The Center's work on 'Estate Tax' Issues


Estate Tax Repeal: A Misguided and Costly Policy

March 25, 2015 at 5:29 pm

Eliminating the federal estate tax on inherited wealth, which the House Ways and Means Committee approved today and which we’ve explained would increase deficits and inequality, is a misguided — and expensive — policy, new data show.  New cost and distributional estimates from the Joint Committee on Taxation (JCT) confirm that repeal would reduce revenues by $269 billion from 2016 through 2025 (adding $320 billion to deficits once the additional interest cost on the national debt is included), with the entire benefit going to the nation’s roughly 5,400 wealthiest estates.

The JCT distributional estimates show that in 2016:

  • Only the nation’s wealthiest 5,400 estates would benefit — about 2 of every 1,000 estates — because only those estates currently face the estate tax to begin with.
  • The nation’s wealthiest 1,336 estates — those worth $20 million or more — would receive 73 percent of the benefit, with each receiving a tax windfall averaging roughly $10 million.
  • The nation’s wealthiest 318 estates — those worth at least $50 million — would receive tax windfalls averaging more than $20 million each.

Ways and Means approved this windfall for heirs of extremely wealthy estates on the same day the House is considering a Republican budget plan that would shrink programs for people with low- and moderate-incomes by an average 43 percent in 2025.  Such deep cuts would produce a dramatically weaker safety net, driving millions of people into poverty and denying or weakening health coverage for tens of millions more.  They would also reduce opportunity for students from modest backgrounds who are striving for a college education and a better future (see graphic). Proponents of the budget plan contend that such cuts are needed to meet their goal of balancing the budget in ten years.

In backing estate tax repeal, however, the House Ways and Means Committee suggests that the nation can afford $320 billion in higher deficits to deliver a tax cut to the wealthiest estates.

Estate Tax Repeal = More Inequality + Bigger Deficits

March 24, 2015 at 10:20 am

As our new paper explains, the House Ways and Means Committee is scheduled to consider a bill this week to repeal the federal estate tax on inherited wealth, just one week after the House Budget Committee approved a budget plan calling for $5 trillion in program cuts disproportionately affecting low- and moderate-income Americans.

Repealing the estate tax would be highly misguided — especially in the context of the House Budget Committee plan, which would repeal health reform and cut Medicaid deeply, causing tens of millions of Americans to become uninsured or underinsured; cut the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), making it harder for millions of low-income families to put food on the table; and cut Pell Grants, raising the financial hurdle for people of modest means to attend college.  Despite these and hundreds of billions of dollars in additional cuts that were largely unspecified, the budget included no revenue increases.  And while concerns of future deficits supposedly drive the budget plan’s harsh cuts, repealing the estate tax would significantly expand deficits.

Repeal would: 

  • Reduce revenues by more than $250 billion over the next ten years. The legislation before the House would not offset this cost, contrary to Republican calls for a balanced budget.
  • Do nothing for 99.8 percent of Americans. Only the estates of the wealthiest 0.2 percent of Americans — roughly 2 out of every 1,000 people who die — owe any estate tax.  This is because of the tax’s high exemption amount, which has jumped from $650,000 in 2001 to $5.43 million per person (effectively $10.86 million for a couple) in 2015.  Repeal would bestow a tax windfall averaging over $2.5 million apiece — or roughly the same amount that a typical college graduate earns in a lifetime — on the roughly 5,400 wealthy estates that will owe the tax in 2015.

  • Exacerbate wealth inequality, which has grown significantly in recent decades. In 2012, the wealthiest 1 percent of American families held about 42 percent of total wealth, new data show. Large inheritances play a significant role in the concentration of wealth; inheritances account for about 40 percent of all household wealth and are extremely concentrated at the top.  Repealing the estate tax would exacerbate wealth inequality by benefiting only the heirs of the country’s wealthiest estates, who also tend to have very high incomes.

    In addition, despite policymakers’ frequent statements about the importance of work, repeal would reduce the incentive for heirs of large estates to work.

Evidence shows the estate tax is an economically sound tax.  Contrary to claims that the estate tax hurts the economy, it likely has little or no impact on wealthy donors’ savings, and it encourages heirs to work.  The estate tax is an economically efficient way to raise revenue that supports public services and lowers deficits without imposing burdens on low- and middle-income Americans.  The tax plays an important role in our revenue system, particularly given our long-term budget challenges.

Click here for the paper.

John Oliver Debunks Some Estate Tax Myths

July 14, 2014 at 4:55 pm

John Oliver’s HBO show this weekend featured a segment on income and wealth inequality (warning: colorful language!), and Oliver cited our paper showing that 99.86 percent of all estates in 2013 owed no estate tax (see chart).

As Oliver mentioned and our paper explains, contrary to the myth that many people face the estate tax, the first $5.25 million of every estate (effectively $10.5 million per married couple) is exempt from tax (with that level indexed for inflation).  That means that very few estates owe any tax.  For those few that did in 2013, the “effective” tax rate — that is, the percentage of the estate’s value that is paid in taxes — was 16.6 percent, on average.  That’s far below the top estate tax rate of 40 percent.

Rather than cutting investments in areas like education, medical research, and environmental protection in order to reduce the deficit, policymakers should be looking to strengthen the estate tax.  Learn more about the myths and realities of the federal estate tax here.

