy. The executor or administrator through whose hand the property passes is, besides, often not interested at all, or very slightly, in evading the duty. Other difficulties no doubt remain. Consideration has to be given to the effect of high duties on the minds and habits of those who are the accumulators of great stores of wealth. They may be influenced to reduce their savings to the injury of the society, or they may employ the various means of evasion that their legal advisers or their own ingenuity may suggest. But behind any actual scale of progression lies the unavoidable danger of arbitrary extension in the future. There is as yet no limiting principle discovered which will determine up to what point progressive death duties shall be carried, and at which their advance should cease. Appeals to the supposed natural rights of owners, or to the equally imaginary rights of the State, can supply no solution of this problem.
*38

§ 5. The history of the English death duties begins with the Stamp Act (1694), which placed 5
s. on probates over £20. This uniform charge—doubled four years later—continued till 1779, when three scales of duty were introduced. The usual process of increase was carried on, and the
ad valorem principle was reached by gradual approximation in 1889. After that date the duty stood at three per cent., imposed on all probates and letters of administration. The old arrangement by which a maximum duty was fixed at a certain point
*39 disappeared, and very small estates—those under £100 and £300—received special allowances. This direct charge on the estate was protected by the account duty—devised by Gladstone in 1881—which was introduced to check evasions, and applied to gifts made within a year of death. Those duties did not include real or settled property, and they therefore failed in comprehensiveness.

The legacy duty, first imposed in 1780, developed in the same way. Though a charge on the receiver of the bequest, it is, like the income tax, in many cases to be paid from the source, that is the estate, and deducted in the payment. Unlike the old probate duty with its practically uniform scale, or the new progressive estate duty, it varies according to degree of relationship, and does not, since 1889, apply to descendants. Its highest point, ten per cent., is reserved for strangers and very distant relatives.

The parallel tax on realty and settled personalty, the succession duty, only dates from 1853. Pitt had failed to establish a tax of the kind in 1796, and it was with great difficulty that the budget plan of 1853 was carried. It amounted to an extension of the legacy duty to successions hitherto exempt.
*40 This undoubtedly just proceeding failed at first to accomplish what was expected; instead of the estimated £2,000,000, its average yield has been about £700,000, or, roughly speaking, one-third of what was anticipated. The great number of lineal successions and the exemption of debts from the duty explain this failure.

Another and, as it proved, very temporary addition to this group of taxes was the estate duty of 1889, which was a supplement of one per cent. to the probate and succession duties when the property exceeded £10,000.
*41

The system of death duties as it thus stood in 1889 was extremely complex, and presented some striking anomalies.
*42 The separation of real and personal property, and the favourable treatment given to the former,
*43 appeared at first sight a gross injustice. Plausible reasons, and especially the alleged heavy local taxation of land, might be put forward in mitigation, but the striking fact of inequality remained untouched. Settled personalty also, and with less justification, escaped its proper share of the death duties, with the natural result of encouraging the tying-up of property, and thereby producing economic and financial loss. There was, too, an unnecessary amount of complication in the number of duties and in the minute distinctions drawn as to the different interests in property. These defects led to a very general recognition of the need for simplification and amendment, a task which was attempted, and in part achieved, by the Finance Act of 1894.

§ 6. This important and carefully conceived measure dealt with most of the points that we have indicated above. For the probate or account duty, applicable to unsettled personal property only, it substituted a new and all-embracing charge (which also included the estate duty of one per cent. established five years before), to be imposed on ‘all property, real or personal, settled or unsettled,’ and thus at a stroke removed the exemptions complained of, while reducing the number of duties. A second sweeping change was the valuation of real on the same basis as personal property, a provision which extends to the assessment of succession duty, if the successor is ‘competent to dispose of’ the property. Interests in real property will therefore be charged at their full commercial value, and the privileges as to time of payment are curtailed. Settled property passing at death also comes under charge, and contributes to swell the aggregate amount of the estate. Settlements are in addition subjected to a penalty charge of one per cent. over and above the estate duty on their transfer.

