Originally Published: 8/23/2006
ELIMINATING THE ESTATE TAX
By The Issue Wonk
The Economic Growth and Tax Relief Act of 20011 (EGTRA) instituted major income and estate tax cuts. In 2001 the tax exemption for inheritances was $675,000 ($1,350,000 for couples). EGTRA increases the exemption incrementally. In 2003 it went $1 million. As of 2006 the exemption is $2 million ($4 million per couple). In 2009 the exemption level goes to $3.5 million ($7 million for a couple). In 2010 the estate tax is completely repealed and then is reinstated in 2011 at the 2001 exemption level. In fact, all tax cuts enacted by EGTRA will expire in 2011.
The Death Tax: While the estate tax has been characterized as a “death tax,” such characterization is patently ridiculous. It is not a tax imposed on the death of a person. It is a tax on the inheritance received by the heirs, a tax on the transfer of a large amount of money to someone who has not earned that money. (See Why an Estate Tax) According to the Center on Budget and Policy Priorities,2 about 99% of estates pay no tax at all. “Among the few estates that do owe taxes, the ‘effective’ tax rate – that is, the percentage of the estate that is paid in taxes – averaged about 19% in 2003, according to the IRS . . .” Although the top tax rate for estates is 50%, the effective rate rarely hits 50% because taxes are due only on that portion of the estate the exceeds the exemption level, not on the entire estate. For example, the 2006 exemption level is $2 million. An estate worth $2.5 million would owe taxes only on $500,000. Also, much of that $500,000 can be shielded from being taxed through currently available techniques (e.g., charitable bequests, payment of state estate taxes, etc.)
Family-Owned Businesses: You often hear that the estate tax unfairly affects small, family-owned farms and businesses, causing them to liquidate their assets in order to pay the taxes. This is not true. According to a Congressional Budget Office (CBO) report,3 the vast majority of farm and family businesses that owe taxes have sufficient assets to pay the taxes. It also found that, if the current exemption level of $2 million had been in place in 2000, only 123 farm estates and only 135 family-owned businesses nationwide would have owed any estate tax at all.
Double Taxation: Many claim that the estate tax constitutes double taxation because it applies to assets that already have been taxed once as income. In reality, most large estates have substantial amounts of “unrealized” capital gains that have never been taxed and the estate tax is the only means of taxing this income. Much of large estates is composed of assets such as real estate or artwork. The appreciation in value is an asset (unrealized capital gain) on which tax is not paid until the asset is sold. In the case of the death of the owner, the asset is not sold, but is passed on to an heir.2
For the last several years Congress has been intent on making all EGTRA tax cuts permanent, including a permanent elimination of the estate tax. However, several key issues have posed a barrier to a permanent elimination.
Loss of Revenue: Reducing revenue during a time of war has been met with resistance by even the most anti-tax Congressional members. According to Friedman and Aron-Dine:4
Already, the number of taxable estates has dropped from more than 50,000 in 2000 to fewer than 13,000 in 2006, and it will fall to about 7,000 when the exemption level rises to $3.5 million ($7 million per couple) in 2009. Put another way, a little over 2% of all estates were subject to tax in 2000. Today, only one-half of 1% of people who die – that is, 5 in 1,000 – pay any estate tax, and that number will fall to 3 in 1,000 in 2009.
Repealing the estate tax would result in a reduction of roughly $1 trillion over the first 10 years. “This cost includes the $776 billion in lost revenue and $213 billion in increased interest payments on the national debt.”2 In addition, such a repeal, quite obviously, would only benefit the wealthiest of the wealthy. There have been some proposals to make the 2009 exemption rate permanent and reduce the top tax rate to 15%. Such a proposal still only benefits the very wealthy, with about 4% of estates valued at less than $5 million receiving any benefit. Estates valued at more than $5 million would receive 96% of the benefits.4
Reduction in Charitable Donations: Repeal of the estate tax would significantly reduce billions of dollars in charitable donations annually. In fact, “Some 120 wealthy Americans, including Warren E. Buffett, George Soros and the father of William H. Gates, are urging Congress not to repeal taxes on estates and gifts.”5 They have filed a petition that says that the estate tax “exerts a powerful and positive effect on charitable giving. Repeal would have a devastating impact on public charities.”
1 Economic Growth and Tax Relief Act of 2001. Public Law 107-16, June 7, 2001.
2 The Estate Tax: Myths and Realities. Center on Budget and Policy Priorities, April 28, 2006.
3 Congressional Budget Office. (July, 2005) Effects of the Federal Estate Tax on Farms and Small Businesses.
4 Friedman, Joel & Aron-Dine, Aviva. (June 2, 2006) The State of the Estate Tax as of 2006. Center on Budget and Policy Priorities.
5 Johnston, David Kay. Dozens of the Wealthy Join to Fight Estate Tax Repeal. The New York Times, February 14, 2001.
© The Issue Wonk, 2006