tax policy center
Tax Policy Center
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Wealth Transfer Taxes: How could we reform the estate tax?

The federal estate and gift tax has changed virtually every year since 2001, raising the effective ex-emption to $3.5 million in 2009 and dropping the maximum tax rate to 45 percent, repealing it all together in 2010, and then increasing the exemption to $5 million and dropping the rate further to 35 percent for 2011 and 2012. Unless more changes are made, it will return as it was under pre-2001 law, with a $1 million exemption and a 55 percent maximum tax rate in 2013. The continuing changes in the tax have made estate planning difficult because of uncertainty about what tax rules will apply when a person dies. Making estate tax law permanent with a modestly higher exemption and a lower tax rate would remove that uncertainty and would maintain some estate tax revenue while protecting all but the largest estates from the tax.

  • Reform should simplify the estate tax to make it easier for taxpayers to pay their fair share with-out complex estate planning. One simplification would allow married couples an exemption equal to twice that for singles, allocated between spouses as they wish. Tax planning already ac-complishes this, but the change would make it automatic. The change would likely have little ef-fect on revenue collections and would significantly reduce the need for estate planning.
  • Reform should attack the loopholes such as special trust arrangements and valuation discounts. Those tax-avoidance measures both complicate estate planning and result in unequal taxes on comparable estates. Closing loopholes could increase revenues, allowing a higher estate tax ex-emption or a reduction of the national debt.
  • Many members of Congress have called for immediate and permanent repeal of the tax. That would be expensive, however: the Joint Committee on Taxation estimates immediate repeal would reduce revenue by about $670 billion between 2008 and 2018. Repeal would also be re-gressive—the benefits would go almost entirely to people at the top of the income distribution—and would invite significant tax sheltering. Gifts from an estate to charity currently qualify for full deduction from the estate’s taxable value, creating a substantial incentive to leave bequests to charities. Economists have estimated that repealing the estate tax would cause charitable do-nations to fall by between 6 and 12 percent, or as much as $25 billion annually.
  • If 2009 estate tax law were made permanent (exempting $3.5 million of assets and taxing any excess at top statutory rate of 45 percent), estate tax liability would be $276 billion between 2011 and 2020, about 57 percent of the liability under current law. If the exemption was in-dexed for inflation the liability would drop to $259 billion, or 53 percent of current law.
  • If current 2011 law were made permanent (exempting $5 million, indexed for inflation, of assets and taxing any excess at 35 percent) estate liability would plummet down to one third of current law levels at $161 billion for 2011 to 2020.
  • If pre-2001 law were made permanent (exempting $1 million of assets and taxing any excess at a top statutory rate of 55 percent) would increase estate liability relative to current law nearly 10 percent to $532 billion over the decade window 2011 to 2020.
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   Entry 4 of 6