Order Code RL30600
Report for Congress
Received through the CRS Web
Estate and Gift Taxes: Economic Issues
Updated January 31, 2003
Jane G. Gravelle
Senior Specialist in Economic Policy
Government and Finance Division
Steven Maguire
Analyst in Public Finance
Government and Finance Division
Congressional Research Service ˜ The Library of Congress
Estate and Gift Taxes: Economic Issues
Summary
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA,
P.L. 107-16) repeals the estate tax after 2009. During the phase-out period, the new
law increases the exempt amount to $3.5 million by 2009 ($1 million in 2003),
lowers the top rate to 45% by 2007 (the top rate in 2003 is 49%), and repeals the
federal credit for state death taxes by 2005. The federal gift tax remains though the
rate is reduced to the top personal income tax rate. After repeal of the estate tax,
carryover basis replaces step-up in basis for assets transferred at death. The
legislation includes an exemption from carryover basis for capital gains of $1.3
million (and an additional $3 million for a surviving spouse). However, the estate
tax provision in EGTRRA automatically sunsets December 31, 2010. Thus, the
estate and gift tax will be reinstated in 2011 as it existed under current law. In the
108th Congress, some policymakers have proposed eliminating the sunset provision
in the EGTRRA, thus making repeal of the estate tax permanent.
Supporters of the estate and gift tax cite its contribution to progressivity in the
tax system and to the need for a tax due to the forgiveness of capital gains taxes on
appreciated assets held until death. (Even though the estate and gift tax is a relatively
small source of revenue, accounting for 1.5% of federal receipts.) Arguments are
also made that inheritances represent a windfall to heirs that are perhaps more
appropriate sources of tax revenue than income earned through work and effort.
Critics of the estate tax argue that it reduces savings and makes it more difficult to
pass on family businesses and farms to the next generation. Critics also argue that
death is not an appropriate time to impose a tax; that much wealth has already been
taxed through income taxes, and that complexity of the tax not only imposes
administration and compliance burdens but undermines the progressivity of the tax.
The analysis in this study suggests that the estate tax is highly progressive,
although that progressivity is somewhat undermined by avoidance mechanisms. If
greater progressivity in the federal tax system were desired, it could be obtained by
altering other taxes. Neither economic theory nor empirical evidence indicate that
the estate tax is likely to have much effect on savings. Although some family
businesses and farms are burdened by the tax, the estate tax applies to only a tiny
fraction (probably around 3% or 4 %) of businesses that have, in most cases,
sufficient liquid assets to pay the tax. Only a small percentage of estate tax revenues
are derived from family businesses and other measures could be considered to
provide further relief. Even though there are many estate tax avoidance techniques,
it also is possible to reform the tax and reduce these complexities as an alternative
to eliminating the tax. Thus, the evaluation of the estate tax may largely turn on the
general appropriateness of such a revenue source and its interaction with existing
capital gains and other income taxes. Changes in the estate tax will, however, have
important implications for charitable giving and for state estate taxes.
A number of alternative revisions are discussed including past proposals to
reduce tax rates and exemptions as well as proposals to reduce the opportunities for
tax avoidance and broaden the estate and gift tax base. This report will be updated
as legislative events warrant.
Contents
How the Estate and Gift Tax Works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Special Rules for Family Owned Farms and Businesses . . . . . . . . . . . . . . . . 5
The Generation Skipping Transfer Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Economic Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Distributional Effect of the Estate and Gift Tax . . . . . . . . . . . . . . . . . . . 6
Effect on Saving . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Effect on Farms and Closely Held Businesses . . . . . . . . . . . . . . . . . . . . . . . 12
Effects of the Marital Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
A Backstop for the Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Effects of the Charitable Deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Efficiency Effects, Distortions, and Administrative Costs . . . . . . . . . . . . . 17
Effects on State Estate and Inheritance Taxes . . . . . . . . . . . . . . . . . . . . . . . 20
Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Repealing the Estate and Gift Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Increasing the Credit or Converting it to an Exemption . . . . . . . . . . . . . . . 21
Taxing the Capital Gains of Heirs vs. the Estate Tax . . . . . . . . . . . . . . . . . 22
Concerns of Farms and Family Businesses . . . . . . . . . . . . . . . . . . . . . . . . . 23
Reform Proposals and Other Structural Changes . . . . . . . . . . . . . . . . . . . . 23
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Appendix: Estate and Gift Tax Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
List of Figures
Figure 1. Estate Tax Rates in 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
List of Tables
Numerical Example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Numerical Example Continued with Taxes and Credits . . . . . . . . . . . . . . . . . . . . 5
Table 1: Estate Tax Deductions and Burdens, 2000 . . . . . . . . . . . . . . . . . . . . . . . 8
Table 2: Theoretical Effect of Estate Tax on Saving, By Bequest Motive . . . . . 10
Table A1: The Filing Requirement and Unified Credit . . . . . . . . . . . . . . . . . . . 28
Table A2: Gross Estate Value of Taxable Returns Filed in 2000 . . . . . . . . . . . . 28
Table A3: Allowable Deductions on 2000 Returns . . . . . . . . . . . . . . . . . . . . . . 29
Table A4: 2003 Estate and Gift Tax Rate Schedule . . . . . . . . . . . . . . . . . . . . . . 29
Table A5: Credit for State Death Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Table A6: Wealth Distribution of Taxable Returns Filed in 2000 . . . . . . . . . . . 30
Estate and Gift Taxes: Economic Issues
The estate and gift tax has been the subject of recent legislative interest. The
“Economic Growth and Tax Relief Reconciliation Act of 2001†(EGTRRA, P.L.
107-16) repeals the estate tax after 2009. However, the legislation sunsets after 2010
reverting back to the law as it existed in 2001. For a more comprehensive review of
the legislation, see CRS Report RL30973, 2001 Tax Cut: Description, Analysis, and
Background.
Immediate repeal of the estate and gift tax in 2001 would have cost up to $662
billion, an amount in excess of the projected estate tax yield of $409 billion because
of projected behavioral responses that would lower income tax revenues (e.g. more
life time transfers to donees in lower tax brackets, more purchase of life insurance
with deferral aspects, and lower compliance).
Proponents of an estate and gift tax argue that it contributes to progressivity in
the tax system by “taxing the rich.†(Note, however, that there is no way to
objectively determine the optimal degree of progressivity in a tax system). A related
argument is that the tax reduces the concentration of wealth and its perceived adverse
consequences for society.1 Moreover, while the estate and gift tax is relatively small
as a revenue source (yielding $28.4 billion in 2001 and accounting for 1.4% of
federal revenue), it raises a not insignificant amount of revenue – revenue that could
increase in the future due to the strong performance of stock market and growth in
inter-generational transfers as the baby boom generation ages. Eliminating or
reducing the tax would either require some other tax to be increased, some spending
program to be reduced, or an increase in the national debt.
In addition, to the extent that inherited wealth is seen as windfall to the
recipient, such a tax may be seen by some as fairer than taxing earnings that are the
result of work and effort. Finally, many economists suggest that an important
rationale for maintaining an estate tax is the escape of unrealized capital gains from
any taxation, since heirs receive a stepped-up basis of assets. Families that accrue
large gains through the appreciation of their wealth in assets can, in the absence of
an estate tax, largely escape any taxes on these gains by passing on the assets to their
heirs.
The estate tax also encourages giving to charity, since charitable contributions
are deductible from the estate tax base. Since charitable giving is generally
recognized as an appropriate object of subsidy, the presence of an estate tax with
1Possible consequences that have been discussed include concentrations of political power,
inefficient investments by the very wealthy, and disincentives to work by heirs (often
referred to as the Carnegie conjecture, reflecting a claim argued by Andrew Carnegie).
CRS-2
such a deduction may be seen as one of the potential tools for encouraging charitable
giving.
Critics of the estate and gift tax typically make two major arguments: the estate
and gift tax discourages savings and investments, and the tax imposes an undue
burden on closely held family businesses (including farms). In the latter case, the
argument is made that the estate tax forces the break-up of family businesses without
adequate liquidity to pay the tax. Critics also suggest that the estate and gift tax is
flawed as a method of introducing progressivity because there are many methods of
avoiding the tax, methods that are more available to very wealthy families (although
this criticism could support reform of the tax as well as repeal). A related criticism
is that the administrative and compliance cost of an estate and gift tax is onerous
relative to its yield (again, however, this argument could also be advanced to support
reform rather than repeal). In general, there may also be a feeling that death is not
a desirable time to impose a tax; indeed, the critics of the estate and gift tax often
refer to the tax as a death tax. Critics also argue that some of the wealth passed on
in estates has generally already been subject to capital income taxes.
The remainder of this paper, following a brief explanation of how the tax
operates, analyzes these arguments for and against the tax. The paper concludes with
an inventory and discussion of alternative policy options.
How the Estate and Gift Tax Works
The unified estate and gift tax is levied on the transfer of assets that occurs
when someone dies or gives a gift. Filing an estate tax return can be difficult
depending on the value and complexity of the estate. The purpose here is to outline
the mechanics of the estate and gift tax. The first section begins with a brief review
of the general rules accompanied with a numerical example. There are some minor
provisions of the law that are not discussed here, however, such as the phase out of
the graduated rates and the credit for taxes on property recently transferred.2 The
second section summarizes the special rules for farms and small businesses. And,
the final section briefly describes the generation skipping transfer tax. The appendix
of this report provides detailed data from returns filed in 2000, the latest year for
which data are available.
