IMPORTANT MESSAGE: We have compiled the list of questions below based on inquiries that we receive. This information is generic in nature regarding tax policy questions and is NOT intended to serve as tax advice. We also cannot provide up-to-date information on any Administration or Congressional proposals that may affect the information shown herein. Any questions regarding specific tax situations or for help in filling out your tax return should be directed to your attorney, accountant or other tax professional, or to the Internal Revenue Service. The IRS will not comment, though, on the legislative merits of current tax law, or on pending Congressional action that may change the tax code. Finally, we make every effort to make certain that the information contained here is accurate, but due to the fluid nature of the legislative process, changes in tax laws may occur that are not reflected here at the time of publication. To the best of our knowledge, this information is accurate.
Why do we need to pay taxes? How did our tax system evolve?
Oliver Wendell Holmes, former Justice of the United States Supreme Court, once said, "Taxes are what we pay for a civilized society." Although people work hard to meet their needs and the needs of their families, there are some things they cannot purchase themselves. For example, the taxes paid to state and local jurisdictions help pay for police and fire protection. These taxes also pay for the operation of the local governments, and for local recreation areas such as parks and other public facilities.
On the national level, Federal income taxes help pay for defense for the country. They also pay for capital facilities such as highways and other transportation services, and for help for those who are poor or ill. These are all services that individual citizens cannot purchase the way they can buy food and clothing and the other necessities of life. When people live together in a society, all of its citizens must bear the cost of providing such services. Taxes are the means by which the society raises the money to cover these public costs.
We have created a series of fact sheets that were excerpted from an Internal Revenue Service publication. Economics of Taxation explains how taxes support government services and benefit our citizens. Writing and Enacting Tax Legislation explains the process for developing and passing legislation into law. We have other information available off-line that we will gladly mail to you upon request. These will help you to understand our Federal tax system, along with taxes imposed by State and local jurisdictions. We believe this information will provide you with a better understanding of the various taxes imposed in the United States.
I want to know about the origin of the Federal estate tax. Can you tell me when it became part of the tax code and the rationale behind it?
In 1916 Congress for the first time levied a tax upon the transfer of a decedent's net estate. The Committee on Ways and Means of the U.S. House of Representatives explained that a new type of tax was needed, because the "consumption taxes" in effect at that time bore most heavily upon those least able to pay them. The Committee further explained that the revenue system should be more evenly and equitably balanced and "a larger portion of our necessary revenues collected from the incomes and inheritances of those deriving the most benefit and protection from the Government."
The Committee recommended an estate tax rather than an inheritance tax because many states already imposed inheritance taxes. It felt that the estate tax helped to form a well-balanced system of inheritance taxation between the Federal Government and the various states and that an estate tax could be readily administered with less conflict than a tax based upon inherited shares.
Various changes in the estate tax provisions of law, as well as their repeal, have been proposed over the years, but the principle has been retained. Our office has available an excerpt from the Ways and Means Committee's report on the Revenue Act of 1935. The report reproduces a June 19, 1935, message from President Roosevelt to Congress advocating an inheritance tax, in addition to the estate tax. Although the inheritance tax proposal was not adopted, the message provides information on why the taxation of individuals' estates was considered appropriate.