So far the changes have been in accordance with the principles admitted by all students of the subject, but the next alteration is of a more questionable character. The imposition of duty on the several forms of property making up an estate is accompanied by their ‘aggregation,’ a process essential for the ascertainment of the rate of estate duty, since it varies with the aggregate amount, beginning at one per cent. and ranging up to eight per cent. in the case of millionaires.
*44 This is a direct introduction of progression into one part of the tax system, and the advocates of the measure have approved of it chiefly on that ground. We need not reconsider the vexed question of progression, but it may be noticed that the effort to apply it is the cause of most of the technical difficulties surrounding the measure. The elaborate forms of account to be furnished by the executor are necessitated by the principle of aggregation. The sum of property ‘passing on the death’ is a vital element in the assessment of the duty. The comparatively small amount of £1,000 added to an estate of £1,000,000 would increase the duty £5,000. Hence the care and scrutiny required as to the exact total. For the same reason the inclusion of property situated abroad becomes very desirable, but it cannot fail to raise difficult questions of ‘double taxation, which may even lead to international difficulties.’
*45 More serious practically than either of the foregoing is the uncertainty that must attend a good deal of the taxation under this system. The rate of duty payable by A may depend on B’s being brought to account for his portion of the estate, a proceeding which may not take place for years. The older duties were sufficiently irksome, and often pressed hardly on innocent persons. Future experience will probably show a great increase of troubles in this respect. Another effect of the system of aggregation combined with progression, in the case of the larger estates, is to place a heavier burden on the receiver of the residue, even though this be of moderate amount. It is quite possible that the whole surplus might disappear under the action of the law, but to avoid this grievance it would be necessary to make the legacy and succession duties vary with the scale of the inheritance.
*46

The treatment of landed property, though on the whole in accordance with sound principles, is open to some question. Local rates and taxes are no inconsiderable items in the burdens on land, and some allowance should be made for their existence. Assessment on capital value, though theoretically fair, tends to fall heavily on an object which can only yield a small annual return. To ask at once the equivalent of three years’ income is distinctly contrary to the canon of convenience. It might indeed be suggested that an annual tax on land equal in amount to the average death duties should be substituted for them, or arrangements might be made for their commutation into such a charge at the owner’s option. At all events, it seems evident that the measure of 1894 has not succeeded in dealing with all the problems that death duties inevitably create.
*47

§ 7. But whatever be the difficulties surrounding the future of the British death duties, there can be no question as to their value as a steadily growing branch of revenue. The increase during the present century has been very large. Before the changes of 1894 the total return—including the amount allotted to local taxation—reached in the year 1891-2 the amount of £11,000,000. After a slight falling off in the three following years, the new maximum point of £14,088,000 was reached in 1895-6. A loss of £125,000 in 1896-7 was followed by an advance in the next three years to £18,473,000 in 1899-1900. The year 1900-1 only gave £17,090,000, but 1901-2 almost touched the highest point obtained with a yield of £18,398,000.
*48 In spite of occasional irregularities, the yield is at once fairly reliable and progressive; so that this class of duties may take place with the income tax as an important contributory to the direct taxation that is needed to counterbalance the excise and customs. This very function makes it all the more necessary to avoid rash experiments that might impair the efficiency of this part of the tax system.

§ 8. By means of the elaborate system of registration the French succession duties have been treated as a subdivision of the taxation on tranfers of property. This arrangement brings gifts
inter vivos and successions after death under a common system, which is convenient, owing to the characteristics of the
Code Civil, but it presents the economic disadvantage of hampering the movement of property. Starting from 1790, the duties on succession were somewhat increased by the measures of 1798, 1816, 1832, and 1850, the latter establishing the same rate of duty for ‘movable’ as for ‘immovable’ property (the former, contrary to the English rule, having been previously favoured). The Franco-German war made a general increase of 25 per cent. necessary; but with this addition, the scheme of succession duties continued unchanged to the end of the nineteenth century. The charge on descendants was more moderate than in England, that between husband and wife somewhat higher. Brothers, sisters, uncles, and aunts paid over 8 per cent.; complete strangers 11¼ per cent. In the actual working of the system several grievances were created, for (1) inheritances were taxed on their gross, not their net, value, (2) no allowance was made for debts, (3) when property was divided into a usufruct, or ‘life interest,’ and a ‘reversion,’ the life tenant paid one-half of the duty, the reversioner paying the full charge, while (4) land was estimated at twenty-five times its annual return for the purpose of the duty.

These defects, together with the strong desire of advanced politicians to introduce a progressive scale of charges, led to a series of attempts to radically reconstruct the French succession duties. After a number of failures the budget law of 1901 provided for the recognition of net value as the basis of assessment (with certain exceptions), and also for the deduction of debts. It further divided the duty between the usufructuary and the ‘bare proprietor,’ according to definite rules. But the most important change—or at all events that which attracted most attention—was the revision of the scale of duties on a progressive basis. Under the new system, somewhat extended in 1902, the duty varies with (1) the relationship, and (2) the total net value of the property received by the successor, and in some cases goes as high as 20½ per cent.
*49 The financial results of this change will be interesting as an illustration of the working of progressive taxation, especially if taken in comparison with those of the English Finance Act of 1894, which was in part the model on which the French legislation is framed.

But with all their defects the former French duties have proved a productive part of the revenue system. Their yield in 1891 exceeded £7,700,000, they rose to £8,400,000 in 1892, with some fluctuations in intermediate years they advanced to £9,000,000 in 1900, and stood at £8,000,000 in 1901.

