Published on January 28, 2008
Death and Taxes . . . : Death and Taxes . . . Conservatives call it "the death tax." Lawyers call it the "estate tax." It used to be known as "the inheritance tax." And each group has a different assessment of who pays the tax, and who would profit from its repeal The estate tax raises substantial revenue from those with the greatest capacity to pay Abolishing the estate tax would cost $1.03 trillion over the first decade How Did We Get Where We Are Today With the Federal Estate Tax?: How Did We Get Where We Are Today With the Federal Estate Tax? Goal #1: Raising revenue for military spending Beginning in 1797, a pattern of enactment and repeal Goal #2: Breaking up concentrations of wealth Beginning in 1916, added goal of breaking up the estates of the rich Neither Goal Achieved To Date: Neither Goal Achieved To Date Revenue generated has decreased as a proportionate share of total tax revenue For fiscal year 2006, the U.S. Government revenues totaled $2,626 billion: Estate and Gift Taxes totaled $27.4 billion, or 1.04% of total revenues Significant increases in exemptions, exclusions, and deductions have significantly lessened estate tax revenue…and lessened the “bite” on the wealthy History of the Federal Estate Tax: History of the Federal Estate Tax The estate tax is one of the oldest federal taxes. First imposed in 1797, its principal purpose was revenue, not redistribution. Once the need for revenue fell, the tax was repealed in 1802. The tax was revived in 1862, again solely for revenue purposes. When the revenue requirement abated the tax was repealed in 1870. Another estate tax, imposed in 1898 to pay for the Spanish-American War, was abolished in 1902. The current estate tax dates from 1916, enacted to pay for World War I. Is There Still A “Death Tax?”: Is There Still A “Death Tax?” Missouri abolished its inheritance tax (1980) There is a “federal estate tax” (FET) Paid by the “estate”, not the individual heirs The FET is “integrated” (unified) with the federal gift tax (FGT) If you try to avoid the FET by making lifetime gifts, you will have to file a federal gift tax return “Loophole” for estates whose net worth is less than a set amount ($2 million in 2007) These are FET-free up to that exemption amount Also a “loophole” for gifts: Annual Exclusion (AE) of $12,000 per donee per year (2006) Married donors can double the AE to $24,000/donee/year, by filing the FGT return jointly. Federal Estate Tax (FET) “Equivalents” (FET Tax-Free Sized Estates): Federal Estate Tax (FET) “Equivalents” (FET Tax-Free Sized Estates) 2007 $2,000,000 2008 $2,000,000 2009 $3,500,000 2010 Repealed 2011 $1,000,000 Federal Gift Tax : Federal Gift Tax There is no Missouri gift tax The federal gift tax does not apply to: Gifts to spouse Gifts to charities Gifts to churches Gifts to schools Gifts to governmental agencies Annual exclusion: $12,000 per donee per year If spouse joins in, doubles to $24,000 per donee per year Donees need not be related to donor Lifetime Federal Gift Tax Exemption: $1,000,000 2007 Federal Estate Tax Rates : 2007 Federal Estate Tax Rates FET rate is 45% in 2007, 2008, and 2009 for any amount exceeding the loophole exemption ($2,000,000 in 2007) 2010: The FET is repealed (for one year) 2011: The maximum rate goes up to 55% 2011: Only the first $1,000,000 is exempt This strange sequence of events will occur because the tax cuts enacted in 2001, including those related to the estate tax, expire after 2010, restoring the law that was in effect prior to 2001. Will Congress Revise the FET and FGT?: Will Congress Revise the FET and FGT? The Bush Administration has called for making the repeal of the estate tax permanent after 2010. The Joint Committee on Taxation estimates that this would reduce revenues by $290 billion through 2015, including $72 billion in 2015 alone. But this estimate essentially captures only the cost of four additional years of estate tax repeal; the revenues losses associated with 10 more years of repeal — for the period 2012 through 2021 — are much higher, about $745 billion. And when the associated $225 billion in higher interest payments on the debt are taken into account, the total cost of repealing the estate tax for a decade would be nearly $1 trillion. U.S. Government DEBT: $9.13 trillion: U.S. Government DEBT: $9.13 trillion The national debt — the total accumulation of annual budget deficits — is up from $5.7 trillion when President Bush took office in January 2001 and it will top $10 trillion sometime right before or right after he leaves in