The death tax is now back on top of the legislative agenda. As part of George W. Bush’s 2001 tax cut, the estate tax was reduced gradually and this year it is zero. The death duties will go back into effect next January unless Congress acts, and the old 55% rate will return.
Sen. Jim DeMint’s (R-SC) amendment to permanently abolish the estate tax was defeated on July 21st by a 55 to 39 vote. During the debate, DeMint said, “If President Obama and the Democrats get their way, Washington could get over half of family estates, farms, and small businesses, a greater inheritance than the children of the deceased.”
An effort to seek even higher death taxes is being led by Senator Bernie Sanders (VT), who describes himself as a Democratic Socialist. Sanders wants the rich to pay more, even though the money subject to the death duties has already been taxed.
It is in effect a “double tax.” This tax allows the government to have a second pass. The death tax brings in just over one percent of federal revenue but its cost of compliance to the government is very high.
The Joint Economic Committee (JEC) says the tax costs the government more than it brings in.
Numerous studies have documented how wealthy people use a variety of tax avoidance strategies. An excellent example is the late Ambassador Joseph Kennedy. He was the father of President John F. Kennedy and Senators Robert and Ted Kennedy.
The Ambassador had a net worth of $400 million, but through estate planning he paid only $134,000 in death taxes. DeMint says Senator Sanders does not understand the real damage the death tax does to the economy.
What Senator Sanders Could Have Learned From Edward T. Stotesbury
Sanders might had had a different perspective if he had met Edward T. Stotesbury who passed away three years before the Senator was born. Stotesbury’s tax strategy was similar to Kennedy’s.
He was making today’s equivalent of $200 million/year in the 1920s, and his estate was worth more than $3 billion as measured by today’s dollars. The Great Depression and income taxes had a big impact on his net worth, but so did estate planning. His assets were just $4 million at the time of his death.
Stotesbury repeatedly said “Roosevelt is not going to get my money.” He compared FDR to Robespierre who led the Reign of Terror during the French Revolution. One of the reasons he was so upset was because Roosevelt raised the top marginal tax rate to 79% in 1935.
During World War II, the marginal tax rate hit 91%, and FDR issued Executive Order 9250 in October 1942 which raised the marginal tax rate for salaries exceeding $25,000 to 100%. This in effect meant no salary would be higher than $25,000.
Stotesbury repeatedly said this was confiscatory. His position was that it was better to go on a spending spree rather than to leave behind a large amount of money that would be taxed at a high rate.
If it had not been for exorbitant taxes, he would have continued to invest in corporations which employ people and to have those assets passed on to his heirs.
Stotesbury had many arguments about this topic with his liberal step-son. His point was that it was far better for America’s economic growth to have money in the hands entrepreneurs who invested it in productive assets.
To avoid taxes, Stotesbury liquidated his stock portfolio. This was happening during the depression when U.S. unemployment hit 25%. Americans desperately needed jobs, but wealthy people were not investing in the corporations that would create jobs.
Who Was Edward T. Stotesbury?
At 17, Ned Stotesbury began working at Drexel & Company as a janitor/clerk. His education was limited but he was a workaholic. At 34 he had worked his way up to partner, and became president at 44. Stotesbury and J.P. Morgan were original partners of the Morgan Bank, and they became the most powerful bankers in the world.
Stotesbury’s most important contribution to history involved the Panic of 1907. Stocks of the nations top corporations plummeted as major banks were insolvement, and firms could not repay loans. The American economy was on the verge of a serious collapse as J.P. Morgan gathered America’s top financiers.
Stotesbury was part of the team and they would not allow any firm to go bankrupt. They coordinated their activities and purchased stock in rival firms to keep them from going under. Morgan and Stotesbury forced the titans of Wall Street to come up with a rescue plan, and it worked.
The Theodore Roosevelt administration provided $35 million for a rescue package, and all of it was repaid with interest. It would have been in their short term interest to have their rivals go out of business, but it would have seriously damaged America’s economy.
A major crisis had been avoided but many lawmakers realized they could not always count on patriotic businessmen. The Panic of 1907 led to the creation of the Federal Reserve System. Morgan said the panic proved his partner knew “more about the details of banking than any other man in the United States.”
Stotesbury’s first wife died in childbirth at the age of 31, and he waited three decades before remarrying in 1912. President William Howard Taft was a wedding guest and J.P. Morgan sent the bride a diamond necklace valued at $500,000. Stotesbury’s step-daughter married General Douglas MacArthur and his step son married the richest women in America, Doris Duke. At the age of 89, Stotesbury died at Whitemarsh Hall in 1938.
If you want to read more see:
The Twilight of Splendor: Chronicles of the Age of American Palaces by James T. Maher, Little Brown, 453 pages, 1975
The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance by Ron Chernow, (2001)
Investment Banking in America: A History by Vincent Carosso, Harvard University Press (1970)
Whitemarsh Hall: The Estate of Edward T. Stotesbury, by Charles G. and Edward C. Zwicker, Springfield Township Historical Society