The Estate Tax Slides 02.09.09 Notes

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The Estate Tax

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Contents

1. The estate tax

2. Congress must address the estate tax in 2009

3. Congress should not weaken the estate tax beyond the 2009 parameters: doing so would be fiscally irresponsible, as even making the 2009 parameters permanent would cost over $600 billion from 2012 to 2021.

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1. The estate tax

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A tax on property that is transferred from deceased persons to their heirs.

In 2009, the estate tax is levied at a 45% rate on the value of an estate above an “exemption” of $3.5 million per person (effectively $7 million per couple).

The $3.5 million per person exemption means that:

─ Estates worth less than $3.5 million pay no estate tax

─ Estates worth more than $3.5 million pay tax only on the portion of the estate in excess of $3.5 million.

Some estates can use other special valuation rules and deductions to further reduce the value of the estate that is subject to the tax

The Estate Tax

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Only a tiny fraction of estates from deaths in 2009 will owe any estate tax

The Tax Policy Center estimates that for 2009 estates:

Source: Urban Institute-Brookings Tax Policy Center.

6Note: A small farm or business estate is defined as an estate with farm and business assets that represent at least half of the gross estate and total no more than $5 million. Source: Urban Institute-Brookings Tax Policy Center

Only a tiny number of small business and farm estates nationwide owe any estate tax

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• The Congressional Budget Office estimated that, had the estate tax not existed in 2000, charitable donations would have been $13 billion to $25 billion lower that year, an amount that:• exceeds the total amount of corporate charitable donations in

the Unites States in 2000 ($11 billion); and • approaches the total amount that foundations contributed to

charitable causes in 2001 ($25 billion).

• CBO also estimated that repealing the estate tax would have reduced charitable bequests by 16 to 28 percent and charitable giving during life by 6 to 11 percent.

• Retaining the estate tax but lowering the top rate would also would produce a marked decline in charitable giving. Brookings economist and noted tax expert William Gale has testified that “reducing the top estate tax rate would have a significantly negative effect” on charitable giving.

The estate tax is an important incentive for charitable giving

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The estate tax “backstops” the income and gift tax

Revenues that would be lost from estate tax repeal, 2012-2021

*Includes estate, gift, and income tax revenues.Source: Urban Institute-Brookings Tax Policy Center; Joint Committee on Taxation, Center on Budget and Policy Priorities calculations.

0

200

400

600

800

1000

1200

$605 billion

$1 trillion

Estate tax revenue lost

All tax revenues lost

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Official 10 year estimate masks true cost of extending estate tax repeal

$0

$20

$40

$60

$80

$100

$120

$140

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Bil

lio

ns

of

Do

llar

s

Official 10-year cost estimate

First 10 years of extending repeal

Note: Joint Committee on Taxation estimates through 2017; CBPP projections through 2021

10

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Repealing the estate tax would add more than $1 trillion to the deficit over 10 years

Source: Joint Committee on Taxation and CBPP

Cost, With Interest, FY 2012-2021

Interest Cost

Revenue Loss

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Estate tax repeal costs more than funding for key policy priorities

$0

$10

$20

$30

$40

$50

$60

$70

$80

Repeal Veterans MedicalCare

National Institutes ofHealth

Elementary andSecondary Education

Source: CBPP calculations based on CBO, Joint Committee on Taxation, and OMB Data

Full cost of repeal in 2012; program funding levels 2012

$41 billion

$29 billion

$24 billion

$69 billion

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2. Congress must address the estate tax in 2009

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Congress must address the estate tax in 2009

Under law enacted in 2001, the estate tax has been weakened since 2001, will be repealed in 2010, but reinstated in 2011 at pre-2001 levels.

Year Per-Person (Effective Per-Couple) Exemption

Top Rate

2001 $675,000 ($1.3 million) 55%

2002 $1 million ($2 million) 50%


2004 $1.5 million ($3 million) 48%






2010 Repeal


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3. Congress should not weaken the estate tax beyond the 2009 parameters: doing so would not be fiscally responsible, as even making the 2009 parameters permanent would cost over $600 billion from 2012 to 2021.

