Lively Debate Ahead on Estate Tax

Most of the attention in the debate to extend the 2001/2003 tax cuts has centered around the income tax, but a closer inspection of the provisions shows that there are a multitude of other taxes being considered. One of these is the estate tax.

The estate tax is a tax on items and money transferred to another after the original owner’s death (through for example, a will or life insurance payments). Enacted in 1916, it originally was designed to prevent the creation of an aristocratic class and as a revenue raiser. The estate tax is currently in limbo, having expired this year but scheduled to return in 2011 at the higher 2001 rate (see below). With the expiration of so many tax cuts soon to be debated by Congress, let's take a look at the revenue implications of various estate tax changes.

 

 

 

In the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax began phasing out through increases in the exempted amount and decreases in the top rate, until its complete repeal this year. However, EGGTRA only applied to the 2001 through 2010 period. Next year, the estate tax will revert to the $1 million exemption at a 55 percent maximum rate. Note that the exemption does not revert all the way back to the 2001 level. This is because the exemption was already scheduled to rise to $1 million as called for in the Taxpayer Relief Act of 1997.

Current Law 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Exemption ($ millions) $0.675 $1 $1 $1.5 $1.5 $2 $2 $2 $3.5 Unlimited $1
Maximum Rate 55% 50% 49% 48% 47% 46% 45% 45% 45% None 55%

 

Since 1977, fewer than 2 percent of all adults who died each year have left taxable estates. Combined with the gift taxes, which are counted as part of the estate tax, CBO reported that since 1945, the estate tax has made up about 2 percent of federal revenues. In recent years, it has amounted to less than 1.5 percent.

So what are the main proposals concerning this tax? CBO projected in 2009 that from 2011-2019, the estate tax would raise about $405 billion under current law ($1 million exemption at a 55 percent rate) with an estimated $15.7 billion revenue expected this year.

  • President Obama's plan for the estate tax has a $3.5 million exemption ($7 million for couples) at a maximum marginal rate of 45 percent, which were the parameters in 2009. The exemption is not indexed to inflation.
  • The Senate Republican’s plan would have a $5 million dollar exemption ($10 million for couples) at a maximum marginal rate of 35 percent. The exemption is indexed to inflation. As noted in the below table, year-by-year revenue estimates are not yet available, but the Tax Policy Center did score the Lincoln-Kyl plan, which has the same parameters. That estimate showed that Lincoln-Kyl would raise about $100 billion less than Obama and about $340 billion less than current law from 2011-2019.
  • A full repeal costs nearly $500 billion from 2011 to 2019, according to a January CBO estimate.
President Obama 2011 2012 2013 2014 2015 2016 2017 2018 2019

Exemption ($ millions)

$3.5 $3.5 $3.5 $3.5 $3.5 $3.5 $3.5 $3.5 $3.5
Maximum Rate 45% 45% 45% 45% 45% 45% 45% 45% 45%
Revenue Collected ($ billions) $25.0 $22.5 $23.6 $25.6 $27.6 $29.8 $32.1 $34.6 $37.2
Senate Republicans  2011 2012  2013  2014  2015  2016  2017  2018  2019
Exemption ($ millions) $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $5.0 $5.0
Maximum Rate 35% 35% 35% 35% 35% 35% 35% 35% 35%
Revenue Collected ($ billions) N/A N/A N/A N/A N/A N/A N/A N/A N/A
Current Law  2011  2012  2013  2014  2015  2016  2017  2018  2019
Exemption ($ millions) $1.0 $1.0 $1.0 1.0 $1.0 $1.0 $1.0 $1.0 $1.0
Maximum Rate 55% 55% 55% 55% 55% 55% 55% 55% 55%
Revenue Collected ($ billions) $15.7 $35.1 $38.9 $43.6 $48.2 $51.2 $54.1 $57.1 $60.3
Full Repeal 2011 2012 2013 2014 2015 2016 2017 2018 2019
Exemption ($ millions) N/A N/A N/A N/A N/A N/A N/A N/A N/A
Maximum Rate 0% 0% 0% 0% 0% 0% 0% 0% 0%
Revenue Collected ($ billions) -$16.4 -$43.6 -$48.6 -$53.9 -$59.2 -$62.9 -$66.2 -$69.7 -$73.5

 

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