CHAPTER XIII.

INHERITANCE TAX HISTORY.

We hear much discussion today of the plan of taxation upon inheritances, and we are apt to gather the impression that the idea of the inheritance tax is modern. Nothing could be farther from the truth. The inheritance tax goes back to the early civ'ilizations. Gibbons, in his History of the Roman Empire, tells us that the Emperor Augustus suggested the use of this tax for the support of his army. This form of taxation has been used from early times in those countries of continental Europe that have borrowed their legal and fiscal systems from the Romans. The use of this tax has grown with the growth of democracy until today it is in use not only in the principal states of continental Europe, and in England, Australia and Canada; in fact, generally throughout the English Colonies, and in a large number of the American states. Its use in England dates from about 1780 and its first recognition in the American states was in Pennsylvania, in 1826. So general is the use of the inheritance tax now that it may well be considered an established part of our revenue system.

THEORIES OF THE INHERITANCE TAX.

There are three main theories advanced by economists in support of taxation of inheritances. They are: the back tax, income without toil or service, and accidental income, theories.

Those who support the back tax theory of inheritance taxation do so on the ground that under our revenue systems the common experience is that taxation falls heaviest upon those least able to bear it and that the wealthy escape a large portion of the tax burden that they should bear. Consequently, they contend that a system that will take from the estate at the time of its descent or distribution a sum that will compensate for a loss of revenue during a period of years is just. It will at once be seen that it is impossible under this theory to draft an inheritance tax law upon any principle that will mete out justice between the inheritance and the state. If the inheritance is taxed on the back tax theory there should be no exemption and the rate should be such as to insure the taxing of only sufficient to make up for the taxes that have been evaded. However impossible it may be to mete out justice in this situation through the medium of an inheritance tax, it is nevertheless true that the popular demand for

this form of taxation is based, in large measure, upon the universal belief in the main fact that lies back of the argument, namely; that the wealthy are not taxed in the same proportion to their wealth as are the poor and the moderately well-to-do.

Some economists support the inheritance tax on the ground that it takes income for which no toil has been expended, thus placing it on a par with other forms of taxation that have for their object the taking for public purposes of unearned increment. Notable among these economists is Dr. Richard T. Ely.

The third theory, namely; that of accidental income, has the support of Dr. E. R. A. Seligman. On this subject he says in his Essays on Taxation:

"The logical defense for the inheritance tax is thus the accidental-income argument. It is in harmony with the general basis of taxation-the faculty or ability of the individual to pay; it rounds out the existing system, whether based on property or on income; and it is not open to the objections which may be urged in one form or another against each of the other theories.

Granting the desirability of the tax, we are at once confronted by the problem of graduated or progressive taxation. Graduation of the tax according to relationship has met with wellnigh universal acceptance; graduation of the tax according to amount has given rise to more controversy. This question has been fully discussed in another place with the conclusion that the theory of progression is more applicable to the inheritance tax than to any other part of the fiscal system; and that, whether we base our demand on the limitation-of-inheritance theory, the faculty theory, or the compensatory theory, some scale of progression is both desirable and practicable.

The inheritance tax of to-day scarcely needs defence. It is found in almost every country; and the more democratic the country, the more developed is the tax. In some of the Canadian provinces, in the Australian colonies, in the Swiss cantons, in England itself, the rates are not only progressive, but highly progressive. In the United States also, there is now a decided movement toward the progressive inheritance tax."*

Dr. Max West also supports this view.

It will thus be seen that there is ample economic authority for the inheritance tax and that this form of taxation is one that is commending itself more and more on account of the ease with which it may be made to yield revenue with the minimum of hardship and of industrial and economic loss. Not the least of the virtues of the inheritance tax is that it cannot be shifted. Its wisdom can scarcely be questioned, since it does not touch private

*(Seligman's Essays on Taxation, pages 132-133.)

property during the life of the owner; it does not levy a tax on business activity; it is easily ascertained and collected while the estate is in probate; it adds no burden to the poor, but requires those who receive much to pay something to the government in proportion to their ability to pay, in so far as ability is measured by the inheritance.

SHOULD THE TAX BE RETRIBUTIVE?

Is it desirable to employ the inheritance tax as an instrument for reducing swollen fortunes? No one can now successfully deny that great fortunes have resulted through special privelege given by law or taken away from the people in defiance of all law. The political unrest prevalent in our country today has brought to light evil deeds in high places which will ultimately bring about a reasonable solution. The alarm and righteous indignation which resulted from recent disclosures would undoubtedly cause many persons to turn against law violators with whatever weapons may be at hand. But, even if this be true, the inheritance tax is not the proper weapon to employ. A retributive inheritance tax would in no way remove the causes of undue concentration of wealth, but merely divide up a man's gains after his death.

