Should revision be made to the US Estate Tax Rate? How do we compare internationally?

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What is the Death Tax?

The death tax (a.k.a., the federal estate tax) is a tax applied to the transfer of a person’s assets at death. It is defined by the Internal Revenue Service as “a tax on your right to transfer property at your death.”

Under current law, the tax is temporarily set at the rate of 35 percent with an exemption of $5 million. On January 1, 2013 the estate tax is set to return at a top marginal rate of 55 percent (with an additional 5% surtax for certain estates) on all assets above a $1 million exemption amount.

Often times family businesses and farms are caught in the death tax trap – if the family is forced to sell all or part of the business or farm to pay for the tax, employees and payrolls must be slashed.  Additionally, customers lose a place to buy a product or service and suppliers of materials lose customers. Click here to see the history of the Death Tax 

 

What assets are subject to Death Tax?

Everything a person has of any value counts towards the death tax exemption.  This means your car, home, stocks, bonds, bank accounts all are totaled together to calculate if you owe the estate tax.  Starting January 1, 2013, under current law, if your total estate is over $1 million, you will owe taxes at a 55% rate. Think about all the assets you own:

• personal property (such as a home, cars, furniture, artwork)
• business assets (property, machinery and inventory)
• investments (stocks, bonds and real estate)

Now think about how much that is worth – these days, it doesn’t take much to push you over the $1 dollar exemption, after which all additional assets are taxed at a 55% rate.  It is easy to see why nearly 70% of voters want the death tax repealed permanently. The estate tax doesn’t just affect millionaires and billionaires, it affects everyday people and America’s main job creating engine – family businesses.

Even at the current $5 million exemption, family businesses and farmers are susceptible because they are “asset rich” and “cash poor” – the great majority of the value is locked in the land and equipment.  If the family doesn’t have the cash on hand to pay the tax, they are forced to sell assets and possibly the entire business or farm.

 

How does the Death Tax work?

For any assets valued over the exemption, the people who inherit the farm, business, or property will owe the tax within nine months of the decedent’s death.  For those family businesses that are forced to take out a loan to keep the business running, their tax rate becomes the tax paid, plus the interest owed on the loan.

 

What can you do to fight the Death Tax?

Sign the Death Tax Repeal Petition

Contact your Congressman or Senator and tell them to repeal the death tax

Contact your candidates for office and ask them to sign the Death Tax Repeal Pledge

Read studies by the American Family Business Foundation about the effects of the death tax

Share your story about the Death Tax

Sign up to receive emails from us

Tell your friends and family about the death tax

 

1. Internal Revenue Service, Estate Tax Overview, http://www.irs.gov/businesses/small/article/0,,id=164871,00.html.
2. Internal Revenue Service, Publication 950, Introduction to Estate and Gift Taxes, http://www.irs.gov/publications/p950/ar01.html#d0e23.

 

 

Brief History of the Death Tax

The Death Tax has been imposed on American taxpayers five distinct times over the last 200 years.  The first three times it was repealed shortly after the conflict ended.

The First Three Death Taxes

A stamp tax was imposed on wills and estates in 1797, to help collect funds for the Undeclared War with France, and repealed in 1802.  In 1862, an inheritance tax with rates of 0.75% to 5% was imposed to collect funds for the Civil War, and was repealed in 1870.  In 1898 an estate tax with a top rate of 15% was imposed on all assets above $1 million to collect funds for the Spanish-American war, and was repealed in 1902.[1]

The Fourth Death Tax

The fourth Federal Estate Tax was imposed in 1916, to support the U.S. involvement in World War I.  That war ended over 90 years ago, yet the tax was only finally repealed on January 1, 2010.  Over the course of the last 94 years, the estate tax rate changed several times.  The initial top rate was 10 percent, and then increased to 25 percent, and ultimately climbed as high as 77 percent.[2]

In 1976 Congress enacted legislative changes designed to make it impossible for a person to transfer substantial assets without being taxed by either the estate tax, the gift tax, or the generation skipping tax.  The gift tax applies to any gifts above $12,000 in a year (and any gifts in a lifetime over $1 million) and the generation skipping tax applies to any gifts that “skip” the first generation (children) and go to grandchildren.  Together, these taxes prevent any large transfer of assets from escaping the IRS.

The 2001 Death Tax Repeal Law

In 2001, President Bush signed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA).  EGTRRA reduced the estate tax from 55 percent in 2001 to 45 percent in 2009 and repealed the estate tax on January 1, 2010.  However, due to complex Senate budget rules, the EGTRRA tax relief was not permanent.  In 2011, all of the EGTRRA tax relief “expired” and the applicable tax rates were set to return to their pre-tax relief rates.  Consequently, the death tax would have “come back to life” in 2011 at the rate of 55 percent.

