Estate Tax
January 31, 2007
"As regards taxation, assessment according to ability to pay
is fundamental to a just and equitable system."
- Pope John XXIII, Mater
et Magistra: Christianity and Social Progress (1961), #132
In 2001, President Bush signed into law a tax cut that included
a slow phase-out and a temporary repeal of the estate tax. The
phase-out, accomplished through rate reductions and increases in
exemptions, is currently scheduled to run until 2009. In 2010,
the estate tax will disappear entirely. In 2011, it reverts back
to 2000 law.
There have been various efforts by Congress since the passage
of the ’01 tax cut to make the repeal permanent. The House
voted to permanently repeal the estate tax in April 2005 at a cost
of nearly $1 trillion between 2012 and 2021.
The Senate was expected to take up permanent repeal in September
2005 but they set the legislation aside after the devastation caused
by Hurricane Katrina. In June 2006, the Senate could not reach
the 60 votes needed to end debate on the estate tax and allow a
vote on full repeal.
Current Status
Where the Estate Tax is Now
Subsequently, the House of Representatives passed an estate tax
reform compromise, H.R. 5638, which would be almost as damaging
as a full repeal. This bill exempts from the estate tax the first
$5 million of an individual's estate and allows couples to exempt
up to $10 million. Assets between those levels and $25 million
would be taxed at the capital gains rate, currently 15 percent.
Estate assets exceeding $25 million would be taxed at twice that
rate, or 30 percent. It will cost our government approximately
$800 billion from 2012-2021.
Estate tax rates would also be tied to the capital gains rate,
which has been targeted by congressional leadership to be zeroed
out. This means an eventual full repeal of the estate tax will
be generated without our members of Congress voting to repeal the
estate tax legislation.
In July of 2006, what was known as the “trifecta” bill, H.R. 5970, aimed to permanently repeal the estate tax by attaching it to both the minimum wage increase and other tax cuts. Although it passed in the House, it failed to reach cloture in the Senate, which meant that the bill was never voted on and therefore not passed.
Fair tax advocates are urging senators to:
- reject any proposals to reduce the top estate tax rate substantially,
including proposals to set it at the “capital gains rate” (which
is currently 15% and is targeted for permanent repeal as well);
- reject any proposals that would lose substantial revenue,
not just in short term, but in 2011 through 2020 and beyond;
- insist that any compromise be offset and not increase the
deficit;
- be prepared to walk away from bipartisan negotiations if these “principles” cannot
be met.
Other ideas for reform are also being proposed. Chuck Collins,
co-founder of United for a Fair Economy, suggests a couple of ideas
in his American Prospect article, “Back from the
Dead,” June 2005:
- Raise exemptions to $2 million for individuals and $4 million
for couples– this would preserve almost 68% of the revenue.
- Use a progressive tax system where estates under $5 million
would pay a lower rate and estates over $20 million would pay
a higher rate– this proposal could create the same revenue
as the existing law.
Estate Tax Background
Who pays the estate tax?
The estate tax is one of this country’s most progressive
taxes and the only federal tax on accumulated wealth, which affects
only the wealthiest 2% of Americans.
In 2003, roughly 66,000 estate tax returns were filed. Of those
filed, less than half were taxable. More...
In 2004, less than 18,800 estates were subject to an estate tax.
Half of all estate taxes are paid by the wealthiest 0.14% of Americans.
More...
How much revenue does the estate tax generate?
It is estimated that in 2004, the estate tax brought in $17.6
billion. The Congressional Budget Office expects to collect $19
billion in revenue from the estate tax in 2010. More here and here  .
From 2012 to 2021, repealing the estate tax will transfer nearly
one trillion dollars (accounting for interest payments on the debt)
to the wealthiest 2% of Americans. That means less funding available
to meet the growing costs of Social Security, Medicare and Medicaid,
as well as other priorities such as improving educational opportunities,
expanding health insurance coverage, and reducing child poverty.
More...
State governments also receive revenue through the federal estate
tax. Under the current provisions of the federal estate tax, estate
taxes levied by states generally do not impose additional burden
on estates; taxpayers receive a dollar credit for state estate
taxes (up to a specified minimum) on their federal tax return.
In other words, states effectively receive a portion of the federal
estate tax. Information gathered from state budgets and state revenue
officials suggests that states together would have lost approximately
$5.5 billion in revenue in fiscal year 2000 if the estate tax repeal
had been in effect. ( "Estate Tax Repeal: A Costly Windfall
for the Wealthiest Americans," CBPP,
February 6, 2001)
What does the estate tax have to do
with charitable giving?
Because unlimited deductions are allowed for charitable gifts, the estate tax
provides a powerful incentive for charitable giving. Repeal would have a devastating
impact on public charities ranging from institutions of higher education and
land conservancies to organizations that assist people in poverty. In 2004,
the Congressional Budget Office released a report that found permanent repeal
of the estate tax would result in a decrease in charitable giving between $12
and $24 billion a year. More...
Why do we need the estate tax?
- It prevents concentrations of wealth
and power and promotes democracy. Huge family fortunes have been shown to distort our
economy and damage our democratic process - this is the main
reason the estate tax was enacted in the first place. The estate
tax raises a good deal of money without affecting 98 percent
of us, encourages charitable giving and promotes America's core
economic and democratic values. More...
- It is fair. The estate tax closes loopholes in the tax system
that would otherwise allow unrealized capital gains income to
never be taxed. It is also the most progressive federal tax,
which taxes those who are most able to pay. According to a 2001
report by the Center on Budget and Policy Priorities, "The
[estimated] 64,000 estates that would otherwise be subject to
the estate tax would receive a tax cut of $55 billion in 2010
as a result of the repeal of the estate tax. This is equal to
the total tax cut from all of the provisions of the Bush plan
that would be shared by some 103 million families - the bottom
74 percent of U.S. families when all families are ranked by income.
Approximately 192 million people- those who live in these 103
million families - would share total tax cuts equal to the amount
of tax reductions that the 64,000 estates would receive."
- It encourages charitable giving. Roughly one-third of private
foundation revenue comes through estate tax giving. The Congressional
Budget Office estimates that repeal of the estate tax would cut
charitable giving by $12 to $24 billion annually. More...
Higher education institutions, museums, religious groups, and many human
service organizations would be directly affected if the estate tax is repealed.
(OMBWatch, "Repeal of Estate
Tax to Harm Nonprofits and Service Delivery," 2001; More...)
One way that citizens contribute to the common good is through
paying taxes. Economic Justice for All , a statement by the U.S.
Catholic Bishops states: "The tax system should be structured
according to the principle of progressivity so that those with
relatively greater financial resources pay a higher rate of taxation." (#202)
The federal estate tax is the most progressive feature and an integral
part of our federal tax system. Permanent repeal of the estate
tax would be irresponsible given the massive deficit that our nation
is now carrying and human needs that remain unmet in our communities.
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