Keepin’ It Real on the Estate Tax

December 10th, 2012 at 9:03 pm

Had a debate on the estate tax today, and the best part of it was reviewing the evidence as per this myth/fact document by CBPP’s Chye-Ching Huang and Nate Frentz.

This is one of those tax policies lurking in background of the fiscal cliff debate—when you hear the White House say that the expiration of the upper income tax cuts raises about $1 trillion in revenue over 10 years, they’re including the estate tax resetting back to 2009 levels (along with other stuff…the rate increases on income just raise about $440 billion of the total).

Compared to keeping it where it is right now (see first link for details), resetting the estate tax would raise about $120 billion over ten…so, there’s real money here ($140 billion including interest savings).

The CBPP doc takes you through all the relevant arguments and counterarguments, but here are some of the most important factoids:

–the estate tax is very progressive: it currently hits the top 0.2% of estates and if it reverts back to the 2009 rules will hit 0.3%–that’s three out of a thousand estates.  As my colleagues say, everybody dies, but only a tiny proportion of the richest estates pay any tax on their bequests.


–because it has large exemptions: currently the first $5 million of the estate’s value is exempt from the tax, hopefully going down to $3.5 million.

though the top statutory rate is now 35%, because of the large exemption, the effective, or average rate is about 15%.

bleeding heart cases hardly exist at all: “Only a handful of small, family-owned farms and businesses owe any estate tax at all, and virtually none would have to be liquidated to pay the tax. TPC estimates that only 40 small business and farm estates nationwide will owe any estate tax in 2012…these 40 estates will owe just 3.1 percent of the estate’s value in tax, on average.”

the double taxation complaint is not valid on the richest estates: most of the value on estates greater than $10 million is from unrealized capital gains.

most advanced economies have a similar tax: “Of the 34 members of the Organization for Economic Co-Operation and Development (OECD), 28 levied some form of estate tax, inheritance tax, or other wealth or wealth transfer tax in 2009 (the latest year for which full data are available).”

So, if anybody is foolish enough to tout these myths in your presence, consider yourself well-armed.

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2 comments in reply to "Keepin’ It Real on the Estate Tax"

  1. D. C. Sessions says:

    The usual complaints regarding inflation and the various dollar numbers in the tax code apply.

    So how about for once indexing them to the median wage rather than the CPI or other deflator?

  2. Sue says:

    I think the highest rate for the estate tax should be at least 50%: this is one of the few tools we have for avoiding the institutionalization of a plutocracy in this country. There is no reason that the next generation “needs” or “deserves” any more than half of the wealth that their parents created (or inherited from the previous generation).