Estate taxes, also known as inheritance or death taxes, are taxes imposed on the estate of a deceased individual. They are one of the oldest forms of individual taxation in the western world, with records indicating use as far back as the days of Aristotle. In the modern era, both Britain and the US began imposing estate taxes as early as the mid-18th century.
Historically, estate taxes have been a contentious political issue. In the United States, they were initially imposed to help fund the war for independence —- and then quickly repealed. They were subsequently reinstated and repealed on no less than three separate occasions. They were last introduced by the Roosevelt administration during the Great Depression, and in 2001 the US Congress initiated a repeal process that will take until 2010 to complete. At that time, estate taxes will be automatically reinstated the following year unless Congress passes legislation making the repeal permanent.
The use of estate taxes varies greatly from country to country. At their peak during the Great Depression, estate taxes in the United States were as high as 70%. As of 2005, estates worth less than $1.5 million are exempt from federal estate taxes. Canada eliminated estate taxes in the 1980s and began treating disbursements as ordinary income. Even in the European Union, which is working tax policy harmonization, great differences remain. Sweden, for instance, has no estate taxes at all, while the UK has a 40% rate on all estates over a nominal value.
Jurisdictions that impose estate taxes generally allow exemptions for charitable bequests and spousal inheritance. Families can also establish trusts as a way of minimizing the impact of estate taxes. To prevent individuals from avoiding estate taxes by simply giving away property during their lifetimes, gift taxes are often imposed.
Controversies over estate taxes generally center on their use as a tool of social policy. Unlike more direct forms of taxation, estate taxes can impact multiple generations of a family. By making it harder for an extended family to accumulate long-term wealth, certain political theorists maintain that estate taxes are the optimal form of taxation for preserving a broad middle class, which in turn is necessary for a strong, participatory democracy. Others contend that family fortunes rise and fall on their own anyway, and that estate taxes are simply a malignant form of wealth redistribution. In societies where estate taxes are particularly high, critics often point to small family businesses as being especially hard hit. To pay estate taxes, surviving family members may be forced to sell their businesses or farms to larger corporations.