General Rules
Filing Threshold. In 2003, estates valued over $1 million must file an estate
tax return. The unified credit, which is identical to the filing threshold, effectively
2For a history of the estate and gift tax as well as a detailed explanation of current law, see
the following CRS reports by John R. Luckey: CRS Report 95-416, Federal Estate, Gift,
and Generation-Skipping Taxes: A Description of Current Law, and CRS Report 95-444,
A History of Federal Estate, Gift, and Generation-Skipping Taxes. See also David
Joulfaian, The Federal Estate and Gift Tax: Description, Profile of Taxpayers and
Economic Consequences, U.S. Treasury Department Office of Tax Analysis Paper 80,
December 1998, for an overview of the tax and associated issues.
CRS-3
exempts from taxation the portion of the estate that falls below the filing threshold.
(The filing threshold is lower, however, if gifts have already been made). Table A1
in the appendix reports the current filing requirement and the unified credit
equivalent for 2003 through 2010.
Gross Estate Value. The gross estate value, which was $217 billion for
returns filed in 2000, is the total value of all property and assets owned by decedents.
Table A2 in the appendix provides the gross estate value for the returns filed in 2000
by wealth category. The data represent the returns filed in 2000, not the decedents
in that year. Thus, a portion of the returns filed in 2000 are from estates valued in
years before 2000.
Allowable Deductions. Deductions from the estate reduce the taxable
portion of the gross estate and in turn the number of taxable returns. In 2000, $95.0
billion was deducted from estates. The most valuable deduction is for bequests to a
surviving spouse, $65.5 billion; the most prevalent (though smallest reported)
deduction is for funeral expenses, $694 million. Appendix table A3 lists the
deductions in greater detail for returns filed in 2000.
Taxable Estate. After subtracting allowable deductions, the remainder of the
estate is the taxable estate. Taxable estate value was $122.8 billion in 2000.
Adjusted taxable gifts are then added to the taxable estate to arrive upon the adjusted
taxable estate. An individual is allowed to exclude $11,000 in gifts per year per
donee from taxable gifts. Thus, only the amount exceeding the $11,000 limit is
added back to the taxable estate. Only 12,527 returns filed in 2000 included taxable
gifts, adding approximately $6.2 billion to the taxable estate value. Thus, adjusted
taxable estates were worth $129.0 billion in 2000. Generally, the adjusted taxable
estate represents the base of estate tax.
Rates and Brackets. After establishing the value of the taxable estate, the
executor calculates the tentative estate tax due.3 The tax due is tentative because the
executor has not redeemed either the unified credit amount or the federal credit for
state death taxes paid (see Table A4 in the appendix).
A Numerical Example. The remaining steps in calculating the estate and gift
tax are most easily exhibited through numerical example. To accomplish this, we
first assume a decedent has an estate worth $2.5 million and leaves $1 million to his
wife and contributes $300,000 to a charitable organization. We also assume the
decedent has not made any taxable gifts leaving $1.2 million in his estate after
deductions. This simple example is exhibited below.
Numerical Example
Gross Estate Value
$2,500,000
Less: hypothetical marital deduction
$1,000,000
Less: hypothetical charitable contribution deduction
$300,000
Taxable Estate
$1,200,000
3 26 I.R.C. 2001(c)
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The taxable estate is valued at $1.2 million after the allowable deductions have
been subtracted from the gross estate value.4 The tax is applied to the $1.2 million
in increments of estate value as provided for in the tax code. For example, the first
increment of $10,000 is taxed at 18%, the second increment of $10,000 is taxed at
20%, the third increment of $20,000 is taxed at 22%, etc. This process continues
until the entire $1.2 million is taxed. The last increment of estate value, that from $1
million to $1.2 million, is taxed at a 41% rate. Thus, even though this estate is in the
41% bracket, only a portion of the estate is taxed at the 41% rate.
Tentative Estate Tax. In 2000, the tentative estate tax after deductions and
before credits was $43.3 billion. Returning to our example, the $1.2 million taxable
estate yields a tentative estate tax of $427,800. Recall, however, we have not yet
considered the “unified credit.â€
The Unified Credit. For decedents dying in 2003, the unified credit is
$345,800, which leaves an estate tax due in our example of $82,000. If our
hypothetical estate tax return were filed in 2004, when the credit rises to $555,800,
the estate presented here would owe nothing in estate taxes. (The unified credit
reduced the tentative estate tax by $22.9 billion in 2000.)
Federal Credit for State Death Taxes. The state death tax credit reduced
the federal estate tax due by $6.5 billion in 2000. This tax credit is determined by yet
another tax rate schedule. The taxable estate value, which is $1.2 million in our
example, is reduced by a standard exemption of $60,000 and the credit rate schedule
applies to the remainder. EGTRRA reduces and eventually repeals the credit for state
death taxes. In 2003, the credit is 50% of what the credit would have been before
EGTRRA; and in 2004, 25% of the pre-EGTRRA credit. In 2005, the credit is
repealed and estates will be allowed to deduct state death taxes paid. For our
hypothetical estate, the credit would be 50% of $45,200 or $22,600. Because the
credit reimburses decedents for state estate taxes, it is analogous to a federal
government transfer to state governments. Table A5 of the appendix reproduces the
credit schedule for the state estate tax.
Net Federal Estate Tax. The net estate tax due was $24.4 billion in 2000.5
This is the final step for the estate executor. After all exemptions, deductions, and
credits, the $2.5 million dollar estate we began with must now remit $59,400 to the
federal government.
All of the steps described above are included in the following table. Also, two
estimates of the average estate tax rate are presented in the bottom two rows. The
federal rate is calculated as the federal estate tax due divided by the gross estate
value. The combined rate is the credit for state taxes added to the federal estate tax
due divided by the gross estate value. The latter measure of average estate tax rate
better represents the full (federal and state) estate tax burden.
4We have dropped the modifier “adjusted†from taxable estate for the benefit of the reader.
The taxable estate and the adjusted taxable estate are identical in the absence of taxable
gifts.
5This is slightly greater than the tentative estate tax less credits because of rounding.
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Numerical Example Continued with Taxes and Credits
Gross Estate Value
$2,500,000
Less: hypothetical marital deduction
$1,000,000
Less: hypothetical charitable contribution deduction
$300,000
Taxable Estate
$1,200,000
Tentative Estate Tax (from the rate schedule)
$427,800
Less: Applicable Credit Amount (in 2003)
$345,800
Estate Tax Due Before State Inheritance Tax Credit
$82,000
Less: State Death Tax Credit1 (in 2003)
$22,600
Net Federal Estate Tax
$59,400
Average Effective Federal Estate Tax Rate
2.38%
Combined Federal and State Average Effective Estate Tax Rate1
3.28%
1 This calculation assumes that the state has adopted the federal credit schedule as its estate tax
mechanism and has adopted the changes implemented by EGTRRA.
Special Rules for Family Owned Farms and Businesses
There are primarily three special rules for family owned farms and businesses.
The first special rule6 allows an additional deduction for qualified estates. The
Qualified Family Owned Business Interest (QFOBI) deduction is set at a maximum
of $675,000 and is coordinated with the applicable credit to yield a total maximum
exclusion of $1.3 million. Specifically, an estate qualifies as a QFOBI if the
decedent is a U.S. citizen or resident and the QFOBI comprises at least 50% of the
adjusted gross estate value. The principal place of business must also be in the
United States and it must be owned as follows: at least 50% by one family; 70% by
two families; or 90% by three families. However, if the business is owned by
multiple families, the decedent’s family ownership must represent at least 30% of the
gross estate value. The qualified heirs must also materially participate in the business
for at least 5 years of 8 years before the death of the decedent. In addition, the
qualified heirs must participate for 5 of 8 years within the 10 years following the
decedent’s death.
The second special rule (26 I.R.C. 6166) allows family owned farm and business
estates to pay the tax in installments over a maximum of 10 years after a deferment
of up to 5 years. The farm or business must comprise at least 35% of the adjusted
gross estate value to qualify for the installment method. A portion of the deferred
estate tax is assessed an annual 2% interest charge.7
626 I.R.C. 2057, EGTRRA repeals this provision for decedents dying after December 31,
2003.
7The 2% is applied to the estate tax due on the sum of $1 million in estate business assets
(the $1 million is indexed for inflation after 1998) and the applicable exclusion amount for
the return year. So, in 2000, the indexed amount was $1,10,000 and the applicable
(continued...)
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The third special rule (26 I.R.C. 2632A) allows family farms and businesses that
meet certain requirements to value their land as currently used rather than at fair
market value. To avoid a recapture tax, heirs must continue to use the land as
designated in the special use notice for at least 10 years following the transfer. The
market value can be reduced by a maximum $750,000 in 1998. After 1998, the
maximum is indexed for inflation, rounded to the next lowest multiple of $10,000.
In 2003, the maximum is $840,000.
The Generation Skipping Transfer Tax
Generally, the generation skipping transfer (GST) tax is levied on transfers from
the decedent to grandchildren. The tax includes a $1,120,000 exemption per donor
in 2003 that is indexed for inflation. Married couples are allowed to “split†their
gifts for an effective exemption of $2,240,000. The rate of tax is the highest estate
and gift tax rate or 49% in 2003. These transfers are also subject to applicable estate
and gift taxes. The GST exemption rises to $1.5 million for 2004-2005; $2 million
in 2006-2008; and $3.5 million in 2009. Very few estates pay a generation skipping
transfer because the high rate of tax discourages this type of bequest.
Economic Issues
As noted in the introduction, the principal arguments surrounding the estate and
gift tax are associated with the desirability of reducing the concentration of wealth
and income through the tax and the possible adverse effect of the tax on savings
behavior and family businesses. There are a number of other issues of fairness or
efficiency associated with particular aspects of the tax (e.g. marital deductions,
charitable deductions, effects on small businesses, interaction with capital gains
taxes) , and the possible contribution to tax complexity. These issues are addressed
in this section.