The 2009 Death Tax Fight

Speaker of the House Nancy Pelosi, Senate Majority Leader Harry Reid, and their allies in Congress tried to stop the 2010 repeal.  They attempted to make the estate tax permanent at the rate of 45 percent – if not higher.   When that failed, they tried to temporarily extend the tax through 2010…without addressing the tax’s looming return to 55 percent in 2011.

AFBI exposed their strategy and shifted public opinion against it.  AFBI’s work created bipartisan opposition to a permanent, 45 percent estate tax.  We stopped the death tax from being included as a revenue-raiser in healthcare legislation, and we gathered dozens of allied organizations to tell Congress to keep the death tax repealed in 2010.  As a result, Congress did not extend the death tax past 2009, and as a result the tax was temporarily repealed in 2010.

The 2011 Temporary Death Tax 

On December 17, 2010, President Obama signed H.R. 4853 into law, which temporarily prevents the tax from returning at the scheduled 2011 rate of 55 percent and exemption of $1 million.  It set the death tax at the rate of 35 percent with an exemption of $5 million.  However, this law will only last for two years and on January 1, 2013, the tax returns at the rate of 55 percent with a $1 million exemption.

 

See “The Current Fight” to learn what is happening right now in Washington.

 

Will you join the fight for repeal?

 

 
[1] “Cost and Consequences of the Federal Estate Tax,” Joint Economic Committee, May 2006, http://www.house.gov/jec/publications/109/05-01-06estatetax

 

NEW INTERNATIONAL SURVEY SHOWS

U.S. DEATH TAX RATES AMONG HIGHEST

August 2007

INTRODUCTION

Since its addition to the U.S. tax code in 1916, the estate tax (often called the “death tax”) has been

a major topic of debate among policymakers and tax policy scholars. The estate tax, a tax on the transfer of

property at death, has undergone a number of changes over the years. Most recently the estate tax was modified

by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA reduced the

estate tax rate gradually to 45 percent in 2007-2009 and repeals it in 2010. In 2011, the estate tax will revert

to its pre-EGTRRA form, with rates ranging from 41 percent to 60 percent.

The likely negative effects of these high tax rates have led many academic scholars and tax policy experts to

call for permanent repeal of or a permanent reduction in the estate tax. This report provides an international

comparison of the top marginal death tax rates in 50 industrialized and developing countries and an analysis

of the economic impact of the estate tax.

INTERNATIONAL

INTERNATIONAL

SURVEY OF TOP

MARGINAL ESTATE

TAX RATES

The top U.S. federal

marginal “death tax” rate is

higher than those of all

other countries surveyed

except for Japan and Korea

(see Figure 1). Death tax

rates imposed on estates

inherited by spouses and

children average only 12

percent for the 50 countries

surveyed, compared

to the current top estate

tax rate of 45 percent in

the United States. Tax rates

are often higher on assets

inherited by more distant

relatives or by non-rela-

tives. Twenty-five coun-

Figure 1

Surveyed Countries with Inheritance/Death Tax Rates (percent)

A u g u s t 2 0 0 7 WWW. A C C F. O RG

tries in the survey – Argentina, Australia,

Canada, China, Columbia, Cyprus, Czech

Republic, Estonia, Hong Kong, India,

Indonesia, Israel, Latvia, Lithuania, Malaysia,

Malta, Mexico, New Zealand, Portugal,

Russia, Slovak Republic, Slovenia, Sweden,

Switzerland, and Thailand – have no death or

inheritance taxes (see Table 1). The average

tax rate in the twenty-five countries with a death tax is 24 percent, only about half the

U.S. top federal estate tax rate. Not only are

the top death tax rates higher in the U.S. than

those in most of the other industrialized and

developing countries in the survey, but the

lowest tax rate in the U.S. – at 45 percent –

is nearly twice as high as the average top foreign

tax rates.

WHY IS ESTATE TAX

REPEAL/REFORM SO IMPORTANT?

_ Impact on Saving: Like all other taxes

on capital income, the estate tax also lowers

the return to saving. Since saving is necessary

to finance productivity-enhancing investment,

which is essential for economic growth, it is important to consider the extent of this negative effect.

A study conducted in 2001 by Douglas Holtz-Eakin, former director of the Maurice R. Greenberg Center

for Geoeconomic Studies at the Council on Foreign Relations and a former director of the Congressional

Budget Office (CBO), and Donald Marples, now Specialist in Public Sector Economics, Government and

Finance Division, Congressional Research Service,1 shows that eliminating the estate tax would correspond to increased household saving of between $800 and $3,000 annually.

