A central element of President Bush's tax package is the repeal of
the federal estate tax by 2009. The estate tax applies to the
cumulative total of taxable gifts made during a person's lifetime plus
transfers made from the estate upon a person's death. Because of
the exemptions in current law, 98 percent of all estates are not
subject to the estate tax. Of the remaining two percent of taxable
estates, only three percent are family-owned farms or small
businesses.
Recently, significant concerns about repealing the estate tax have
been raised by a wide range of individuals and groups. Wealthy
Americans such as Bill Gates, Sr. and Warren Buffett have spoken
out against a repeal of the estate tax, because it is a critical restraint
on the concentration of wealth. State officials have warned that
states rely on the estate tax as a source of revenue and could face
budget shortfalls if the estate tax is repealed. Finally, many
charitable organizations, universities, and other groups that rely on
donations for funding are concerned that an elimination of the estate
tax would sharply reduce the amount of contributions they receive
from individuals and trusts.
Democrats realize that, with the strong economy of the last eight
years, many individuals have enjoyed unprecedented economic
prosperity. In addition, many farmers and small business owners
continue to express concerns they will have to sell their business
because of the steep tax burden imposed on the transfer of their
assets to an heir. In order to address those concerns, Democrats
have proposed an estate tax plan that would immediately increase
the general estate tax exemption allowed for all taxpayers. As a
result, the Democratic plan would exempt two-thirds of all estates
currently subject to the estate tax, so that more than 99 percent of all
estates would be exempt from the estate tax.
Estate Tax Created to Prevent Concentration of Wealth
At the time it was established in 1916, the estate tax was championed by Republicans
Teddy Roosevelt and William Howard Taft. Roosevelt said in 1907 that an inheritance
tax on "such enormous fortunes as have been accumulated in America would be one of
the methods by which we should try to preserve a measurable equality of opportunity..."
In a recent editorial, William Gates Sr. wrote: "Such distinguished Americans as
Supreme Court Justice Louis Brandeis saw the estate tax as a practical, democratic
restraint on massive concentrated wealth and power. And in fact repeal of the estate
tax today would widen the growing gap in economic and political influence between the
wealthy and the rest of America." (The Washington Post, 2/16/01)
States Benefit From the Estate Tax
Prior to the creation of the estate tax, the taxation of estates was the prerogative of
state governments. When the federal estate tax was enacted in 1916, the law was
structured in such a way that allowed states to continue to receive a portion of the
revenue gained from the tax. State estate tax laws have generally been drafted in such
a way that ties the state laws directly to the federal estate tax. Therefore, a repeal the
of federal estate tax would repeal provisions in state law that serve as an important
source of revenue for many states.
The Center on Budget and Policy Priorities has estimated that states would lose nearly
$5.5 billion annually if the estate tax is repealed. California, for example, would lose
about $937 million annually, Florida would lose $779 million, and Illinois would lose
$370 million.
98 Percent of All Estates Now Exempt From Taxation
Under current law, estates owned by married couples are eligible for a general estate
tax exemption of $1.35 million ($675,000 for individuals). The exemption is scheduled
to reach $2 million ($1 million for individuals) by 2006 and thereafter. Married couples
with a family-owned small business or farm are eligible for a separate $2.6 million
exemption ($1.3 million for individuals).
As a result of the current law exemptions, 98 percent of all estates are not subject to the
estate tax. Of the remaining two percent of taxable estates, only six thousandths of one
percent are family-owned small businesses and farms.
President's Estate Tax is Costly and Provides a Windfall to the
Wealthy Few
By phasing in the repeal of the estate tax, the President's proposal has hidden its true
costs. The President's plan would cost $267 billion between 2001 and 2011. The cost
of the repeal increases every year - the first five years of the proposal would cost $60
billion. However, the cost of the proposal in the following five years would be over $200
billion. In 2011, the repeal would cost $58 billion. Given the back-loaded nature of the
President's plan, the cost of the repeal would be even greater in the years after the
current revenue estimates.
Last year, the Department of Treasury estimated that a similar plan proposed by
congressional Republicans would cost $105 billion over 10 years, and rapidly increase
to $750 billion over the following 10 years. The Joint Committee on Taxation has not
released an updated cost estimate on the President's estate tax proposal; however, it is
expected that the Committee's analysis will show the President's plan would be
considerably more expensive than projected in his budget proposal.
According to data provided by the Internal Revenue Service and the Center on Budget
and Policy Priorities, approximately 64,000 estates will be subject to the federal estate
tax by 2011. The Center on Budget and Policy Priorities estimates that the 64,000
estates that otherwise would 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 the bottom 74
percent of U.S. families.
Wealthy Americans Oppose the President's Plan to
Repeal the Estate Tax
A month ago, over 120 wealthy Americans, led by William Gates, Sr., signed a petition
that argued that "repealing the estate tax would enrich the heirs of America's
millionaires and billionaires while hurting families who struggle to make ends meet."
Warren Buffett has spoken out about repealing the estate tax. Mr. Buffett has said
repealing the estate tax "would be a terrible mistake," the equivalent of "choosing the
2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000
Olympics. We would regard that as absolute folly in terms of athletic competition. We
have come closer to a true meritocracy than anywhere else around the world. You
have mobility so people with talents can be put to the best use. Without the estate tax,
you in effect will have an aristocracy of wealth, which means you pass down the ability
to command the resources of the nation based on heredity rather than merit." (The New
York Times, 2/14/01)
The Democratic Alternative Provides Immediate Relief
The Democratic alternative tax proposal would increase the estate tax exclusion to
$4 million per married couple ($2 million per taxpayer), effective January 1, 2002. This
amount would gradually increase to $5 million. The proposal would repeal the estate
tax for over two-thirds of the two percent of the estates now liable for the estate tax.
This plan would provide an immediate benefit to farmers, small business owners and
families who have enjoyed the benefits of the strong economy in the last eight years
and want to pass their assets to their children.