The Distributional Effect of the Estate and Gift Tax
Distributional effects concern both vertical equity (how high income individuals
are affected relative to low income individuals) and horizontal equity (how
individuals in equal circumstances are differentially affected). Note that economic
analysis cannot be used to determine the optimal degree of distribution across income
and wealth (vertical equity).
Vertical Equity. The estate tax is the most progressive of any of the federal
taxes; out of the approximately 2.3 million deaths in 2000, only 2.1% of estates paid
any estate tax. These numbers can be contrasted with the income tax where most
families and single individuals file tax returns and about 70% of those returns owe
7(...continued)
exclusion was $1,000,000. The sum of these two numbers, $2,100,000, is then run through
the estate tax rate schedule to yield a tentative tax of $829,800. The applicable credit in
2002 was $345,800 which leaves $484,000 to multiply by the 2% interest. The result:
$9,680 in annual interest cost.
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tax. In addition, out of the 2.1% of decedents whose estates pay tax, about 36% of
these had gross estates valued at less than $1 million. Because the exclusion is $1
million in 2003, the percentage of decedents’ estates paying estate taxes will likely
fall considerably.
Evidence suggests that the average effective tax rate rises with the size of the
estate except for the highest tax rate bracket, as shown in Table 1 [columns (f) and
(g)]. Column (f) reports 2000 effective tax rates for the decedent before the credit
for state death taxes and column (g) shows the actual amount paid to the federal
government. Estates valued at less than the exemption amount, of course, pay no
taxes and the tax rate rises and then falls with the very largest estates, despite the fact
that the rates are graduated.
Columns (b), (c), and (d) show the deductions from the estate. Charitable
deductions are the primary reason for the lower tax rate in the highest levels of the
estate tax. The charitable deduction accounts for 7.4% of estates on average but
17.9% in the highest wealth bracket. The deduction for bequests left to spouse also
rises as a portion of the gross estate as estate size increases, although this rise is not
confined to the highest bracket. The progressivity of the estate tax through the initial
brackets is the result of the unified credit and the graduated rate structure.
The data in Table 1 may actually overstate the amount of rate progression in the
estate tax. Tax planning techniques, such as gift tax exclusions or valuation
discounts, reduce the size of the gross estate and are more common with larger
estates. These techniques reduce the size of the estate but do not appear in the IRS
data, thus, the effective tax rates may be overstated for larger estates.
Despite the lack of progressivity through all of the estate size brackets, the
principal point for distributional purposes is that the estate and gift tax is confined
to the wealthiest of decedents and to a tiny share of the population. For example,
estates over $5 million accounted for 7.0% of taxable estates, but accounted for
53.5% of estate tax revenues. Thus, to the extent that concentration of income and
wealth are viewed as undesirable, the estate tax plays some role, albeit small–because
few pay the tax–in increasing income and wealth equality.
Note also an effect that contradicts some claims made by opponents of the tax.
The Carnegie conjecture suggests that large inheritances reduce labor effort by heirs.
Thus, the estate tax, which reduces inheritances, could increase output and economic
growth because heirs work more (increase their labor supply) if their inheritance is
reduced. A recent study found some evidence that this occurs.8 Although, for very
large inheritances, the effect of one individual on the labor supply may be small
relative to the effect on saving.
8 Douglas Holtz-Eakin, David Joulfaian, and Harvey S. Rosen, The Carnegie Conjecture:
Some Empirical Evidence, Quarterly Journal of Economics, vol. 108, May 1993, pp. 413-
435.
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Table 1: Estate Tax Deductions and Burdens, 2000
Percent of Gross Estate
Tax as a Percent of Net Estate*
Size of Gross
After
Estate
Bequests to
Before
Unified
After All
($ millions)
Expenses
Spouse
Charity
Credit
Credit
Credits**
(a)
(b)
(c)
(d)
(e)
(f)
(g)
0.6-1.0
5.50
16.56
2.32
26.68
0.00
2.11
1.0-2.5
5.89
27.58
3.82
24.20
9.00
8.71
2.5-5.0
6.10
34.14
6.14
25.21
18.59
15.88
5.0-10.0
6.60
33.22
8.54
27.96
24.67
20.25
10.0-20.0
6.25
35.15
9.98
27.91
26.25
20.54
over 20.0
5.41
40.51
17.93
21.21
20.82
15.41
Total
5.87
30.12
7.40
24.92
13.72
11.92
Source: CRS calculations from Statistics of Income, Federal Estate Tax Returns, 1998-2000, June
2002. *Net estate is estate value less expenses. Expenses include funeral expenses, attorney’s fees,
executors’ commissions, other expenses/losses, and debts and mortgages. **This includes any gift
taxes that are owed by an estate, which could increase the total taxes owed by an estate.
Horizontal Equity. Estate and gift taxes can affect similar individuals
differentially for a variety of reasons. Special provisions for farmers and family
businesses (discussed subsequently) can cause families with the same amount of
wealth to be taxed differentially. The availability and differential use of avoidance
techniques (also discussed subsequently) can lead to different tax burdens for the
same amount of wealth. Moreover, individuals who accumulate similar amounts of
wealth may pay differential taxes depending on how long they live.
Effect on Saving
Many people presume that the estate tax reduces savings, since the estate and
gift tax, like a capital income tax, applies to wealth. It may appear “obvious†that a
tax on wealth would reduce wealth. However, taxes on capital income do not
necessarily reduce savings. This ambiguous result arises from the opposing forces
of an income and substitution effect. An investment is made to provide future
consumption; if the rate of return rises because a tax is cut, more consumption might
be shifted from the present to the future (the substitution effect). This effect, in
isolation, would increase saving.
However, the tax savings also increases the return earned on investment and
allows higher consumption both today and in the future. This effect is called an
income effect, and it tends to reduce saving. Its effect is most pronounced when the
savings is for a fixed target (such as a fund for college tuition or a target bequest to
an heir). Thus, saving for precautionary reasons (as a hedge against bad events) is
less likely to increase when the rate of return rises than saving for retirement.
Empirical evidence on savings responses, while difficult to obtain, suggests a small
effect of uncertain sign (i.e. either positive or negative). Current events certainly
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suggest that savings fall when the rate of return rises: as returns on stocks have
increased dramatically, the savings rate has plunged.
The same points can generally be made about a tax on estates and gifts, although
some analysts suspect that an estate tax, to be paid at a distant date in the future,
would be less likely to have an effect (in either direction) than income taxes being
paid currently. A reduction in estate taxes makes a larger net bequest possible,
reducing the price of the bequest in terms of forgone consumption. This substitution
effect would cause savings to increase. At the same time, a reduction in estate taxes
causes the net estate to be larger, allowing a larger net bequest to be made with a
smaller amount of savings (the income effect). Again, the latter effect is most
pronounced when there is a target net bequest; a smaller gross bequest can be left
(and less savings required on the part of the decedent) to achieve the net target.
Unfortunately, virtually no empirical evidence about the effect of estate and gift
taxes exists, in part because these taxes have been viewed as small and relatively
unimportant by most researchers and in part because there are tremendous difficulties
in trying to link an estate and gift tax which occurs at the end of a lifetime to annual
savings behavior. But a reasonable expectation is that the effects of cutting the estate
and gift tax on savings would not be large and would not even necessarily be
positive.
Of course, the effect on national saving depends on the use to which tax
revenues are put. If revenues are used to decrease the national debt, they become part
of government saving, and it is more likely that cutting estate and gift taxes would
reduce saving by decreasing government saving, since there may be little or no effect
on private saving. If they are used for government spending on consumption
programs, or transfers that are primarily used for consumption, then it is less likely
that cutting estate and gift taxes would reduce saving because the estate tax cut would
be financed out of decreased consumption (rather than decreased saving). In this
case, reducing the tax would probably have a small effect on national saving, since
the evidence suggests a small effect on private saving. A similar effect would occur
if tax revenues are held constant and the alternative tax primarily reduced
consumption.
Actually, the estate and gift tax is, in some ways, more complicated to assess
than a tax on capital income or wealth. There are a variety of possible motives for
leaving bequests, which are likely to cause savings to respond differently to the estate
tax. In addition, there are consequences for the heirs which may affect their savings.
Several of these alternative motives and their consequences are outlined by Gale
and Perozek.9 Motives for leaving bequests include: (1) altruism: individuals want
to increase the welfare of their children and other descendants because they care
about them; (2) accident: individuals do not intentionally save to leave a bequest but
as a fund to cover unexpected costs or the costs of living longer than expected (thus,
9William G. Gale and Maria G. Perozek. Do Estate Taxes Reduce Savings? April 2000.
Presented at a Conference on Estate and Gift Taxes sponsored by the Office of Tax Policy
Research, University of Michigan, and the Brookings Institution, May 4-5, 2000.
CRS-10
bequests are left by accident and are in the nature of precautionary savings); (3)
exchange: parents promise to leave bequests to their children in exchange for
services (visiting, looking after parents when they are sick); and (4) joy of giving:
individuals get pleasure directly from giving, with the pleasure depending on the size
of the estate. To Gale and Perozek’s classifications we might add satiation: when
individuals have so much wealth that any consumption desire can be met.
The theoretical effects of these alternative theories on decedents and heirs are
summarized in table 2. A discussion of each follows in the text, but it is interesting
to see that there is a tendency for estate taxes to increase saving, not decrease it. This
effect occurs in part because there are “double†income effects that discourage
consumption, acting on both the decedent and the heir.