_ Impact on Cost of Capital: The estate tax raises “the user cost of capital,” the internal rate of return

required of a project so that the cash flows are sufficient to meet the market rate of return. Using data from

the Health and Retirement Survey, in another econometric study,2 Dr. Holtz-Eakin found that entrepreneurs

face an expected tax liability that is typically nearly five times as large as non-entrepreneurs because of

the type of investments they make. For example, the top 10 percent of entrepreneurs face capital costs that

are over 8 percent higher than they would be in the absence of an estate tax; for the top one percent, the

cost of capital is over 14 percent higher.

 

_ Impact on Investment: The negative effect of the estate tax on saving and on the cost of capital is also reflected in investment. For example, Dr. Holtz-Eakin estimates that the estate tax reduces annual investment by sole proprietors and partnerships by about 2 to 6 percent. To give a sense of the magnitudes involved, according to U.S. data, investment by sole proprietors and partnerships totaled approximately

$118 billion in 2001, suggesting a decrease in investment by these entities of $2.4 to $7.1 billion in this narrow category of small business alone. Moreover, according to a CBO study released in July 2005,“…estate taxes reduce after-tax returns on investment just as income taxes do, and a large body of research

suggests that the income tax discourages entrepreneurial effort to some degree.”3 Impact on Wages and Labor Supply: As noted by Dr. N. Gregory Mankiw, former chairman of President Bush’s Council of Economic Advisers and now Robert M. Beren Professor of Economics at

Harvard University, even though the estate tax is a tax on capital, lower capital accumulation decreases the

productivity of labor and thus reduces wages. Furthermore, Dr. Holtz-Eakin and Dr. Marples’ study shows

that the estate tax also has a negative impact on individuals’ decisions to participate in the labor force. A“ballpark figure” of the impact suggests that eliminating the estate tax would raise labor force participation

by single individuals aged 51 to 61 by 0.5 percent.

_ Impact on Job Growth: Sole proprietors and other entrepreneurs are unusually sensitive to their personal tax situations. Drawing on research by Massachusetts Institute of Technology Professor James Poterba,

which shows that the estate tax raises the tax rate on capital income by as much as 3 percentage points for older individuals, Dr Holtz-Eakin’s research shows that each one percent increase in the tax rate (including the estate tax) causes sole proprietorships to reduce their desire to employ a worker by 0.2 percent. As tax

rates rise, the risk of additional hiring increases due to the need to meet a higher hurdle rate, thus fewer jobs are created. For sole proprietors who already have an employee on board, each one each one percent increase in the tax rate reduces the desire to employ additional workers by 0.4 percent.

_ Macroeconomic Impact: In 2001, shortly before the enactment of EGTRRA, the ACCF Center for Policy Research sponsored an analysis by Dr. Allen Sinai, Chief Global Economist, Strategist and President of Decision Economics, Inc., of the overall impact on the U.S. economy of reducing or repealing the estate tax. Dr. Sinai is one of the nation’s most highly regarded economists, a consultant to the Federal Reserve,

the President’s Council of Economic Advisers, and the Congressional Budget Office, among other leading policymakers in the U.S. and abroad. The Sinai-Boston Econometric Model of the U.S. used for the study is a large-scale quarterly econometric model that includes considerable detail on aggregate demand, financial

markets, sectoral flows of funds and balance sheets, interactions of the financial system with the real economy, and detailed trade and international financial flows. The study showed that immediate elimination or reform of the estate tax, retroactive to January 1, 2001, would result in:

_ An increase in GDP by a cumulative $90 billion to $150 billion over the 2001–2008 period.

_ An increase in job growth in the range of 80,000 to 165,000 per year and a slightly lower unemployment rate as a result.

_ A rise in the level of potential output by an average $6 billion to $9 billion per year.

_ An increase in tax receipts, excluding estate tax receipts, in response to the stronger economy and financial system, feeding back approximately $0.20 per dollar of estate tax reduction, to some extent helping to pay for the estate tax reduction.

 

CONCLUSION

More and more of the rest of the world realizes the futility of taxing saving, investment and capital income. The U.S. needs more saving and investment for job creation, higher standards of living and a strong economy in a very competitive global economy. The U.S. estate tax is an unnecessary impediment to economic growth.

1. Douglas Holtz-Eakin and Donald Marples, “Estate Taxes, Labor Supply and Economic Efficiency,”

(Washington D.C.: American Council for Capital Formation Center for Policy Research, January 2001).

At the time of study, Dr. Holtz-Eakin was professor and chair, Department of Economics, and associate

director, Center for Policy Research, Syracuse University. Dr. Marples was a Ph.D. candidate and research

assistant, Center for Policy Research, Syracuse University.

2. Douglas Holtz-Eakin, “The Death Tax: Impact on Investment, Employment, and Entrepreneurs,”

(Washington D.C.: American Council for Capital Formation Center for Policy Research, August 1999).