January 2009. The dollar is down about 35% since the end of 2001 against a basket of major currencies. Foreign governments and investors now (December 2007) hold some $2.23 trillion — or about 44% — of all publicly held U.S. debt. That's up 9.5% from a year earlier. Japan is first with $586 billion, followed by China ($400 billion) and Britain ($244 billion). Saudi Arabia and other oil-exporting countries account for $123 billion, according to the Treasury. Despite vows in both parties to restrain federal spending, the national debt as a percentage of the U.S. Gross Domestic Product has grown from about 35% in 1975 to around 65% today. Even during the four most recent years when there was a budget surplus, 1998-2001, the national debt ranged between $5.5 trillion and $5.8 trillion. Who is loaning Washington all this money? : Who is loaning Washington all this money? Ordinary investors who buy Treasury bills, notes and U.S. savings bonds, for one. Also it is banks, pension funds, mutual fund companies and state, local and increasingly foreign governments. This accounts for about $5.1 trillion of the total and is called the "publicly held" debt. The remaining $4 trillion is owed to Social Security and other government accounts. Too Much National Debt Is A Threat To Our National Security: Too Much National Debt Is A Threat To Our National Security "Borrowing hundreds of billions of dollars from China and OPEC puts not only our future economy, but also our national security, at risk. It is critical that we ensure that countries that control our debt do not control our future," said Sen. George Voinovich of Ohio, a Republican budget hawk. Is There A Solution To Too Much National Debt?: Is There A Solution To Too Much National Debt? The overall debt might be next to impossible to chisel down appreciably, regardless of who is in the White House or which party controls Congress, without major spending cuts, tax increases or both. The basic facts are a matter of arithmetic, not ideology. There's little dispute that current fiscal policies are unsustainable. Former Presidential Candidate Ross Perot had this solution…: Former Presidential Candidate Ross Perot had this solution… Texas billionaire Ross Perot made paying down the national debt a central element of his quixotic third-party presidential bid in 1992. The national debt then stood at $4 trillion and Perot displayed charts showing it would soar to $8 trillion by 2007 if left unchecked. He was about a trillion low. What happened to the projected SURPLUS?: What happened to the projected SURPLUS? Not long ago, it actually looked like the national debt could be paid off — in full. In the late 1990s, the bipartisan Congressional Budget Office projected a surplus of a $5.6 trillion over ten years — and calculated the debt would be paid off as early as 2006. Former Fed chairman Alan Greenspan recently wrote that he was "stunned" and even troubled by such a prospect. Among other things, he worried about where the government would park its surplus if Treasury bonds went out of existence because they were no longer needed. Slide18: Source: USAToday, December 3, 2007. “U.S. debt: $30,000 per American” http://www.usatoday.com/money/economy/2007-12-03-debt_N.htm?loc=interstitialskip Raise the Exemption?: Raise the Exemption? Raising the exemption level by modest amounts significantly reduces the number of estates that would be subject to the estate tax. Compared with the number of estates subject to tax in 2011 under the $1 million exemption level set in current law, raising the exemption level to $2 million would reduce the number of taxable estates by 61 percent. Raising the exemption level to $3.5 million would reduce the number of taxable estates by 84 percent. At these higher exemption levels, very few small businesses and farms would be subject to the estate tax. : At these higher exemption levels, very few small businesses and farms would be subject to the estate tax. With a $1 million exemption, there would be 760 taxable estates nationwide in 2011 in which a small farm or small business comprises a majority of the estate and thus creating the situation where the estate may have too few assets beyond the farm or business to pay the estate tax without selling some or all of the farm or business. With a $2 million exemption, there would be 210 estates in 2011 where a small farm or business represents more than half of the value of the estate. At a $3.5 million exemption level, there would only be 50 such estates in the nation, an average of one per state Government