Myths and Realities about the Estate Tax
The estate tax is a tax on
property (cash, real estate, stock, or other assets) transferred from deceased
persons to their heirs. Only the wealthiest estates in the country pay
the tax because it is levied only on the portion of an estate’s value that
exceeds a specified exemption level, currently $5.25 million per person
(effectively $10.5 million per married couple). The estate tax thus limits, to
a modest degree, the large tax breaks that extremely wealthy households get on
their wealth as it grows, which can otherwise go completely untaxed.
Though the estate tax has been an important source of federal revenue for
nearly a century, a number of myths continue to surround it.
Myth 1: The estate tax is best characterized as the
Reality: Everybody dies, but only the richest
0.14 percent of estates pay any estate tax.
Myth 2: The estate tax forces estates to turn
over half of their assets to the government.
Reality: The few estates that pay any estate
tax generally pay less than one-sixth of the value of the estate in tax.
Myth 3: Weakening or repealing the estate tax
wouldn’t significantly worsen the deficit because the tax doesn’t raise much
Reality: Repealing the estate tax would
increase the deficit by at least $200 billion over the next ten years.
Myth 4: The costs of complying with the estate
tax nearly equal the amount of revenue the tax raises.
Reality: The costs of estate tax compliance
are relatively modest and are consistent with the costs of complying with other
Myth 5: Many small, family-owned farms and
businesses must be liquidated to pay estate taxes.
Reality: Only a handful of small, family-owned
farms and businesses owe any estate tax at all, and virtually none would have
to be liquidated to pay the tax.
Myth 6: The estate tax constitutes “double
taxation” because it applies to assets that already have been taxed once as
Reality: Large estates consist to a
significant degree of “unrealized” capital gains that have never been taxed;
the estate tax is the only means of taxing this income.
Myth 7: If policymakers decide to retain the
estate tax, the logical top rate would be 20 percent, the same as the top
capital gains rate.
Reality: To match the effective tax rate on
capital gains, the estate tax would need to be less — not more — generous than
the current tax.
Myth 8: Eliminating the estate tax would
encourage people to save and thereby make more capital available for
Reality: Eliminating the estate tax would not
substantially affect private saving, and it would greatly increase government
dissaving (i.e., deficits); as a result, it would more likely reduce the amount
of capital available for investment than increase it.
Myth 9: The United States taxes estates more
heavily than do other countries.
Reality: Measured as a share of the economy,
U.S. estate tax revenues are below the international average for taxes on wealth.
Myth 10: The estate tax unfairly punishes
Reality: The estate tax affects only those
most able to pay, and the funds it raises help support a range of programs that
benefit the nation.