At the time of the study, Dr. Holtz-Eakin was professor and chair, Department of Economics, Syracuse

3. Congressional Budget Office, “Effects of the Federal Estate Tax on Farms and Small Businesses,” July

2005, pg. 6.

4

 

New Information to be used

 

 

Update: On June 19, Sen. John Thune introduced S. 1183 and Rep. Kevin Brady introduced H.R. 2429 to repeal the estate tax.

Thought the estate tax debate was dead and buried? Not a chance. The big January tax law might have made the federal estate tax permanent, but President Barack Obama wants to make it tougher, and the man who dubbed it the “death tax” is back battling to get rid of it. “We can repeal this tax in 2017,” booms 77-year-old Jim Martin, one of the early eccentric advocates of estate tax repeal, who now heads up the 60 Plus Association, a conservative seniors organization.

Of course, that’s assuming there’s a Republican president elected in 2016. But nothing seems to deter Martin, who in a series of ads is trying to reestablish himself as the ringleader of the repeal cause.

In one ad, Martin calls burying the death tax a “shovel ready” job under the image of a tombstone. He pits death tax foes including Mitch McConnell, John Boehner, Pat Boone, and Grover Norquist on the side of Ronald Reagan against death tax proponents including President Obama, Bill Gates Sr., Warren Buffet and George Soros on the side of Karl Marx who famously called for the “abolition of all rights of inheritance” in the Communist Manifesto.

In another creepier ad featuring zombies in the background, Martin introduces a death tax timeline, showing how the tax was enacted three times to pay for wars and quickly repealed (1797 to 1802; 1862 to 1870; and 1898 to 1902) and again in 1916 to help pay for World War 1. “That conflict ended almost 100 years ago. Now is the time to drive a stake through the heart of the DEATH TAX for the fourth and final time!” the ad proclaims. (For a 90-year history of the estate tax, courtesy of IRS researchers, check out: The Estate Tax: Ninety Years And Counting).

From his office in Arlington, Va., Martin says that he’s working on a third ad, comparing the death tax timeline to a timeline on the repeal of the federal telephone excise tax which has a similar history of having been enacted to fund the Spanish-American War and later repealed and reenacted and finally repealed  (for all but local-only service) in 2006 under the Bush presidency (President Bill Clinton vetoed an earlier repeal bill).

Martin has been running the ads in The Washington Times and The Washington Examiner, and he ran the ads in April in the Dallas Morning News to coincide with the George W. Bush Presidential Library dedication in University Park, Texas. (Martin boasts that Bush said he saw his ad.)

There was one magic year — 2010 — with no federal estate tax, thanks to the Bush tax cuts. The estate tax was set to return on Jan. 1, 2011 with a $1 million exemption and a 55% top rate, but in December 2010 Congress temporarily upped the exemption to $5 million. Then this past January Congress made that exemption permanent and indexed for inflation and set the rate at 40%. The exemption is $5.25 million for 2013. Surviving spouses can carry over each other’s unused exemptions, so that means a couple can shield a combined $10.5 million.

After the January tax law, “A lot of people thought the fight was over,” Martin says, “but I decided, ‘Let’s get back in the battle.” But isn’t the estate tax permanent now? “There’s no permanency in this town,” he says, noting that President Barack Obama’s latest budget calls for a $3.5 million exemption and a 45% rate.

The exemption has gone up from $600,000 (with a 55% top rate) when Martin first started rallying against the tax in the 1990s to $5.25 million today (with a 40% top rate). “That’s progress,” he says but not a reason to give up. He signs his emails: “Kill the Death Tax. Don’t Wound It!”

Sen. John Thune (Rep.-S.D.) will be reintroducing a repeal bill in the coming weeks, according to his staff; Martin shoots hoops with him. And Rep. Kevin Brady’s (Rep.-Texas) companion bill should follow, possibly as part of a bigger tax reform package. Martin says his 60 Plus Association will push to get co-sponsors, holding certain Congressional members accountable, with an eye towards key Senate races in 2014.

Another roundabout way opponents are fighting the estate tax is by supporting what’s known as dynamic scoring. That takes into account macroeconomic effects of tax changes. Looking at it that way, instead of costing $600 billion over 10 years, estate tax repeal would cost $200 billion over 10 years.

Meanwhile estate tax proponents — although they might not be as visible — aren’t giving up either. The January tax law made the federal estate tax stronger by raising the tax rate from 35% in 2012 to 40% as of Jan. 1, 2013, notes Mike Lapham, director of the Responsible Wealth project with United for a Fair Economy, adding that his group is looking at ways to strengthen the estate tax further. The group’s responsible estate tax proposal signed by Buffett, Gates Sr., and Soros, calls for a $4 million per couple exemption and a starting tax rate of 45%. “We think there will be times when Congress is looking for new revenue sources, and this is a fairly easy one; I should say painless,” says Lapham.

And so the battle resumes.

 

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