Estate Tax Snapshots

The Economic Policy Institute has issued two analyses of the estate tax with dramatic, but easy to understand, charts.

The first, Death and taxes (part I): who pays the estate tax and how much, concludes:

The basic exemption allowed [by the estate tax] shielded estates under $1 million in value from any tax whatsoever. The highest average rates do not exceed 17% and apply to estates between $5 and $20 million, which comprised less than 8% of all estate tax returns.

The second, Death and taxes (part II): Wealthiest estates account for most of revenue generated by estate tax, shows:

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.

The average rates of tax themselves overstate what might be called a typical rate of tax. The Congressional Budget Office found that in 2000, the average rate of estate tax, among those who pay any tax, was 18.5%, but for the median estate of this group, the average tax rate was a significantly lower 10.6%. A tiny number of very large estates can push the average well above the median.

Another widespread concern is that the tax is burdensome on small businesses and farms. The recent report from the Congressional Budget Office provides new analysis of this question. Current law provides a variety of special breaks for estates that qualify as including the assets of a family-owned business. It turns out that the average size of estates in such returns exceeds the overall average size of estates. The estates of farmers are about 90% of the size of both average and median estates. Thus, the breaks amount to perverse, preferential treatment for relatively large "family business" estates, or for "family farm" estates that are close to average or typical size.

The EPI analysis is supported by an analysis offered by the IRS, Which Estates Are Affected by the Federal Estate Tax?: An Examination of the Filing Population for Year-of-Death 2001. Significantly, the report finds that in 2001 estate tax decedents bequeathed almost $13 Billion to charitable institutions.

Additionally, the report reveals the lie that the estate tax overly burdens closely held businesses and farms:

In the aggregate, liquid assets--including State and local bonds, Federal savings bonds, other Federal bonds, cash, and cash management accounts--were sufficient (with a ratio greater than 1) to meet reported tax liabilities in all but two gross estate categories.

The two categories in which liquid assets were insufficient were those that encompassed estates with a value of more than $5 Million and less than $20 Million. Yet, "the majority of estates with an estate tax liability, 71.4 percent, reported liquid assets that exceeded estate tax liabilities."

It must be remembered that the IRS report covered returns for decedents dying before 2002. With respect to those estates, the maximum amount shielded by the lifetime credit was only $675,000. This year, the amount is $1.5 Million and, for decedents dying after December 31 of this year, increases to $2M. Thus the burdens on smaller estates reflected in the report have been substantially eliminated.

A hat tip to TaxProf for the links to the EPI report.