estate tax (aka death tax)

Issue in Brief

What's up?

The “estate” or “death” tax – which takes a cut of person's wealth before it passes on to the heirs – is phasing out, as part of the 2001 Bush tax cuts, but it will pop back in full pre-Bush force after 2010. Many would like to see those cuts extended after the 2011 expiration date or to see the cuts expanded. Some would prefer the death tax disappeared altogether. The House under Bush has voted umpteen times to permanently ditch or reduce the estate tax, but a permanent cut always got stuck in the Senate. With the dems taking charge in 2007, efforts to dispel the estate tax ended; instead the Obama administration is seeking to fix a long-term compromise, holding the estate tax exemption at $3.5 billion.

What exactly is the tax? Before the Bush tax cuts, estates were taxed above $675,000 at a rate of up to 55%. (For the non-mathies: that would give the government $150,000 off a $1 million estate and $4.6 million on a $10 million estate - even though after other deductions the final tax would likely be lower). As part of Bush's phase-out plan, this year's tax only hits estates above the $2 million mark at a rate up to 46%. (See our tax facts page for the full phase-out.) All told, the government collects about $25 billion a year from the death tax, just over 1% of all revenue (CBO). Just how much would be coming in if the tax law hadn't changed is unclear, but it would be something between $29 billion (where it was in 2000) and $43 billion (where it will be when the tax comes back in 2012). (Note: the law also allows individuals to give a tax-free ‘gift' of up to $12,000 a year, and to set up trust funds as a way to protect inheritances from the full brunt of the death tax.)

Get rid of it!

Opponents of the death tax argue that it hurts family owned businesses by forcing heirs to downsize or even sell “the family farm” (we're talking literally) in order to pay Uncle Sam. That's bad for families and for the economy; instead of expanding, hiring and investing, critics say, small businesses have to cut back or save to survive a hefty estate tax. On moral grounds, opponents also say the tax is unfair; if a parent works hard all her life, paying her taxes all along, why should her hard earned money go to the government and not to the people she chooses?

Keep it!

Supporters of the estate tax don't want it axed mostly because they say we can't afford to lose it: with large deficits and a growing debt, every $25 billion counts toward keeping the country in financial good stead. Supporters also say the tax is good for society; America prides itself on being classless, where people have to work hard to get ahead – allowing the rich to pass on all their money to their heirs only supports a more fixed upper class.

Fix it!

Middle of the roaders believe the death tax is a bit of a ‘blessed curse'; although it increases government revenue, if too high it can cut into potential jobs and economic growth. They say keep the tax, but raise the floor on what can be taxed – suggested numbers range from $3 million-$10 million – so some money still comes in but fewer small businesses will be hurt.

Where things stand now

Twenty states have repealed the state death tax. The House under Bush voted to completely nix the estate tax multiple times, but the Senate never managed to follow suit. Now, with Congress needing to act to keep the estate tax from bouncing back to full force next year, a compromise may be in the works, setting the tax exemption somewhere between $3 and $5 billion (NYT).

Some facts

Selling the farm: CBO's (pdf) estimates on how many farmers and businesses get hit:

  • How many estates didn't have enough liquid assets (ready cash) to pay their estate tax in 2000:

    • All estates: 2,834

    • Farm estates: 138

    • Small business owner estates: 164

  • If there had been a $1.5 million floor in 2000 (instead of a $675,000 floor), how many estates wouldn't have had enough liquid assets:

    • All estates: 740

    • Farm estates: 27

    • Small business owner estates: 82

Slowing growth

  • In a 1996 survey of business owners,

    • 60% said the estate tax would limit their business's growth, while

    • 13% said it would make growth impossible

More reading

Updated April, 2009.

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