Table 2: Theoretical Effect of Estate Tax on Saving, By Bequest
Motive
Bequest Motive
Effect on Decedent Saving
Effect on Heir Saving
Altruism
Ambiguous
Increases
Accidental
None
Increases
Exchange
Ambiguous
None
Joy of Giving
Ambiguous
Increases
Satiation
None
Increases or None
Altruistic. When giving is motivated by altruism, the effect of the tax is
ambiguous, as might not be surprising given the discussion of income and
substitution effects. The effects on the parents are ambiguous, while the windfall
receipt of an inheritance tends to reduce the need to save by the children. That is, the
estate tax reduces the inheritances and thus increases saving by heirs. The outcomes
are also partly dependent on whether children think they can elicit a larger inheritance
by squandering their own money (which causes them to save even less) and whether
the parent sees this problem and responds to it in a way that forestalls it.
Interestingly, some parents might respond by spending a lot of their assets before
death to induce their children to be more responsible and save more. The cost of
doing this is the reduction in welfare of their children from the smaller bequest as
compared with the parent’s benefit from consumption. The estate tax actually makes
the cost of using this method smaller (in terms of reduced bequests for each dollar
spent), and causes the parents to consume more. While these motivations and actions
of parent and child can become complex, this theory leaves us with an ambiguous
effect on savings.
Accidental. In the second case, where bequests are left because parents die
before they have exhausted their resources, the estate tax has no effect on the saving
of the parents. Indeed, the parents are not really concerned about the estate tax since
it has no effect on the reason they are accumulating assets. If they need the assets
because they live too long or become ill, no tax will be paid. Bequests are a windfall
CRS-11
to children, in this case, and tend to increase their consumption. Thus, taxing
bequests, because it reduces this windfall, reduces their consumption and promotes
savings. If the revenue from the estate tax is saved by the government, national
saving rises. (If the revenue is spent on consumption, there is no effect on savings).
Thus, in this case, the estate tax reduces private consumption and repealing it,
reducing the surplus, would increase consumption (reduce savings).
Exchange. In the third case, parents are basically paying for children’s
services with bequests and the estate tax becomes like a tax on products: the price for
their children’s attention has increased. Not surprisingly, the savings and size of
bequest by the parents depends on how responsive they are to these price changes.
If the demand is less responsive to price changes (price inelastic), parents will save
and bequeath more to make up for the tax to be sure of receiving their children’s
services, but if there are close substitutes they might save less, bequeath less, and
purchase alternatives (e.g. nursing home care). In this model, the child’s saving is not
affected, since the bequest is payment for forgone wages (or leisure).
Joy of Giving. A fourth motive is called the “joy-of-giving†motive, where
individuals simply enjoy leaving a bequest. If the parent focuses on the before-tax
bequest, the estate tax will have no effect on his or her behavior, but will reduce the
inheritance and theoretically increase the saving of children. Thus, repealing the
estate tax would reduce private saving. If the parent focuses on the after-tax bequest,
the effect on saving is ambiguous (again, due to income and substitution effects).
Satiation. Some families may be so wealthy that they can satisfy all of their
consumption needs without feeling any constraints and their wealth accumulation
may be a (large) residual. In this case, as well, the estate tax would have no effect on
saving of the donor, and perhaps little effect on the donee as well.
Empirical Evidence. Evidence for these motives is not clear but this analysis
does suggest that there are many circumstances in which a repeal of the estate tax
would reduce savings, not increase it. Virtually no work has been done to estimate
the effect of estate taxes on accumulation of assets. A preliminary analysis of estate
tax data by Kopczuk and Slemrod found some limited evidence of a negative effect
on savings, but this effect was not robust (i.e. did not persist with changes in data sets
or specification).10 This effect was relatively small in any case and the authors stress
the many limitations of their results. In particular, their analysis cannot distinguish
between the reduction of estates due to savings responses and those due to tax
avoidance techniques. Given the paucity of empirical evidence on the issue, the
evidence on savings responses in general, and the theory outlined above, it appears
difficult to argue for repeal of the estate tax to increase private saving. Even if the
responsiveness to the estate and gift tax is as large as the largest empirical estimates
of interest elasticities, the effect on savings and output would be negligible and more
10Wojciech Kopczuk and Joel Slemrod, The Impact of the Estate Tax on the Wealth
Accumulation and Avoidance Behavior of Donors. April 17, 2000. Presented at a
Conference on Estate and Gift Taxes sponsored by the Office of Tax Policy Research,
University of Michigan, and the Brookings Institution, May 4-5, 2000.
CRS-12
than offset by public dissaving.11 Indeed, if the only objective were increased
savings, it would probably be more effective to simply keep the estate and gift tax
and use the proceeds to reduce the national debt.
Effect on Farms and Closely Held Businesses
Much attention been focused on the effect of the estate and gift tax on family
farms and businesses and there is a perception that the estate tax is a significant
burden on these businesses. Typically, family farm and business owners hold
significant wealth in business and farm assets as well as other assets such as stocks,
bonds and cash. Because many business owners are relatively well off and the estate
and gift tax is a progressive tax, the probability of a farm or small business owner
encountering tax liability is greater than for other decedents.
Opponents of the estate and gift tax suggest that a family business or farm may
in fact have to sell assets, often at a discounted price, to pay the tax. In his 1997
testimony, Bruce Bartlett from the National Center for Policy Analysis, stated that
...according to a survey, 51% of businesses would have difficulty surviving in the
event of principal owner’s death and 14% said it would be impossible for them
to survive. Only 10% said the estate tax would have no effect; 30% said they
would have to sell the family business, and 41% would have to borrow against
equity.12
Are the data from this survey representative of the country as a whole? And,
what are the policy issues associated with this effect? In response to the above
testimony, there are two questions to explore. One, is repeal of the estate and gift tax
efficiently targeted to relieve farms and small businesses? And two, of the farmer and
small business decedents, how many actually encounter estate tax liability?
Target Efficiency. Congress has incorporated into tax law three provisions,
outlined earlier, that address and reduce the negative consequences of the estate tax
on farms and small businesses. These laws are targeted to benefit only farm and
small business heirs. In contrast, proposals to repeal the estate and gift tax entirely
are poorly targeted to farms and small businesses.
11Interest elasticities have been estimated at no higher than 0.4; that is, a one percent
increase in the rate of return would increase savings by 0.4%. Ignoring the effect on the
deficit or assuming the revenue loss is made up by some other tax or spending program that
has no effect on private savings, this amount is about 40% of the revenue cost, so that
savings might initially increase by about $12 billion. Output would rise by this increase
multiplied by the interest rate, or about $1 billion (or, 1/100 of 1% of output). In the long
run, savings would accumulate, and national income might eventually increase by about one
tenth of 1%. (This calculation is based on the following: the current revenue cost of $28
billion accounts for about 1.4% of capital income of approximately 25% of Net National
Product; at an elasticity of 0.4, a 1.4% increase in income would lead to a 0.56 % increase
in the capital stock and multiplying by the capital share of income (0.25) would lead to an
approximate 0.14 increase in the capital stock.)
12Statement before the Subcommittee on Tax, Finance, and Exports, Committee on Small
Business, June 12, 1997.
CRS-13
Of the52,000 taxable returns filed in 2000, 2,765 (5.3%) returns included farm
assets. Additionally, no more than 14,992 (28.8%) returns included “business assetsâ€
in the estate.13 (Some returns may be double counted). Together, farm and business
owners, by our definition, represent approximately 34% of all taxable estate tax
returns.
However, this estimate is overstated, even aside from the likelihood of double
counting. The estimate for farms assumes any estate with a farm asset is a farm
return thus including part-time farmers or those who may own farm land not directly
farmed. The estimate for business assets may include many returns that include small
interests (particularly for corporate stock and partnerships). Treasury data for 1998
indicated that farm estates where farm assets accounted for at least half of the gross
estate accounted for 1.4% of taxable estates, while returns with closely held stock,
non-corporate business or partnership assets equal to half of the gross estate
accounted for 1.6%. The same data indicated that farm real estate and other farm
assets in these returns accounted for 0.6% of the gross value of estates. Similarly
estates with half of the assets representing business assets accounted for 4.1% of
estates’ gross values.14 Thus, it is clear that if the main motive for repealing the
estate tax or reducing rates across-the-board were to assist farms and small
businesses, most of the revenue loss would accrue to those outside the target group.
How Many Farm and Small Business Decedents Pay the Tax? The
more difficult question to answer is how many decedent farmers and small family
business owners pay the tax. The first step in answering this question is to estimate
the number of farmers and business owners (or those with farm and business assets)
who die in any given year. We chose 2000 as our base year.
About 2.3 million people 20 and over died in the United States in 2000. Some
portion were farm and business owners. To estimate the number of those who died
that were farm or business owners, we assume that the distribution of income tax
filers roughly approximates the distribution of deaths in any given year. Or, the
portion of farm individual income tax returns to total income tax returns in 2000
approximates the number farm deaths to total deaths. The same logic is used to
approximate the number of business owner deaths. (Note that farmers tend to be
older than other occupational groups and have somewhat higher death rates, which
may slightly overstate our estimates of the share of farmer estates with tax).
In 2000, there were 129.4 million individual income tax returns filed; about 2
million were classified as farm returns and 17.6 million included business income or
loss. These returns represent 1.6% and 13.6% of all returns respectively. If the
13A return is classified as a business return if at least one of the following assets is in the
estate: closely held stock, limited partnerships, real estate partnership, other non-corporate
business assets. Counting the same estate more than once is likely which overstates the
number of business estate tax returns.
14See CRS Report RS20593, Asset Distribution of Taxable Estates: An Analysis, by Steven
Maguire.