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Making the 2009 estate tax parameters permanent would mean a $3.5 million per person exemption; 45% rate on amounts above the exemption

ProposalPer Person Exemption

RateState

Estate Taxes

Cost* 2012-2021 ($ billions)

Cost as percentage of cost of

repeal

Repeal $1,276 100%

Kyl Proposal $5 million20% from $5m to 5m

Deduction $989

77%30% above $25m

Carper, Voinovich, Leahy

(S.3284)

$3.5 million (inflation indexed)

45% Deduction $640 50%

Make 2009 Permanent

$3.5 million 45% Deduction $609 48%

McDermott(H.R. 6499)

$2 million (inflation indexed)

45% from $2m to 5m

Credit $569

45%50% from $5m to 10m

55% from above 10m

Pomeroy(H.R.4242)

$3.5 million

47%

Deduction $556

44%52% on estates between $10 million and $46 million

* Cost compared to current law; includes the cost of forgone estate tax revenues, forgone income and gift tax revenues, and interest on the public debt, assuming that the legislation is deficit financed.

Source: Urban Institute-Brookings Tax Policy Center and Center on Budget and Policy Priorities calculation.

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$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

Repeal Kyl Carper,Voinovich,

Leahy

Make 2009Permanent

McDermott Pomeroy

*Includes lost estate, gift, and income tax revenues. Cost is for 2012-2021. Source: Urban Institute-Brookings Tax Policy Center.

Making the 2009 parameters permanent is very costly, but less so than other proposals

Billions of Dollars

Interest Cost

Revenue Loss

$1.3 trillion

$989 billion

$639 billion$609 billion $569 billion $556 billion

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$0

$10

$20

$30

$40

$50

Make 2009 Permanent

Veterans’ Medical Care

National Institutes of

Health

Elementary and Secondary School Ed.

Making the 2009 estate tax parameters permanent would preserve tax revenues of $36 billion in 2012

Note: tax revenues preserved includes estate, income, and gift tax revenues that would otherwise be lost if the estate tax were repealed. Source: Urban Institute-Brookings Tax Policy Center.

$36 billion tax revenues

preserved

$41 billion

$29 billion

$24 billion

Revenues preserved from freezing 2009 parameters in 2012; program funding levels 2012

Billions of dollars

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Portion of Shortfall

Eliminated by Estate Tax Revenue

Actuaries Estimate Estate Tax at 2009 Levels Could Cover One Quarter of Social Security Shortfall

(Assumes $3.5 Million Exemption, 45 Percent Rate)

Source: Social Security Actuaries; updated by CBPP

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2.3%

0.6%0.3% 0.3% 0.3%

0.1%0%

1%

2%

3%

4%

5%

Current law McDermott Pomeroy Carper,Voinovich,

Leahy

Make 2009Permanent

Kyl

Percent of 2011 Estates Owing Estate Tax

Source: Urban Institute-Brookings Tax Policy Center

Under the 2009 parameters, only 3 of every 1000 estates would owe any estate tax in 2011

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3,500

650

140 14040

140

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Current law Pomeroy Carper,Voinovich,

Leahy

Make 2009Permanent

McDermott Kyl

Small business and farm estates from deaths in 2011 owing estate tax

Note: A small farm or business is defined as an estate tax return with farm and business assets that represent at least half of the gross estate and total no more than $5 million. Source: Urban Institute-Brookings Tax Policy Center

If the 2009 estate tax parameters were made permanent, only 140 farm and small business estates would owe any estate tax in 2011

Number of Small Business and Farm Estates that owe estate tax

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Less than $ 5 million

$5 – 10 million

$10 – 20 million

More than $20 million

19%

16%

Share of estate tax owed by size of 2011 estate, if the 2009 estate tax parameters were made permanent

62% of taxes owed would be from estates worth more than $20 million


If the 2009 estate tax parameters were made permanent, the estate tax would be concentrated on

extremely wealthy estates

Only 3% of taxes owed would be from estates worth

less than $5 million

Value of gross estate

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If the 2009 estate tax parameters are made permanent, less than one-fifth of the average taxable estate will be owed in

taxAverage Effective Tax Rate, in 2011, by Size of Gross Estate