The tax plan proposed by President Trump and Republican congressional leaders would among other provisions permanently repeal the federal estate tax, which affects only the very wealthiest Americans – those with estates valued in the top 0.2 percent. Eliminating the estate tax would reduce federal revenue at the same time that the President and Congress have proposed significant spending cuts that would harm many important public services and systems that improve the lives of individuals and families. Outright repeal of the estate tax would follow congressional actions that have eroded this tax over the past couple of decades. Since 2001, for example, Congress has cut the top rate for the estate tax from 55 percent to 40 percent, increased the size of estates that are exempt from the tax, and phased out the portion of the estate tax that is shared with states, a move that eliminated all estate tax revenue received by California.
To help shed light on what’s at stake with the proposed elimination of the federal estate tax, this post describes how this tax works, shows the very small share of Americans it affects, and discusses some fundamental concerns raised by its potential repeal.
What Is the Estate Tax?
The estate tax is levied on large accumulations of wealth that are transferred from the estate of a person who has died to the estate’s beneficiaries. The estate tax serves as a “back stop” to the income tax, ensuring that income that is not taxed during an individual’s lifetime, such as unearned capital gains, is taxed when it passes from one generation to the next.
Repealing the Estate Tax Would Eliminate a Revenue Source That Supports Key Services
The estate tax will raise an estimated $20 billion in 2017, according to the Tax Policy Center, and its repeal would reduce federal revenue by an estimated $240 billion over the next decade. While estate tax revenues are small in comparison to overall federal revenue, they provide funding for a range of essential public services and systems from health care to education to environmental protection. To put this in perspective: The estate tax will raise significantly more in a decade than the federal government will spend on the Food and Drug Administration, the Centers for Disease Control and Prevention, and the Environmental Protection Agency combined, according to the Center on Budget and Policy Priorities. This is despite a decline in estate tax revenue since the late 1990s. For example, during the 10-year period from 1997 through 2006 the estate tax raised more than $300 billion, after adjusting for inflation. This is one-fourth more than the estate tax is projected to raise during the next decade.
The Very Small Share of Americans Who Pay Estate Taxes Today Is a Fraction of Those Who Paid the Tax 20 Years Ago
In 2017, just 2 out of every 1,000 estates are estimated to owe any estate tax. This is one-tenth of the share of estates subject to the tax 20 years ago. In the late 1990s, more than 45,000 estates each year — around 2 percent of those who died — paid estate taxes, but that number is estimated to fall to 5,500 in 2017 (see chart below). This drop is due to a large increase in the size of estates that are exempt from tax. Congress increased the estate tax exemption from $650,000 per person ($1.3 million per couple) in 2001 to $5.49 million per person ($10.98 million per couple) in 2017. Moreover, large loopholes enable many estates to avoid taxes altogether. As a result, less than half of the estimated 11,300 estates that are expected to file an estate tax return will owe any taxes in 2017. And while estate tax opponents claim that the tax burdens small farms and businesses, just 80 of these entities are expected to pay any estate tax this year, according to Tax Policy Center estimates.
The Largest Share of Federal Estate Tax Revenue Comes from California
The federal government collects a much larger share of estate tax revenue from California than from any other state. Californians paid $3.9 billion in estate taxes — more than 20 percent of total federal estate tax revenue — in 2016, the most recent year for which IRS data are available. And more than 1 out of every 5 Americans who paid estate taxes last year resided in California.
The Few Who Owe Estate Taxes Pay Far Less Than the Top Tax Rate
Although the top estate tax rate is currently 40 percent, the Tax Policy Center estimates that in 2017 the average tax rate paid by the few estates subject to the tax will be less than half that amount (17.0 percent). Taxable estates worth between $5 million and $10 million will pay less than a 9 percent tax rate, on average, and those estates worth more than $20 million will pay an average estate tax rate of less than 20 percent. One reason for such a low tax rate is that estate taxes are levied only on the portion of an estate’s value that exceeds the exemption level. For example, the estate of a couple worth $12 million would owe taxes on only around $1 million, based upon the current $5.49 million exemption per person (nearly $11 million a couple). Moreover, policymakers have enacted generous deductions and other discounts that can shield a large portion of an estate’s remaining value from taxation.
The Very Wealthiest Americans Pay the Largest Share of the Estate Tax
The estate tax is the most progressive part of the US tax code because it affects only Americans who are most able to pay. As a result, the estate tax helps make the US tax system more equitable and fair. And the very wealthiest not only account for the largest share of the few Americans subject to the estate tax, but their estates account for the largest share of estate tax revenue. The top 10 percent of income earners account for two-thirds of all estates subject to tax and will pay 88 percent of all estate taxes in 2017, according to Tax Policy Center estimates. Further, the top one-tenth of 1 percent of income earners account for only 4 percent of taxable returns, but will pay $5.5 billion — more than one-quarter of all estimated estate tax revenue this year.
Repealing the Estate Tax: Benefitting the Wealthy Few Would Cost a Lot
Repeal of the federal estate tax would provide a significant tax break to the very wealthiest Americans, including Californians, with this loss of revenue very likely paid for by cuts to vital services that help the less fortunate make ends meet and access greater opportunity. Although the estate tax affects only a small number of the very wealthy, it raises substantial revenue that supports key public systems and services. This makes the proposal to repeal the estate tax particularly unfair, as it comes at the same time that the President and Congress have proposed significant cuts to many of these important services. If Congress acts to eliminate the estate tax, less well-off taxpayers would have to make up for the lost revenue in order to help pay for these services, face reductions to these services, or bear the burden of increases in the national debt, which could eventually force cuts to health care, education, scientific research, and other vital programs.
— Jonathan Kaplan