Prof. Bullock, of the Department of Economics of Harvard University, in an address delivered before the National Tax Association at Columbus, Ohio, in 1907, used this apt language:

"If fortunes have been made by reckless or dishonest management of large corporations, the obvious remedies are reform of our corporation laws and the cultivation of higher standards of business morals. This may be a slow and difficult task; but it is perhaps the issue of the hour, and beside it the taxation of inheritances pales into utter insignificance. New legislation will be needed, but the relentless enforcement of existing laws against such old-fashioned offenses as conspiracy and theft would probably go far to accomplish the desired result. Make it as dangerous to mismanage a transcontinental railway as to hold up a transcontinental express, and you will speedily reduce one class of swollen fortunes. Make it as perilous for an officer to plunder an insurance company as for a clerk to appropriate a few hundred dollars from its fund, and you will reduce another. Punish the financier who loots a street railway as you punish the hungry man who robs a bakery, and you will reach a third class of fortunes. Deal with such gentlemen in the criminal courts rather than in the probate, and you will remove causes of dissatisfaction; pursue them in the civil courts with suits of restitution, and you will return stolen goods to the rightful owners. These remedies are simple and old fashioned; they may offer no complex prob

lems for the amateur sociologist; but they lie directly at hand and have a potency far exceeding all schemes for social regeneration through act of Congress.'

It has been argued with great force that a retributive tax on inheritance would cause property other than real estate to go into hiding in an effort to escape a tax of 20 per cent or 30 per cent, whereas a small tax, one for revenue, could be collected with considerable success, as the average man would not exert himself to escape a small tax. But the menace of great concentration of wealth and of large fortunes is not upon us in North Dakota. Consequently, there is no desire to use the inheritance tax law as a retributive measure.

THE LEGAL BASIS OF THE INHERITANCE TAX.

No theory of individual ownership of property ever was nor can be devised which does not leave the exercise of property rights at the will of government. Property right, then, is not a natural right, and there is a growing school of thinkers who qualify the right to ownership of property to an ownership that is socially useful. It is not allowed as a human, individual necessity. It exists only through some form of government. In a country like ours the governing power rests in the people. They are bigger than all statutes and constitutions, for these they may change at will. They formulate and adopt constitutions in order that they may restrict themselves. This is true both in state and federal forms of government. Unless the people have protected property by constitutional provisions, either state or federal, or both, the legislatures of the various states in the union would have perfect freedom to enact laws for the taxation of property and of legal priveleges which would confiscate that property to the state.

In enacting an inheritance tax law for North Dakota, the legislature is unrestrained except by the federal and state conştitutions. In Article Five of the Federal Constitution we find a restriction on Congress which provides that no person shall be deprived of life, liberty or property without due process of law. In the Fourteenth amendment we find a restriction upon the power of states: "Nor shall any state deprive any person fo rlife, liberty or property without due process of law nor deny to any person within its jurisdiction the equal protection of the laws." The latter is the only limitation on the power of a state to enact a law for the taxation of inheritances. The Constitution of North Dakota merely provides that: "Laws shall be passed taxing by uniform rule all property." This is a constitutional provision applicable to all laws that are passed for the taxation of property and has no application to laws which are designed to tax privileges of various forms. The inheritance tax

law is a tax upon the privelege of inheriting property from an ancestor or of taking according to the laws of descent or by operation of a will, and is not, in a legal sense, a tax on property. Therefore the only constitutional restrictions upon the right of the legislature to pass an inheritance tax law are that they shall not take property without due process of law nor deprive any person of the equal protection of the laws. That the inheritance tax law which is herewith presented for the consideration of the legislature meets these legal constitutional requirements will appear from the decisions which are hereinafter quoted.

Thus, to sum up: Nobody has the absolute right to inherit. the property of his relatives nor to take by devise. Such right exists only by virtue of statute. Except for such constitutional provision it would be as lawful for the legislature to prescribe that half or all of the property of a descendant should pass to the state as for it to provide that relatives shall take in accordance with the laws of succession or that both relatives and strangers in blood shall take by law. By reason of the fact that it has so long been the law of civilization that property is inherited by the relatives of one who is deceased, such law, in all probability, will never be changed. But such custom, enacted into positive law, has not prevented the enactment of laws providing that in the passage of property from one person to another under the laws of succession or by will, it shall pass subject to conditions in favor of the state. The power which makes such transfer possible may impose conditions upon it. Such conditions may be the withholding on the part of the sovereign of a part of such property for its own use, and when this is done it is done by means of a tax taxing the privilege of passing property on. In passing such laws we must avoid the federal danger signals designated as due process of law and equal protection of the laws.

Such a tax as above described is called an inheritance tax. If it is small it is a revenue measure; if large it is enacted in an attempt to break up swollen fortunes. We are firmly of the opinion, then, that an inheritance tax is perfectly legitimate and that it is effective as a revenue measure and easy to administer, and further; that it should not be a retributive measure but levied only for the purpose of raising revenue.

NORTH DAKOTA'S PRESENT LAW AND A
PROPOSED LAW.

Our present inheritance tax law is a failure as a revenue measure. It was passed in 1903 and provides that there shall be an exemption of twenty-five thousand dollars from the tax. Direct heirs are exempt absolutely and two per cent is levied on the property passing to collateral heirs and strangers in blood above the said exemption. Since its enactment the total revenue de