Resources

Estate Tax

Click here to download this page as a PDF

Why the estate tax is important

The federal estate tax is imposed on an estate, not the heirs, when wealth transfers from very large estates. It is a highly progressive tax that raises a significant amount of revenue to fund vital services. The country desperately needs this revenue for education, health, nutrition, and other priorities to promote a competitive workforce and ensure opportunity for every American. But Americans have been told that increased investments are not affordable, even though Congress has gradually eliminated an important revenue source in the estate tax that can help fund these priorities and reduce the budget deficit.

The Bush administration set in place the gradual elimination of the estate tax even amid two wars, natural disasters, and a recession. It cut the tax to exempt more and more estates beginning in 2001. Only one-quarter of 1 percent of all estates were expected to pay the tax by 2009, and there is no estate tax at all for 2010.

The estate tax is scheduled to go back into force in 2011 with a 55 percent tax on the value of an estate that exceeds $1 million for an individual or $2 million for couples unless Congress reduces it again. A few super-wealthy families want an even bigger exemption and a lower rate.

But most estates pay no tax at all.

The estate tax only affects those with more than the exemption amount to pass on to their heirs—$3.5 million for individuals or $7 million for couples in 2009. And even then, gifts to a spouse, administrative and funeral expenses, charitable contributions, and other items are deducted before the value of the estate is calculated.

Less than 2 percent of estates will owe tax with a $1 million exemption. Restoring the $3.5 million exemption results in only one-quarter of 1 percent owing tax, and increasing the exemption to $5 million reduces that number by almost half.

Some have raised concerns about how the tax affects small businesses and farmers, but only a very small fraction of small business and farm estates are liable for the tax. No more than 123 farm estates in the entire country would owe tax with a $3.5 million exemption.

Why the estate tax was instituted

The estate tax raises revenue that government needs to invest in the American people.

The scheduled tax for 2011—a $1 million exemption with a 55 percent rate—is estimated to raise $34.4 billion in revenues. Changing the tax to a $3.5 million exemption and a 45 percent rate would reduce that to $18.1 billion; at $5 million and 35 percent, revenue would fall to only $11.5 billion.

The cost of reducing the tax grows over time as the real and nominal value of wealth increases. Moving to a $3.5 million exemption and 45 percent rate would lose $16.3 billion in 2011 and $30.7 billion in 2019.

The estate tax ensures that the families who have benefited the most from public infrastructure, an educated workforce, public safety, and other services pay their fair share to maintain those benefits.

The estate tax provides a check on the concentration of power in the hands of those born into great wealth. This is a growing problem today, as hardworking Americans find fewer opportunities for success because education and other paths to advancement are increasingly unaffordable.

The estate tax corrects a feature of our tax system that would otherwise allow certain income to escape taxation entirely. The appreciated value of assets such as real estate and securities is not subject to income tax unless the asset is sold during the owner’s lifetime.

The estate tax encourages charitable giving because there is an unlimited deduction for charitable contributions. The Congressional Budget Office estimated in 2004 that if the estate tax had not existed in 2000, charitable donations would have been $13 billion to $25 billion lower that year.

What we propose should be done about it

Congress must maintain a robust estate tax on those who have more than $3.5 million in assets to pass on to their heirs. It should:

• Reinstate a strong estate tax for 2010 and make it permanent for subsequent years
• Make the top rate for 2010 and beyond no less than 45 percent, and the exemption no higher than—and preferably lower than—$3.5 million per individual estate and $7 million per couple
• Institute a surtax on very large estates, such as those valued at more than $20 million

Tags: Fact Sheets, Toolkit

« Back to resources list