The Incredible Shrinking Estate Tax
The estate tax is only a faint shadow of its former self. In 2009, less than one-quarter of one percent of deaths—just 5,500 decedents—will leave taxable estates, the smallest percentage since at least the Great Depression. In part, that tiny fraction reflects the current recession’s devastation of assets—the Fed estimates that the total value of household and nonprofit assets fell by about one-sixth between 2007 and the first quarter of 2009. But changes in estate tax rules over the past decade have played a much larger role than economic swings.
The Economic Growth Tax Relief and Reconciliation Act of 2001 (EGTRRA), best known as the Bush tax cuts, phases the estate tax out over a decade. The act raised the effective exemption incrementally from $675,000 in 2001 to $3.5 million in 2009 and dropped the top tax rate from 55 percent to 45 percent. The levy disappears entirely in 2010, only to return in 2011 under pre-EGTRRA law—a $1-million exemption and 55-percent top rate. The Obama administration has proposed making the 2009 parameters permanent and indexing them for inflation. Others would set a higher exemption and a lower tax rate.
So what’s happened?
For decades before 1976, only estates worth $60,000 or more owed estate tax. That threshold remained constant in nominal terms, so more and more estates had to pay the tax as economic growth and inflation boosted household wealth. In 1943, just under 1 percent of deaths led to estate tax payments; by 1976, that share had grown to 7.65 percent (see graph).
Congress doubled the effective exemption to $120,000 in 1977 and raised it gradually to $600,000 in 1987, where it stayed for ten years. As the exemption rose, the share of estates owing tax fell to just 0.9 percent in 1987 before growing again because of the fixed exemption. In 1997, when a bit more than 2 percent of estates owed tax, Congress again enacted a series of increases in the exemption that would have reached $1 million in 2006. Deaths resulting in estate tax liability stabilized until EGTRRA set off the latest inexorable drop in taxable estates.
So what’s next? The share of estates owing tax is scheduled to drop to zero in 2010, thanks to the one-year repeal. Except Congress won’t let that happen. Smart money says Congress will extend the 2009 law for 2010—a $3.5-million exemption and a 45-percent tax rate—and then consider a permanent fix when they deal with the scheduled 2011 sunset of almost all of the Bush tax cuts. Senators John Kyl (R-Az) and and Blanche Lincoln (D-AR) want to shrink the tax below its 2009 level—they want a $5-million exemption and a 35-percent tax rate.
Few lawmakers now call for total repeal, though such a proposal would surely get lots of votes. Opinion polls show significant numbers of voters saying they would more likely vote for a candidate who favors repeal. Maybe they all think they’ll win the lottery or their next great idea will become another Google. In the real world, we’re spending a lot of time worrying about a tax that fewer than three in a thousand of us will pay. And, when we do, we’ll be dead.
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>Maybe they all think they’ll win the lottery or their next great idea will become another Google.
You got it right. 45% of Americans think they are somewhat or very likely to be wealthy in their lifetimes.
Fact: 5.7% of households are worth a million or more. 1% are worth $5 mil or more.
http://www.asymptosis.com/a-land-of-magical-thinking-becoming-a-millionaire.html
Joe the $40K-a-year plumber was “thinking about buying” the quarter-million dollar plumbing company he worked for. That's why he was so worried about candidate Obama's communistic tax plans. (And even then, he obviously hadn't done the math. Even with a 30% return on equity, the company would only yield $75K a year.)
Go figger.
Steve
http://asymptosis.com
It sounds like you did not need the money from work. Most of us do and we will never pay estate taxes.
Someone needs to explain to me a rational justification why your children deserve to be idle while other children must grow up to work.
>As I understand it, the really despicable aspect of the drop in the estate tax rate to 0 in 2010 as currently scheduled is that at the same time the rule allowing stepped-up basis for inherited property would be repealed.
No, not exactly. There is an exemption for small amounts of appreciated property that still get the stepped up basis. I don't recall the exact amount, but it's over $1M.
It isn't. It is just corporate welfare for life insurance companies. Check out the new groups I found at http://www.estatetaxtruth.org.
As I understand it, the really despicable aspect of the drop in the estate tax rate to 0 in 2010 as currently scheduled is that at the same time the rule allowing stepped-up basis for inherited property would be repealed. This was apparently one of the revenue-estimating tricks they did in 2001. So, instead of the very small percentage of people who would pay tax on estates over $6 million, indexed, the Pritzker, Walton and Mars families, and others of their ilk, would pay no tax on their multi-billion-dollar estates, and everyone who inherits a house that their parents bought for $10,000 in 1950 and then sells it in 2010 for $350,000 would pay tax on the $340,000 gain. Some of us can never sell our houses, because we've been rolling over the proceeds of condos and prior dwellings and houses jointly-owned with prior spouses and capital improvements and periods of commercial use and generally such complex histories that it would take an archaeologist plus a team of accountants just to figure out what the basis was.
Nine years ago, I got a pencil out and calculated that after federal and state income taxes, payroll taxes and the 50% tax on our estate, I could leave my kids 27 cents of each additional dollar I made from my job.
Seemed silly to work anymore, so I quit my job in 2000 and haven't worked since.
The estate tax discourages effort and small business expansion. I doubt that it is a net revenue raiser.
Estates should not be taxed. Instead, withdrawls from estates should be taxed as income and this should be done as part of comprehensive tax reform which limits who has to file taxes at all. Additionally, there should be a loophole for heirs who cash out by selling stock to an ESOP or other qualified broad based employee-ownership plan.
Estate taxes are not about soaking the rich, but distributing wealth more broadly. They are not supposed to just be a cash cow.
You wanna guess why so few people pay the tax? You mentioned the exemption, but there are plenty of small family business owners out there shoveling money at life insurance companies, trusts and tax preparers (money that could be spent to hire more employees and increase income tax rolls) in order to pass the business on to their kids.
Maybe that (and not the pure saintly goodness of his heart) is why insurance mogul, Warren Buffett, testified against repeal.
The estate tax accounts for less than 2% of the federal budget. It is estimated that repeal would create 1.5 million jobs.
Hmmm…jobs or massively, insanely rich insurance companies? Boy, that's tough, but I'm gonna say jobs. And I think 90% of the country will agree.