The U.S. economy is not a force of nature. It is the direct result of policy decisions about what to tax, what not tax, what to regulate, and what not to regulate. United for a Fair Economy recognizes that the federal tax has significantly contributed to the modern surge in economic inequality since the 1980s. Thus, federal tax advocacy has been a core component of our work.
In recent years, no federal tax issue has been more critical than the estate tax. Since 1916, the estate tax has helped protect our economic system from creating an oligarchy; that is, a pervasive concentration of wealth. Our goal is to ensure that the US has a strong estate tax that holds the wealthy accountable for their fair share of our tax responsibility.
What is the estate tax?
The estate tax is a tax on the transfer of assets at death (inherited wealth). It applies only to large accumulated fortunes.
When someone dies, his or her assets (the "estate") are distributed to heirs. If the total value of the estate is larger than the tax-exempt amount, an estate tax is imposed on the portion above the exemption before the remaining assets are distributed. Any amount given to a spouse or charity is tax exempt.
How large does an estate need to be to be taxed and what are the rates?
Since 2002, the estate tax has been paid only by millionaires. Rates have varied, since the Bush Tax Cuts of 2001 and 2003 resulted in frequent changes to the estate tax exemption and rate.
The individual estate tax exemption—the amount of money an individual can pass to heirs tax free—has been as low as $1 million in 2002 and as high as $5.4 million (the current rate). The exemption is effectively doubled for married couples who engage in basic estate planning.
According to the Joint Committee on Taxation, "Estates worth less than $5.4 million for an individual and nearly $11 million for a married couple are exempt from paying any tax. That means 99.8% of estates would not be affected.
Rates on the amount above the tax-free exemption have varied from 55 percent to 35 percent. Currently, the top Federal estate tax rate is 40%, although the average effective rate is about 17%, according to the Center for Budget and Policy Priorities.
Who pays the estate tax?
The estate tax is reserved only for society's wealthiest elite. In 2017, just 2 out of every thousand (0.2 percent) of all estates were expected to owe any estate tax at all.
What about farms and small businesses?
Very few family farms and small businesses are affected by the estate tax. The Tax Policy Center estimates that in 2017, only 50 farms per year in the U.S. would owe any estate tax, and the number of small businesses is similarly small. In 2001, the New York Times reported that American Farm Bureau Federation (who was in favor of repealing the estate tax) could not cite a single case of a family farm lost due to the estate tax.
On average, those few small business and farm estates will owe only 14 percent of the estate, so it is unlikely they will have to sell the business or farm. Plus, they can spread any payments over 14 years. They also benefit from special use valuation, and minority interests and marketability discounts.
Moreover, gutting the estate tax would actually hurt family farms. The estate tax helps make family farms more competitive against mega-scale agriculture, because it moderates ever-larger concentrations of wealth and economic clout. Repeal of the estate tax or exempting farms completely will only encourage further concentration of farm ownership, which reduces competition. An unlimited exemption for farm assets could create a giant loophole from the estate tax because wealthy individuals who expect to owe estate tax could use much or all of their wealth to buy farms before they died.
How much does the estate tax raise every year?
The estate tax raises billions of dollars each year. The estate tax, at 2002-2009 rates and exemptions, raised $15-26 billion per year. The variations are due to the changes in exemption and rates caused by the Bush tax cuts, as well as fluctuations in the overall economy that affect the value of assets like stocks and real estate.
According to the Joint Committee on Taxation, "Repealing the estate tax would cost $269 billion over a decade, before counting the interest costs of adding to the debt."
Why is it important to preserve a strong estate tax?
Weakening the estate tax would mean billions of dollars in tax breaks each year for the exclusive benefit of multi-millionaires. The responsibility of paying taxes for public services will shift from millionaires to low- and middle-income taxpayers. A strong estate tax is one of the best remedies for economic inequality because it reduces dynastic wealth and helps ensure more broadly shared prosperity.
What makes for a good estate tax?
A strong estate tax law will have a graduated rate structure that taxes very large fortunes at a higher rate and an exemption that results in 98 percent of Americans paying no estate tax. A strong estate tax would raise substantial revenue for our government.