CRS-14
profile of individual income tax return filers is similar to the profile of decedents, this
implies approximately 37,000 farmers and 320,000 business owners died in 2000.15
Recall that the estate tax return data include 2,765 returns with farm assets and
14,992 returns we classify as business returns. Dividing these two numbers by the
estimated number of deaths for each vocation yields an taxable estate tax return rate
of 7.4% for farm owner decedents and 4.7% for business owner decedents. Thus,
one can conclude that most farmers and business owners are unlikely to encounter
estate tax liability.
Other Issues. Liquidity constraints or the inability of farms and small
business to meet their tax liability with cash, may not be widespread. A recent
National Bureau of Economic Research (NBER) paper using 1992 data estimated that
41% of business owners could pay estate and gift taxes solely out of narrowly defined
liquid assets (insurance proceeds, cash and bank accounts); if stocks (equities) were
included in a business’s liquid assets, an estimated 54% could cover their estate and
gift tax liability; if bonds are included an estimated 58% could cover their tax.16
These estimates suggest that only 3 to 4% of family farms and businesses would
potentially be at risk even without accounting for the special exemptions; the special
exemption suggests a much smaller number would be at risk.17 If one included other
non-business assets that are either not included in these estimates through lack of
data (such as pensions) or nonfinancial assets (such as real estate) the estimate would
be even higher. For many businesses a partial sale of assets (e.g. a portion of farm
land) might be made or business assets could be used as security for loans to pay the
tax. Finally, some estates may wish to liquidate the business because no heir wishes
to continue it. Given these studies and analysis, it appears that only a tiny fraction,
almost certainly no more than a percent or so, of heirs of business owners and
farmers would be at risk of being forced to liquidate the family business to pay estate
and gift taxes.
Effects of the Marital Deduction
One of the most important deductions from the estate tax is the unlimited
marital deduction, which accounted for 30% of the gross value of all estates, and
close to 35% for larger estates (larger estates may be more likely to reflect the death
of the first spouse). An individual can leave his or her entire estate to a surviving
spouse without paying any tax and getting step-up in basis (which permits no tax on
accrued gains). The arguments for an unlimited marital deduction are obvious: since
spouses tend to be relatively close in age, taxing wealth transferred between spouses
15The percentages are multiplied by the 2,349,361deaths of those 20 years old and over. If
the age were higher then the pool of decedents would be smaller and the percentage that
paid estate taxes incrementally higher.
16Holtz-Eakin, Douglas, John W. Philips, and Harvey S. Rosen, “Estate Taxes, Life
Insurance, and Small Business,†National Bureau of Economic Research, no. 7360,
September 1999, p. 12.
17Of course, if all heirs do not wish to continue ownership in the family business, these
liquid assets might need to be used to buy them out; that, however, is a choice made by the
heirs and not a forced sale.
CRS-15
amounts to a “double tax†in a generation and also discourages the adequate
provision for the surviving spouse (although this latter objective could be met with
a large, but not necessarily unlimited, marital deduction). (There is, however, a
partial credit for prior transfers within a decade which could mitigate this double
taxation within a generation.) Moreover, without an exclusion for assets transferred
to the spouse, a substantial amount of planning early in the married couple’s life (e.g.
allowing for joint ownership of assets) could make a substantial difference in the
estate tax liability.
Nevertheless, the unlimited marital deduction causes a certain amount of
distortion. If a spouse leaves all assets to the surviving spouse, he or she forgoes the
unified credit, equivalent to an exclusion that is currently $1 million and will
eventually reach $3.5 million in 2009. In addition, because the estate tax is
graduated, leaving all assets to a spouse can cause the couple to lose the advantage
of going through the lower rate brackets twice. A very wealthy donor would leave
enough to children (or to the ultimate beneficiary after the second spouse’s death) to
cover the exemption and to go through all of the rate brackets; then when the second
spouse dies, another exemption and another “walk through the rate brackets†will be
available. Donors can try to avoid the loss of these benefits and still provide for the
surviving spouse by setting up trusts to allow lifetime income to the spouse and
perhaps provide for invasion of the corpus for emergencies. These methods, of
course, require pre-planning and may not be perfect substitutes for simply leaving
assets to the surviving spouse, who would not have complete control.
Under other circumstances, the unlimited marital deduction can cause a
decedent to leave more wealth to his or her spouse than would otherwise be
preferable. For example, a decedent with children from a previous marriage might
like to leave more assets to the children but the unlimited marital deduction may
make it more attractive to leave assets to a spouse. One way of dealing with this
problem is to leave a lifetime interest to the spouse and direct the disposal of the
corpus of the trust to children. Indeed, the tax law facilitates this approach by
allowing a trust called a Qualified Terminable Interest Property (QTIP) trust.
Nevertheless, this approach also requires planning and is not a perfect substitute for
directly leaving assets to children (particularly if the spouse has a long prospective
life).
The point is that these provisions, whether deemed desirable or undesirable,
distort the choices of a decedent and cause more resources to be devoted to estate
planning than would otherwise be the case.
A Backstop for the Income Tax
Capital Gains. One reason frequently cited by tax analysts for retaining an
estate tax is that the tax acts as a back-up for a source of leakage in the individual
income tax – the failure to tax capital gains passed on at death. Normally, a capital
gains tax applies on the difference between the sales price of an asset and the cost of
acquiring it (this cost is referred to as the basis). Under current law, accumulated
capital gains on an asset held until death will never be subject to the capital gains tax
because the heirs will treat the market value at time of death (rather than original
cost) as their basis. Assuming market values are estimated correctly, if heirs
CRS-16
immediately sold these assets, no tax would be due. This treatment is referred to as
“step-up in basis.†It is estimated that 36% or more of gains escape taxes through
step-up.18
The estate and gift tax is not a carefully designed back-up for the capital gains
tax. It allows no deduction for original cost basis, it has large exemptions which may
exclude much of capital gains from the tax in any case (including the unlimited
marital deduction), and the tax rates vary from those that would be imposed on
capital gains if realized. In particular, estate tax rates can be much larger than those
imposed on capital gains (the current capital gains tax is capped at 20%, while the
maximum marginal estate tax rate is 49%).
If the capital gains tax were the primary reason for retaining an estate and gift
tax, then the tax could be restructured to impose capital gains taxes on a constructive
realization basis. Alternatively, one could adopt a carry-over of basis, so that the
basis remained the original cost, although this proposal could still allow an indefinite
deferral of gain.
Owner-Occupied Housing, Life Insurance, and Other Assets. Owner
occupied housing and life insurance also escape income taxes on capital gains
accrued through inside build-up (for the most part). Owner-occupied housing also
escapes income tax on implicit rental income. There are practical economic and
administrative reasons for some of these tax rules. It is administratively difficult to
tax implicit rental income and taxing capital gains could potentially impede labor
mobility. There are other assets as well that escape the income tax (such as tax
exempt bonds). The estate and gift tax could also be seen as a backstop for these
lapses in the individual income tax.
Effects of the Charitable Deduction
One group that benefits from the presence of an estate and gift tax is the non-
profit sector, since charitable contributions can be given or bequeathed without
paying tax. As shown in table 1, 7.4% of assets of those filing estate tax returns are
left to charities; 17.9% of the assets of the highest wealth class are left to charity.
Although one recent study found that charitable bequests are very responsive to the
estate tax, and indeed that the charitable deduction is “target efficient†in the sense
that it induces more charitable contributions than it loses in revenue, other studies
18 See CRS Report 91-250, The Limits to Capital Gains Feedback Effects, by Jane G.
Gravelle. This study examined accumulated realizations relative to accumulated accruals.
Also see Poterba, James M. and Scott Weisbenner, “The Distributional Burden of Taxing
Estates and Unrealized capital Gains at the Time of Death,†National Bureau of Economic
Research, no. 7811, July 2000, p. 36.
CRS-17
have found a variety of responses, both small and large.19 One problem with these
types of studies is the difficulty in separating wealth and price effects.
An individual would have even greater tax benefits if charitable contributions
were made during the lifetime, since they are deductible for purposes of the income
tax, thereby reducing not only income tax but also, because the eventual estate is
reduced, the estate tax as well. On the other hand, under the income tax charitable
gifts are limited to 50% of income (30% for private foundations) and there are also
restrictions on the ability to deduct appreciated property at full value. Despite this
effect, a significant amount of charitable giving occurs through bequests and one
study estimated that total charitable giving through bequests would fall by 12% if the
estate tax were eliminated.20 This reduction is, however, less than 1% of total
charitable contributions.21
Charitable deductions play a role in some estate planning techniques described
in the next section. In addition, some charitable deductions allow considerable
retention of control by the heirs, as in the case of private foundations. Unlike the
case of the income tax, there are no special restrictions on bequests to private
foundations. (Under the income tax system, deductibility as a percent of income is
more limited for gifts to foundations; there are also more limitations on gifts of
appreciated property to foundations).
Efficiency Effects, Distortions, and Administrative Costs
A number of tax planning and tax avoidance techniques take advantage of the
annual gift exclusion, the charitable deduction, the unlimited marital deduction, and
issues of valuation. Because choices made with respect to these techniques can affect
total tax liability, these planning techniques complicate compliance on the part of the
taxpayer and administration on the part of the IRS. They may also induce individuals
to arrange their affairs in ways that would not otherwise be desirable, resulting in
distortions of economic behavior.