§ 9. The Italian succession duties resemble the French (as they existed previous to the recent change), but are rather higher on lineal successions, and a little lighter in other cases. Deduction of debts, if proved on good evidence, is allowed. The receipts from this source increased from £1,000,000 in 1876 to £1,470,000 in 1890-1. The yield in 1900-1 was £1,590,000.

Though the German States nearly all levy succession duties they are of a very moderate character. Descendants are generally exempt,
*50 and in Prussia ascendants as well as the husband or wife are also free. The highest point in most States is eight per cent. Alsace-Lorraine imposes nine per cent. on strangers. Baden, Hamburg, Hesse, Lubeck, and Oldenburg go as far as ten per cent.
*51 The example of England and France will probably lead to an extension of these taxes, but proposals in this direction have as yet been decisively rejected by the legislatures.

Switzerland was long remarkable as being the only continental country possessing progressive succession duties. This feature, which is quite in accordance with the system of income and property taxes already described,
*52 only appears in cantonal taxation, and varies much from canton to canton. In some the duties are proportional and light, in others high and progressive. Thus in Uri a stranger receiving £40,000 has to pay £30,000 in duties. But, as Schanz significantly remarks, ‘so high a property is not found there.’
*53

The Australasian colonies have signalised themselves by a very active employment of progressive death duties, reaching in some instances to 20 per cent.
*54 It should, however, be remembered that direct taxation generally has been very little developed in Australia, owing to the great preponderance of customs duties and to the large proportion of gross economic revenue.
*55

§ 10. In the United States the inheritance tax has been chiefly developed in ‘State’ legislation. Beginning with taxes on collateral successions some legislatures have advanced to duties on direct successions, combined with progressive rates. Thus New York imposed a ‘direct’ tax of one per cent. on personal property over $10,000, Ohio followed with a progressive tax on direct successions (which was declared to be unconstitutional), and a uniform tax on collaterals. The example so set has been followed by a number of States, Minnesota, Nebraska, Washington, and Utah being the latest cases of imitation. It is highly probable that nearly all the American States will adopt this tax in some form or other.
*56 There are, however, difficulties to be encountered. The constitutions of some of the States, which declare that taxation must be ‘uniform,’ prevent the employment of progressive or graduated rates.
*57 Then, the economic conditions are not favourable. The interstate mobility of capital is so complete that the strict enforcement of a heavy progressive tax on successions, especially in the case of immaterial wealth, seems almost impossible. Hence, at first sight, the conclusion appears justified that inheritance taxes are, on the analogy of the income tax, better suited for ‘Federal’ than for State administration. Competent opinion in America is, however, agreed in approving of the attribution of the inheritance like the corporation tax to the States,
*58 and this judgment must be regarded as conclusive.

The Federal Government has confined the use of the inheritance to times of war. In 1898 a duty was laid on successions exceeding $10,000. Descendants, brothers and sisters, were taxed ¾ per cent., for more distant degrees the rates increased up to 5 per cent. In regard to amount, successions over $25,000 paid one-half more; those between $100,000 and $500,000 paid double; the next class—those up to $1,000,000—paid two and one-half times; finally in the case of successions over $1,000,000, the original tax was tripled. The validity of this law was questioned on the ground that as a ‘direct’ tax it was outside the competance of Congress; but it was upheld by the Supreme Court, to the surprise of those who had followed the arguments on the income tax cases.
*59

On the whole it may perhaps be said that, bearing in mind the peculiarities of the American Constitution and the actual economic conditions of the country, the States are the best organs for levying the duties on successions, but this makes it all the more important that the dangers of the progressive system should be avoided, and that there should be inter-state agreements establishing similarity of rates, and providing for equal and reciprocal treatment where property in different States is concerned.
*60

§ 11. The problem of incidence might first be supposed not to arise at all in this connexion. ‘Taxes upon the transference of property from the dead to the living,’ said Adam Smith, ‘fall finally, as well as immediately, upon the persons to whom the property is transferred.’
*61 But this view altogether neglects the ulterior effects on the distribution of wealth that the duties may bring about. If, as Ricardo argued, they fall mainly on capital, it is evident that the whole society suffers by less efficient production, and it is also probable that the higher value of the remaining capital will lead to a rise in interest and a consequent fall in wages. Hard as it may be to trace these results in any actual case, yet, given the conditions, they must be in existence. The pressure of existing death duties on capital is not, however, so clear. The English receipts of over £18,000,000, or the French of £8,000,000, are but a small part of the annual savings (not more than 6 or 7 per cent.). Even if we suppose that the whole amount would be added to savings the effect would not be important. This, however, could not happen, as an equal amount of taxation would have to be imposed in other directions, and it would in some degree trench on capital.
*62

On the whole, we may best regard the succession duties as presenting a parallel to the income-tax. The latter withdraws annually for the service of the State a portion of the new wealth created in the period; the former operate in the same way, but at uncertain intervals, on the collective wealth of the society.