CRS report: Estate and Gift Taxes–Economic Issues

TheEconomic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)repeals the estate tax in 2010. During the phase-out period, the newlaw increases the exempt amount to $3.5 million by 2009, lowers the toprate to 45% by 2007, and repealed the federal credit for state deathtaxes in 2005. The federal gift tax remains though the rate is reducedto the top personal income tax rate. After repeal of the estate tax,carryover basis replaces step-up in basis for assets transferred atdeath. The legislation includes an exemption from carryover basis forcapital gains of $1.3 million (and an additional $3 million for asurviving spouse). However, the estate tax provision in EGTRRAautomatically sunsets December 31, 2010. Thus, the estate and gift taxwill be reinstated in 2011 as it existed before EGTRRA. In the 109thCongress, H.R. 8, which passed the House on April 13, 2005 (and it’sSenate companion S. 420), would eliminate the sunset provision inEGTRRA, thus making repeal of the estate tax permanent. Repeal of thesunset (as in H.R. 8) would retain the EGTRRA changes to the taxationof capital gains of inherited assets and the gift tax. Supporters ofthe estate and gift tax cite its contribution to progressivity in thetax system and to the need for a tax due to the forgiveness of capitalgains taxes on appreciated assets held until death. (The estate taxaccounts for 1.2% of federal tax receipts.) Arguments are also madethat inheritances represent a windfall to heirs that are moreappropriate sources of tax revenue than income earned through work andeffort. Critics of the estate tax argue that it reduces savings andmakes it difficult to pass on family businesses and farms. Critics alsoargue that death is not an appropriate time to impose a tax; that muchwealth has already been taxed through income taxes; and that complexityof the tax imposes administrative and compliance burdens that underminethe progressivity of the tax. The analysis in this study suggests thatthe estate tax is highly progressive, although that progressivity issomewhat undermined by avoidance mechanisms. Neither economic theorynor empirical evidence indicate that the estate tax is likely to havemuch effect on savings. Although some family businesses and farms areburdened by the tax, the estate tax applies to only a tiny fraction(approximately 3% or 4 %) of businesses that have, in most cases,sufficient liquid assets to pay the tax. Only a small percentage ofestate tax revenues are derived from family businesses. Even thoughthere are many estate tax avoidance techniques, it also is possible toreform the tax and reduce these complexities as an alternative toeliminating the tax. Thus, the evaluation of the estate tax may largelyturn on the general appropriateness of such a revenue source and itsinteraction with incentives for charitable giving, state estate taxes,and capital gains and other income taxes. A number of alternativerevisions are discussed including past proposals to reduce tax ratesand exemptions as well as proposals to reduce the opportunities for taxavoidance and broaden the estate and gift tax base. This report will beupdated as legislative events warrant.

Get it at http://www.nationalaglawcenter.org/assets/crs/RL30600.pdf