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• National Agricultural Law Center

Summary

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) repeals the estate tax in 2010. During the phase-out period, the new law increases the exempt amount to $3.5 million by 2009 and lowers the top rate to 45% by 2007. The federal gift tax remains though the rate is reduced to the top personal income tax rate and the exemption is separate from the estate tax exemption. 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. Late in the 109th Congress, two Senate compromise proposals were reported in the press, but were not introduced. One (Senator Kyl) would have set the exemption at $5 million for each spouse and lowered the rate to 15%. The second (Senator Baucus) would have set the exemption at $3.5 million and include a progressive rate schedule beginning at 15% and rising to 35%. Earlier, on July 29, 2006, the House approved H.R. 5970 by a vote of 230-180. The bill would have restored the unified estate and gift tax exclusion and raise the exclusion amount to $5 million per decedent by 2015. Any unused exclusion could have been carried over to the estate of the surviving spouse. The tax rate on taxable assets up to $25 million would have been equal to the tax rate on capital gains. The tax rate on assets over $25 million would have dropped to 30% by 2015. The JCT estimated that the estate tax provisions of H.R. 5970 would have cost $268 billion over FYs 2007-2016. 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. Arguments are also made that inheritances represent a windfall to heirs that are 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 difficult to pass on family businesses. 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 imposes administrative and compliance burdens that undermine the progressivity of the tax. The analysis in this study suggests that the estate tax is highly progressive, although progressivity is undermined by avoidance mechanisms. Neither economic theory nor empirical evidence indicate that the estate tax is likely to have much effect on savings. Although some family businesses are burdened by the tax, only a small percentage of estate tax revenues are derived from family businesses. 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 appropriateness of such a revenue source and its interaction with incentives for charitable giving, state estate taxes, and capital gains and other income taxes. This report will be updated as legislative events warrant.

Related Legislation:
• H.R.5970
• S.2007

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