The most straightforward method of reducing estate and gift taxes is to transfer
assets as gifts during the lifetime (inter-vivos transfers) rather than bequests. Gifts
are generally subject to lower taxes for two reasons. First, assets can be transferred
without affecting the unified credit because of the $11,000 annual exclusion. The
exclusion was designed to permit gifts (such as wedding and Christmas presents)
without involving the complication of the gift tax. This annual exclusion can,
however, allow very large lifetime gifts. For example, a couple with two children,
who are both married, could make $88,000 of tax free gifts per year (each spouse
19See David Joulfaian, Estate Taxes and Charitable Bequests by the Wealth, National Bureau
of Economic Research Working Paper 7663, April 2000. This paper contains a review of
the econometric literature on the charitable response. Note that, in general, a tax incentive
induces more spending than it loses in revenue when the elasticity (the percentage change
in spending divided by the percentage change in taxes) is greater than one.
20Ibid.
21Bruce Bartlett, Misplaced Fears for Generosity, Washington Times, June 26, 2000, p. A16.
CRS-18
could give $11,000 to each child and the child’s spouse). Over 10 years, $880,000
could be transferred tax free (and without reducing the lifetime credit). Moreover,
the estate is further reduced by the appreciation on these assets.
The effective gift tax is also lower than the estate tax because it is imposed on
a tax-exclusive basis rather than a tax-inclusive basis. For example, if the tax rate is
49%, a gift of $100,000 can be given with a $49,000 gift tax, for an out-of-pocket
total cost of $149,000. However, if the transfer were made at death, the estate tax on
the total outlay of $149,000 would be 49% of the total, or $74,500. Despite these
significant advantages, especially from the annual exclusion, relatively little inter-
vivos giving occurs.22 There are a number of possible reasons for this failure to take
advantage of the gift exclusion, and one is that the donee does not wish to relinquish
economic control or perhaps provide assets to children before they are deemed to
have sufficient maturity to handle them. There are certain trust and other devices that
have been developed to allow some control to be maintained while utilizing the
annual gift tax exclusion.23 The annual gift exclusion can also be used to shift the
ownership of insurance policies away from the person whose life is insured and out
of the gross estate.
One particular method that allows a potentially large amount of estate tax
avoidance is a Crummey trust. Normally, gifts placed in a trust are not eligible for
the $11,000 exclusion, unless the trust allows a present interest by the beneficiary.
The courts have held that contributions to a trust that allows the beneficiary
withdrawal rights, even if the individual is a minor, and even if withdrawal rights are
available for only a brief period (e.g. 15 or 30 days), can be treated as gifts eligible
for the annual exclusion. This rule has been used to remove insurance assets from
an estate (by placing them in a trust and using the annual $11,000 gift exclusion to
pay the premiums without incurring tax). Under the Crummey trust, a large number
of individuals (who may be children or other relatives of the primary beneficiaries)
can be given the right (a right not usually exercised) to withdraw up to $11,000 over
the limited time period. (Under lapse of power rules, however, this amount is
sometimes limited to $5,500). All of these individuals are not necessarily primary
beneficiaries of the trust but they expand the gift exclusion aggregate. In one case,
a Crummey trust with 35 donees was reported.24
There is, however, one disadvantage of inter vivos gifts: these gifts do not
benefit from the step-up in basis at death that allows capital gains to go
22 See James Poterba. “Estate and Gift Taxes and Incentives for Inter Vivos Giving in the
United States,†forthcoming Journal of Public Economics. Even at high income levels,
Poterba found that only about 45% of households take advantage of lifetime giving. He also
found that those with illiquid assets (such as family businesses) and those with large
unrealized capital gains are less likely to make inter-vivos gifts.
23For a more complete discussion of this and other techniques, see Richard Schmalbeck,
Avoiding Wealth Transfer Taxes, paper presented at the conference Rethinking Estate and
Gift Taxation, May 4-5, 2000, Office of Tax Policy Research, University of Michigan, and
the Brookings Institution and Charles Davenport and Jay Soled. Enlivening the Death-Tax
Death-Talk. Tax Notes, July 26, 1999, pp. 591-629.
24See Davenport and Soled, op cit.
CRS-19
unrecognized, so that very wealthy families with assets with large unrealized gains
might prefer bequests (at least after the annual exclusion is used up).25
Individuals can also avoid taxes by skipping generations; although there is a
generation skipping tax, there are large exemptions from the tax ($1.12 million per
decedent). Generation skipping may be accomplished through a direct skip (a
decedent leaves assets to grandchildren rather than children) or an indirect skip
(assets are left in a trust with income rights to children, and the corpus passing to the
grandchildren on the children’s death). The generation skipping tax rate is 49%.
Relatively little revenue has been collected from the generation skipping tax because
the tax has been successful in eliminating generation skipping transfers that are above
the limit.26
Charitable deductions can also be used to avoid estate and gift taxes (and
income taxes as well). For example, if a charity can be given rights to an asset during
a fixed period (through a fixed annuity, or a fixed percentage of the asset’s value),
with the remainder going to the donor’s children or other heirs, estate taxes can be
avoided if the period of the trust is overstated (by being based on a particular
individual life that is likely to be shorter than the actuarial life). Although
restrictions have now been applied to limit reference persons to related parties, in the
past so-called “vulture trusts†that recruited a completely unrelated person with a
diminished life expectancy were used to avoid tax. 27
Assets can also be transferred to charity while maintaining control through
private foundations. Private foundations allow an individual or his or her heirs to
direct the disposition of funds in the foundations for charitable purposes and continue
to exercise power and control over the assets.
As noted earlier, some estate planning techniques are used to provide maximum
benefits of the marital deduction plus the exclusion and lower rates; these approaches
can also involve the use of trusts, such as the Qualified Terminable Interest Property
(QTIP). These plans may permit the invasion of the corpus for emergency reasons.
Finally, a significant way of reducing estate taxes is to reduce the valuation of
assets. A lower valuation can be achieved by transferring assets into a family
partnership with many interests so that one party is not technically able to sell at a
“market price†without agreement from the other owners to sell, a circumstance that
the courts have seen as lowering the value of even obviously marketable assets, such
as publicly traded stocks (the minority interest discount). Undervaluation can also be
argued through the claim that a sale of a large block of stock (a “fire saleâ€) would
reduce asset value or, with a family-owned business, that the death of the owner (or
25See David Joulfaian, Choosing Between Gifts and Bequests: How Taxes Affect the Timing
of Wealth Transfers. U.S. Department of Treasury Office of Tax Analysis Paper 86. May
2000.
26For a description see CRS Report 95-416, Federal Estate, Gift, and Generation-Skipping
Taxes: A Description of Current Law, by John R. Luckey.
27See Schmalbeck, op cit. The reference individual cannot be terminal (have a life
expectancy of less than a year), however.
CRS-20
a “key manâ€) lowers the value substantially. A fractional interest in a property (such
as real estate) may also qualify for a discount. Discounts may also be allowed for
special use property whose market value may be higher than the value of the property
in its current use.
Estate planning techniques complicate the tax law, increase the resources in the
economy devoted to planning and also increase the administrative burden on the IRS
especially when such cases go to court. Some claims have been made that the
administrative costs and costs to taxpayers comprise a large part of the revenues.
However, a recent study set the costs of complying with the estate tax at 6 to 9% of
revenues. Moreover, an interesting argument was also made in that study that the
inducement to settle affairs provided by the existence of an estate tax may be
beneficial as it encourages individuals to get their affairs in order and avoid costly
and difficult disputes among heirs.28
Of course, the administrative and compliance costs are, themselves, in part a
consequence of the design of the tax. If the estate tax were revised to mitigate some
of the need for tax planning, the administrative and compliance costs might be lower.
The high tax rates for some estates and the lack of third-party reporting
mechanisms suggest that compliance may be a problem, although a large fraction of
returns with large estates are audited. Estimates of the estate “tax gap,†or the
fraction of revenues that are not collected, have varied considerably; a recent estimate
suggests about 13% of estates and gift taxes are not collected, although the authors
suggest that this measure is very difficult to estimate.29
Effects on State Estate and Inheritance Taxes
The credit for state estate or inheritance taxes was probably introduced to
discourage states from luring wealthy taxpayers to their state to die. In theory, the
federal credit for state death taxes eliminates the incentive for states to “race to the
bottom†of estate tax rates and burden. Lower state liability simply increases federal
liability by an equal amount. In short, the state credit is simply a federal transfer to
states contingent upon the state’s maintenance of an estate tax.
The credit also reduces the federal tax burden of the estate and gift tax. The
highest effective credit rate is 8% (half of 16%) of the gross estate value which
reduces the highest federal rate of 49% to 41%. The relationship between the federal
rate–before and after the credit is imposed–is simulated in the chart below for the
2002 tax year. The difference between the two lines represents state death tax credit
or the transfer to state governments from the federal government.
28See Davenport and Soled, op cit. This study also reviewed a variety of other studies of
estate tax compliance costs.
29See Martha Eller, Brian Erard and Chih-Chin Ho, The Magnitude and Determinants of
Federal Estate Tax Noncompliance, Rethinking Estate and Gift Taxation, May 4-5, 2000,
Office of Tax Policy Research, University of Michigan, and the Brookings Institution.
CRS-21
Figure 1. Estate Tax Rates in 2002
50.0%
40.0%
30.0%
tate Tax Rate
20.0%
erage Es
10.0%
v
A
0.0% $1.0
$5.0
$9.0
$13.0
$17.0
$21.0
$25.0
Size of Estate, (in Millions)
State Rate
Federal Rate
Combined Rate
Beginning in 2005, the “credit for state death taxes†will be eliminated and
replaced with a deduction for those taxes. Many states have relied on the federal
credit for their estate tax and will need to modify their tax laws to continue collecting
their estate and inheritance taxes. Under current state laws, “... there will be 29 states
that have no state death tax in 2005.â€30
Policy Options
Repealing the Estate and Gift Tax
One option is to eliminate the estate tax. This approach has been taken in the
2001 tax cut bill, the Economic Growth and Tax Relief Reconciliation Act of 2001
(EGTRRA, P.L. 107-16). However, the legislation sunsets after 2010, reverting to
what the law would have been in 2011 if not for EGTRRA. During the phase-out
period, the estate tax will still generate revenue, thus understating the full fiscal
impact (revenue loss) of complete repeal. Immediate repeal of the estate and gift tax
would cost up to $662 billion, whereas the 10-year revenue cost of the temporary
repeal of the estate tax under P.L. 107-16 is $138 billion; in 2011 the cost alone is
$53.9 billion.