Greenstein on President Obama’s New Budget

March 4, 2014 at 1:47 pm

CBPP President Robert Greenstein has issued a statement on the President’s fiscal year 2015 budget:

President Obama’s new budget is a solid blueprint that would reduce deficits, alleviate poverty, and boost investment in areas needed for future economic growth, such as infrastructure, education, and research.

On the deficit front, the budget confounds the recent predictions of some pundits by including, rather than eschewing, deficit reduction.  While offsetting the costs of its new investment initiatives by cutting spending and scaling back tax breaks, the budget goes further by reducing deficits enough to put federal debt as a share of gross domestic product (GDP) on a declining path.  With about $1.7 trillion in deficit reduction over the next ten years (excluding the savings from winding down operations in Afghanistan), the budget would reduce the debt-to-GDP ratio to 69 percent in 2024.

As previously announced, the budget doesn’t include the proposal in the President’s budget last year to switch to the “chained Consumer Price Index” in calculating annual cost-of-living adjustments in Social Security and other programs.  It does, however, retain the $400 billion in Medicare savings in last year’s budget, including about $60 billion in Medicare beneficiary reductions (through increases in premiums for affluent beneficiaries, increases in some co-payments, and changes affecting Medigap coverage).

On the poverty-fighting front, the budget features an important proposal to boost the Earned Income Tax Credit (EITC) for low-income workers who are not living with minor children — a measure many analysts across the political spectrum believe holds considerable promise for reducing poverty and also increasing labor-force participation, including among young minority men.  Single low-wage men and women are the one group of Americans whom the federal tax code literally taxes into — or deeper into — poverty.  The Obama proposal, which builds on a long bipartisan tradition of support for the EITC, would substantially address that problem.

No one should declare this budget “dead on arrival,” for two reasons.  First, under the Murray-Ryan agreement of last year, both parties have agreed on the total amount available for appropriated programs this year, and the Obama budget includes program-by-program requests that hit that total.  Consequently, the budget’s appropriations requests will likely play an important role as the Appropriations Committees craft the annual funding bills this year.

Second, with no big budget showdowns or deadlines looming this year, 2014 likely won’t be a year of significant budgetary action beyond the appropriations bills.  But 2015 may well be.  Policymakers likely will seek to negotiate another budget deal to ease the scheduled sequestration budget cuts for 2016 and beyond and also may consider tax reform and other measures.  Both the new Obama budget and the budget proposal that House Budget Committee Chair Paul Ryan will unveil in a few weeks will offer dueling frameworks for a year-long debate on where fiscal and program policy should go, in advance of larger decisions next year.

The vision reflected in the Obama budget will provide a much sounder course than the one we’ll likely see in the Ryan budget.  That’s because the Obama budget curbs lower-priority spending and unproductive special-interest tax breaks in order to make investments that the nation needs for future prosperity, reduce poverty and better reward low-paid work, and give many young children a better chance of success, while reducing mid-term and long-term deficits at the same time.

“Blank Slate” Approach to Tax Reform Leaves Biggest Question Unanswered

June 28, 2013 at 11:54 am

Yesterday’s call from Senate Finance Committee Chairman Max Baucus and ranking Republican Orrin Hatch to initiate tax reform with a “blank slate” that doesn’t include any of the deductions, credits, exclusions, and other tax breaks collectively known as “tax expenditures” leaves a critical question unresolved:  what will policymakers do with the proceeds from narrowing or eliminating tax expenditures?

Will they use a substantial share of the savings to help put together an alternative to sequestration or otherwise devote such savings (presumably in conjunction with spending reductions) to the long-term deficit reduction that the nation needs?  Or will the savings go entirely to cutting tax rates?

Using some of the savings as part of a responsible, balanced alternative to sequestration —thereby averting harsh cuts in areas ranging from national security to education, medical research, and Head Start — and to help put the nation on a firmer long-term fiscal footing ought to be a higher priority than the pursuit of ever-lower tax rates.

Tax reform that curbs unproductive tax expenditures surely has merit.  Yet revenue-neutral tax reform would be highly problematic, as it would likely take revenues off the table for deficit reduction for years to come by using up virtually all politically achievable reductions in tax expenditures.  That, in turn, would likely take mandatory programs off the table for deficit reduction as well, because many policymakers would justifiably reject large mandatory cuts in the absence of new revenues.

In addition, policymakers face an immediate need to replace the harmful sequestration budget cuts, which are affecting defense and non-defense programs alike, with a mix of savings from tax expenditures and mandatory programs.  But revenue-neutral tax reform could foreclose that option by using up all of the politically achievable tax expenditure savings to pay for tax-rate reductions.

An essential ingredient of tax reform — and the one target for policymakers to specify in advance — is therefore a revenue target: one that contributes to a balanced deficit-reduction package that includes replacing sequestration.  Revenues raised through tax reform — including through a “blank slate” approach — should go to lower rates only after this target has been met, as most budget agreements under discussion over the past few years would have done.

This means that while policymakers may have useful exploratory discussions on tax reform now, they should defer actual legislative action until there is a larger fiscal policy agreement that includes a revenue target under which tax reform will contribute meaningfully to deficit reduction.