Revenues: Government Revenues While sharply reducing the number of estates subject to the estate tax, these higher exemption levels, with a 45 percent estate tax rate, would still yield a reasonable amount of revenue. A $2 million exemption and a 45 percent rate would maintain 68 percent of the estate tax revenue that would be lost if the FET were to be repealed A $3.5 million exemption would maintain 44 percent of the revenue Effective Tax Rate is LESS than 45%: Effective Tax Rate is LESS than 45% The Tax Policy Center estimates that, under a federal estate tax with a $2 million exemption and a 45 percent top rate, taxable estates would, on average, pay an effective tax rate of only 18 percent in 2011. Even very large estates valued at over $20 million would pay an average of 22 percent of the total value of the estate in federal estate tax, or less than half of the top 45 percent rate. Lower the top rate from 45% to 15%?: Lower the top rate from 45% to 15%? Would reduce the revenues raised under these two reform options ($2 or $3.5 million exemption) by about two-thirds But would have almost no effect on the number of estates subject to the tax, including estates with small businesses and farms. 15% Rate & $2 Million Exemption: 15% Rate & $2 Million Exemption With a $2 million exemption, dropping the top tax rate from 45 percent to 15 percent would result in the effective tax rate falling from an average of 18 percent to 6 percent. Would maintain only about 20% of the revenue that would be lost under repeal. 15% Rate & $3.5 Million Exemption: 15% Rate & $3.5 Million Exemption Setting the exemption at $3.5 million while lowering the rate to 15 percent would maintain only 13 percent of the revenue that would be lost under repeal The vast majority of the benefits of lowering the rate from 45 percent to 15 percent would flow to the largest estates Wealthy Estates Minimize the FET Bite: Wealthy Estates Minimize the FET Bite Because of legal estate planning techniques, much less of the tax actually falls on the wealthy than is commonly believed. In 1997, more than 50 percent of all estate tax revenue came from estates under $5 million. Slide28: In 2003, of 2.4 million deaths, only 30,627 taxable estate tax returns—1.3%—were filed Slide29: The top 3.1% of returns filed accounted for 39.5% of revenues collected. This chart shows that if the bottom three-quarters of current estate tax filers were exempted from the tax entirely, only 18.3% of the revenue would be lost. Why should we tax large estates?: Why should we tax large estates? The best reason is to tax income that escapes the individual income tax This is elementary fairness. Tax all types of income, not just the types received by the average person. Another reason is to tax people according to their ability to pay taxes Millionaires can more easily afford to pay taxes than can truck drivers, schoolteachers and domestic workers A third reason is that the tax encourages and subsidizes gifts to charitable institutions If you repeal the estate tax, you would repeal that incentive to give Who Wants to Stay a Millionaire?: Who Wants to Stay a Millionaire? Millionaires may rejoice. Congress is on course to pass a tax cut crafted especially for the rich: the repeal of the federal estate and gift tax, what politicians call the "death tax." The way you get really rich in the U.S. is with capital gains from stocks and bonds and from business ownership. Neither type of gain is taxed under the income tax unless the stock, bond or business is sold. If the owner dies before selling, any such accumulation of wealth would pass to heirs tax-free, but for the estate tax. Slide32: Repeal of the estate and gift tax will not benefit the overwhelming majority of taxpayers one iota. How to Make Up for the Loss of Revenue from the Rich?: How to Make Up for the Loss of Revenue from the Rich? To offset the cost of repealing the tax, Congress is contemplating the extension of capital gains taxation to all who inherit financial assets, called a 'carryover' provision. That 'carryover' will mean higher taxes for many people who would never be liable for any Estate and Gift Tax A case of the rich benefiting at the expense of anyone who gets an inheritance of any size. To die rich is to die in disgrace*: To die rich is to die in disgrace* Andrew Carnegie, steel magnate, one of our original rich guys in the U.S. "The parent who leaves a son enormous wealth generally deadens the talents and energies of the son and tempts him to lead a less useful and less worthy life than he otherwise would."