Increasing the Credit or Converting it to an Exemption
Some proposals would have retained the tax and increased the credit or
converted the credit to an exemption. The latter approach would have also had the
effect of reducing the estate tax rates, since the rate structure under an exemption
would begin at the lowest rate (18%) rather than the rate at which the estate tax
unified credit ends (in the 41% bracket). Note, however, that the conversion of a
30Harley Duncan, “State Responses to Estate Tax Changes Enacted as Part of the Economic
Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA),†State Tax Notes, December
2, 2002, p. 615.
CRS-22
credit to an exemption, while reducing aggregate taxes, would have actually
increased the net federal tax by dramatically reducing the state tax credit. Revisions
in the computation of the state credit would have mitigated this effect. Another
alternative to raising the credit or exemption outright could be to index the existing
credit for inflation.
For the same revenue cost, increasing the exemption would favor individuals
with small estates and rate reductions would favor large estates. Indexing
exemptions for inflation would preserve the value of the exemption against erosion
by price inflation.
Taxing the Capital Gains of Heirs vs. the Estate Tax
In 2010, the estate tax will be replaced by a tax on the capital gains of heirs
when an inherited asset is sold. The new law includes an exemption from carryover
basis for capital gains of $1.3 million (and an additional $3 million for a surviving
spouse).
There are efficiency losses to taxing capital gains of heirs on inherited assets
because such taxation would increase the lock-in effect. The lock-in effect occurs
when potential taxpayers hold onto their assets because the anticipated tax on the
gain. If the asset value grows from generation to generation, the lock-in effect
becomes stronger and stronger. Some analysts have suggested that the result of the
lock-in effect will be familial asset hoarding.
Both taxation of gains at death and carry-over basis may be complicated by lack
of information by the executor on the basis of assets (some of which may have been
originally inherited by the decedent). Indeed, a proposal in the 1970s to provide
carry-over basis was never put into place because of protests, some associated with
the problem of determining the basis. This problem may be less serious for
EGTRRA because of the carry-over of basis exemption.
Allowing constructive realization or carryover basis may further complicate
estate planning if an exemption were allowed, because it would be advantageous to
pick those assets with the largest amounts of appreciation for the exclusion or
carryover basis. In addition, since the tax arising from carryover basis would depend
on the heir’s income tax rates, revenues could be saved by allocating appreciated
assets to heirs with the lowest expected tax rates.
Changing from the current step-up basis for inherited assets to a carryover basis,
as enacted by EGTRRA, will also affect the life insurance choices of taxpayers.
Generally, EGTRRA will likely encourage taxpayers to invest more in life insurance
than other investments. Under current tax law, the appreciation of assets held in life
insurance policies is not subject to capital gains taxes. Also, the payout from these
policies, usually in cash to heirs, is not subject to income taxes and effectively
receives a stepped up basis. The switch to carryover basis at death would then favor
life insurance policies over other assets that are subject to capital gains taxes at death
(assuming the heir liquidates the assets). The anticipated change to more assets held
in life insurance policies will likely reduce the revenue generated by capital gains
taxes.
CRS-23
Concerns of Farms and Family Businesses
Farms and family businesses could have received further relief by increases in
the special exemptions. Because of the distribution of estates across asset types,
almost all decedents with significant farm or business assets would not pay an estate
tax. While this approach would have been effective at targeting the farm and family
businesses for relief, it would have exacerbated a concern with the estate and gift
tax–the unfairness of a differential treatment of owners of these business and farm
assets compared to those with other forms of assets. Why should a wealthy
individual whose assets are in a closely held corporation escape estate and gift tax on
his or her assets, while an individual who holds shares in a publicly traded
corporation pay a tax?
Larger exemptions also encourage wealthy decedents to convert other property
into business or farm property to take advantage of the special exemptions. An
incentive already exists to shift property into this exempt form and it would have
been exacerbated by an expansion of the exemption.
Reform Proposals and Other Structural Changes
Many pre-EGTRRA proposals were intended to modify rather than completely
repeal the estate tax. The proposed revisions would have focused on eliminating
estate tax avoidance schemes or at fixing current inconsistencies in the estate tax law.
The issues presented here are still relevant even after enactment of EGTRRA for
three reasons. One, during the phase-out period, the estate and gift is still part of the
tax code. Two, the gift tax is retained even after eventual repeal of the estate tax.
Three, the legislation sunsets after 2010, thus, technically, the estate tax will return
as it would have been in 2011.
Phase out of Unified Credit for Largest Estates. This provision would
allow for a phase out of the unified credit as well as the lower rates, by extending the
bubble. This provision would cause large estates to be taxed at the top rate of 49%.
Impose Consistent Valuation Rules. Analysts have proposed that valuation
of assets be the same for income tax purposes as for estate tax purposes. Basically,
it is advantageous for valuation to be high for purposes of the income tax, so as to
minimize any future capital gains, while it is advantageous for valuation to be low
for estate tax purposes to reduce estate tax. In addition to requiring consistency in
valuation for both purposes, it has also been proposed that the donor report the basis
of assets transferred by gift to the donor (currently, assets transferred by gift and then
sold do not benefit from step-up in basis, but the donor is not required to report the
basis to the donee).
Modify the Rules for the Allocation of Basis. Under current law, a
transaction that is part gift and part sale assigns a basis to the asset for the donee that
is the larger of the fair market value or the amount actually paid. The donor pays a
tax on the difference between amount paid and his basis and may frequently
CRS-24
recognize no gain. This proposal would allocate basis proportionally to the gift and
sale portions.31
Eliminate Stepped up Basis on Survivor’s Share of Community Property.
Under present law, in common law states, half of property held jointly by a married
couple is included in the first decedent’s gross estate and that half is thus eligible for
step-up in basis for purposes of future capital gains. In the case of a community
property state, however, where all properties acquired during marriage are deemed
community property, a step up in basis is available for all community property, not
just the half that is allocated to the decedent spouse. The reason for this rule, which
is quite old, was the presumption in the past that property in a common law state
would have been held by the husband (who would have acquired it) and thus would
all have been eligible for step-up, while only one half of property in community
property states would have been deemed to be held by the husband and be eligible
for step up. This older treatment, it is argued, was made obsolete by changes in 1981
that determined that only half of any jointly held property would be included in the
estate regardless of how the property was acquired, and thus made the step up apply
to only one half of this type of property. Thus, currently couples in community
property states are being treated more favorably than those in common law states.
A reservation with this treatment is that property that could be allocated to one
spouse in a common law state may not be able to escape the community property
treatment in a community property states, and common law states may now be
favored if these assets in common law states tend to be held by the first decedent.
However, couples in community property states may be able to convert to separate
property by agreement, and thereby take advantage of the same planning
opportunities as those in common law states.
Modify QTIP Rules. Under present law, an individual may obtain a marital
deduction for amounts left in trust to a spouse under a Qualified Terminable Interest
Property (QTIP) trust, with one requirement being that the second spouse must then
include the trust amounts in their own estate. In some cases the second estate has
argued that there is a defect in the trust arrangement so that the trust amount is not
included in the second spouse’s estate (even though a deduction was allowed for it
in the first spouse’s estate). This provision would require inclusion in the second
spouse’s estate for any amount excluded in the first spouse’s estate.
Eliminate Non-Business Valuation Discounts. This provision would require
that marketable assets be valued at the fair market value; i.e. there would be no
valuation discounts for holding assets in a family partnership or for “fire-saleâ€
dispositions.
31For example, suppose an asset with a basis of $50,000 but a market value of $100,000 is
sold to the donee for $50,000. The donor would realize no gain and the gift amount would
be $50,000, with the donee having a basis of $50,000. Eventually, the gain would be taxed
when the donee sold the property, but that tax would be delayed. However, if the asset were
divided into a gift of $50,000 with a basis of $25,000 and a sale of $50,000 with a basis of
$50,000, the donor would realize a gain of $25,000; the donee would now have a basis of
$75,000. Half of the gain would be subject to tax immediately.
CRS-25
Eliminate the Exception for a Retained Interest in Personal Residences
from Gift Tax Rules. Under current law, when a gift is made but the grantor retains
an interest, that retained interest is valued at zero (making the size of the gift and the
gift tax larger). In the case of a personal residence, however, the retained interest is
valued based on actuarial tables. In general, retained interests are only allowed to be
deducted from the fair market of the gift (reducing gift taxes) if they can be
objectively valued (and hence are allowed for certain types of trusts, such as those
that pay an annuity).
Disallow Annual Gift Taxes in a Crummey Trust. As noted earlier, the
annual gift exclusion is not available for gifts placed in trust unless certain rules are
met, but a Crummey trust, which allows some right of withdrawal, is eligible. This
revision would allow gifts in trust to be deductible only if the only beneficiary is the
individual, and if the trust does not terminate before the individual dies, the assets
will be in the beneficiary’s estate. These rules are similar to generation skipping
taxes.
Reduce the Annual Gift Tax Exclusion. The annual gift tax exclusion allows
significant amounts to be transferred free of tax and also plays a role in transferring
insurance out of the estate (by using the annual gift tax exclusion to pay the
premium). While some gift tax exclusion is probably desirable for simplification
purposes, the $11,000 exclusion’s role in estate tax avoidance could be reduced by
reducing its size. An alternative change that would limit the use of the annual
exclusion in tax avoidance approaches would be a single exclusion per donor (or
some aggregate limit per donor), to prevent the multiplication of the excluded
amount by gifts to several children and those children’s spouses and the use of
techniques such as the Crummey trust.
Allow Inheritance of Marital Deductions or Lower Rates. One of the
complications of estate planning is maximizing the use of the exemption and lower
rate brackets by a married couple. In this case, while it may be economically and
personally desirable to pass the entire estate (or most of the estate) to the surviving
spouse, minimizing taxes would require passing to others at least the exemption
amount and perhaps more to take some advantage as well of the lower rate brackets.
Such complex situations could be avoided by allowing the surviving spouse to inherit
any unused deduction and lower rate brackets so that the couple’s full deductions and
lower rates could be utilized regardless of how much was left to the surviving spouse.
Allow Gift Tax Treatment Only on Final and Actual Transfer. Many of the
tax avoidance techniques with charitable gifts involve over-valuation of a deductible
interest. For example, a gift may be made of the remainder interest after an annuity
has been provided to a charitable organization . The larger the value of the charitable
annuity, the smaller the value of the gift (and the gift tax). One way to over-value an
annuity is to allow the annuity to extend to a particular individual’s lifetime, when
that individual has a shorter life than the actuarial tables indicate. Similarly, a way
to transfer income via the gift tax exclusion without the recipient having control over
it is to place it in a Crummey trust. Even if the individual is able to exercise
withdrawal rights, the expectation of not receiving future gifts if the assets are
withdrawn in violation of the donor’s wishes may mean that such rights will never
CRS-26
be exercised. A rule that excludes all assets placed in trusts from consideration for
the gift tax would eliminate this mechanism.
These types of valuation techniques could be addressed by only allowing the
gift tax to be imposed at the time of the actual final transfer. In such a case, no
actuarial valuation would be necessary and no trust mechanisms would be available.
Valuation of Assets. One option is to disallow discounts for property that has
a market value (such as bonds and publicly traded stock) regardless of the form the
asset is held in, as suggested by the administration tax proposals. Such a change
would prevent the avoidance technique of placing assets into a family partnership or
similar arrangement and then arguing that the property has lost market value because
it would require agreement of the heirs to sell it. In addition, other limits on
valuation discounts could be imposed. For example, blockage discounts based on
“fire sale†arguments could be disallowed. Such a provision might allow for an
adjustment if the property is immediately sold at such a lower price.
Include Life Insurance Proceeds in the Base. Some tax avoidance
techniques are associated with shifting life insurance proceeds out of the estate by
shifting to another owner.
Switch to an Inheritance Tax. Some authors have suggested that an
inheritance tax should be substituted for the estate tax. Some states have inheritance
taxes. An estate tax applies to the total assets left by the decedent. An inheritance
tax would be applied separately to assets received by each of the heirs. If tax rates
are progressive, smaller taxes would be applied the greater the number of
beneficiaries of the assets. One reason for such a change would, therefore, be to
encourage more dispersion of wealth among heirs, since taxes would be lower
(assuming exemptions and graduated rates) if split among more recipients. In
addition, under an inheritance tax the tax rate can be varied according to the status
of the heir (son vs. cousin, for example). At the same time, one can see more
avoidance complications arising from an inheritance tax.
Conclusion
The analysis in this report has suggested that some of the arguments used for
and against maintaining the estate tax may be questioned or of lesser import than is
popularly assumed. For example, there is little evidence that the estate tax has much
effect on savings (and therefore on output); indeed, estate taxes could easily increase
rather than reduce savings. Similarly, only a tiny fraction of farms and small
businesses face the estate and gift tax and it has been estimated that the majority of
those who do have sufficient non-business assets to pay the tax. Moreover, only a
small potion of the estate tax is collected from these family owned farms and small
businesses, so that dramatically reducing estate tax rates or eliminating the tax for the
purpose of helping these family businesses is not very target efficient.
Although the estate tax does contribute to the progressivity of the tax system,
this progressivity is undermined, to an undetermined degree, by certain estate tax
CRS-27
avoidance techniques. Of course, one alternative is to broaden the estate tax base by
restricting some of these estate planning techniques. At the same time progressivity
could be achieved by other methods.
On the other hand, arguments that the estate tax is a back-up for the income
escaping the capital gains tax, would not support the current high rates of the estate
tax, which should be lowered to 20% or less to serve this purpose.
More intangible arguments, such as the argument that inheritances are windfalls
that should be taxed at higher rates on the one hand, or that death is an undesirable
time to levy a tax and that transferred assets have already been subject to taxes, are
more difficult to assess but remain important issues in the determination of the
desirability of estate and gift taxes.
CRS-28
Appendix: Estate and Gift Tax Data
Table A1: The Filing Requirement and Unified Credit
Filing Requirement or
Year of Death
Unified Credit
Equivalent Exemption
2003
$1,000,000
$345,800
2004 and 2005
$1,500,000
$555,800
2006 through 2008
$2,000,000
$780,800
2009
$3,500,000
$1,525,800
2010
repealed
repealed
Table A2: Gross Estate Value of Taxable Returns Filed in 2000
Percent
Gross Estate
Gross Taxable
Taxable
All
Taxable
Size of Gross Estate
Value
Estate Value
Estate
Returns
Returns
(in 000s)
(in 000s)
Tax
Returns
All Returns
108,322
52,000
$217,402,426
$130,371,309
48%
$.6 to $1 million
47,845
18,634
$38,598,125
$15,800,654
39%
$1 to $2.5 million
45,248
23,827
$66,946,098
$35,518,751
53%
$2.5 to $5.0 million 10,018
5,917
$34,085,398
$20,265,359
59%
$5.0 to $10.0 million
3,386
2,258
$23,286,561
$15,545,769
67%
$10.0 to $20 million
1,129
814
$15,253,132
$11,032,374
72%
over $20.0 million
696
549
$39,233,112
$32,208,403
79%
Source: Internal Revenue Service, Statistics of Income, Federal Estate Tax Returns, 1998-2000, June
2002.
CRS-29
Table A3: Allowable Deductions on 2000 Returns
Value of Deductions
Returns with Deduction
(in millions)
Deduction
Total
Taxable
Total
Taxable
Total deductions
108,263
51,975
$95,042
$34,870
Bequests to surviving spouse
46,922
4,991
$65,481
$16,984
Charitable deductions
18,011
10,959
$16,092
$9,803
Debts and mortgages
80,221
46,130
$7,820
$3,865
Executor’s commissions
36,781
29,716
$1,664
$1,471
Attorney’s fees
67,068
44,956
$1,370
$1,091
Other expenses and losses
75,168
48,212
$1,206
$985
Funeral expenses
95,380
49,521
$695
$353
Source: Internal Revenue Service, Statistics of Income, Federal Estate Tax Returns, 1998-2000, June
2002.
Table A4: 2003 Estate and Gift Tax Rate Schedule
Taxable Estate
Current Statutory Rate
to
Value From
(in Percent)
$0
$10,000
18
$10,001
$20,000
20
$20,001
$40,000
22
$40,001
$60,000
24
$60,001
$80,000
26
$80,001
$100,000
28
$100,001
$150,000
30
$150,001
$250,000
32
$250,001
$500,000
34
$500,001
$750,000
37
$750,001
$1,000,000
39
$1,000,001
$1,250,000
41
$1,250,001
$1,500,000
43
$1,500,001
$2,000,000
45
$2,000,001
and over
49
CRS-30
Table A5: Credit for State Death Taxes
Note: In 2003, the credit is 50% of value of the credit as calculated in this table.
Taxable Estate
Value
Current Statutory Credit
to
(less the $60,000
Rate (in Percent)
exemption)
$0
$40,000
0
$40,001
$90,000
.8
$90,001
$140,000
1.6
$140,001
$240,000
2.4
$240,001
$440,000
3.2
$440,001
$640,000
4.0
$640,001
$840,000
4.8
$840,001
$1,040,000
5.6
$1,040,001
$1,540,000
6.4
$1,540,001
$2,040,000
7.2
$2,040,001
$2,540,000
8.0
$2,540,001
$3,040,000
8.8
$3,040,001
$3,540,000
9.6
$3,540,001
$4,040,000
10.4
$4,040,001
$5,040,000
11.2
$5,040,001
$6,040,000
12.0
$6,040,001
$7,040,000
12.8
$7,040,001
$8,040,000
13.6
$8,040,001
$9,040,000
14.4
$9,040,001
$10,040,000
15.2
$10,040,001
and over
16.0
Table A6: Wealth Distribution of Taxable Returns Filed in 2000
Gross
Percent of
Percent
Size of Gross
Taxable
Taxable
Net Estate
Taxable
Federal
Estate
Returns
Estate Value
Tax
Estate
Estate Tax
(millions)
Returns
Revenue
All Returns
52,000
$130,371
$24,399
100%
100%
$.6 to $1 million
18,634
$15,801
$769
36%
3%
1 to 2.5 million
23,827
$35,519
$5,486
46%
22%
2.5 to 5.0 million 5,917
$20,265
$5,081
11%
21%
5.0 to 10.0 million
2,258
$15,546
$4,405
4%
18%
10.0 to 20 million
814
$11,032
$2,937
2%
12%
over 20.0 million
549
$32,208
$5,720
1%
23%
Source: Internal Revenue Service, Statistics of Income, Federal Estate Tax Returns, 1998-2000, June
2002.