BEYOND THE NUMBERS
One of the lesser-known tax breaks that would expire at year-end under current law is a 2010 cut in the estate tax, which had already shrunk considerably between 2001 and 2009 due to President Bush’s 2001 tax cuts. With policymakers expected to consider what to do about the tax in the coming weeks, we’ve updated a paper that corrects the 10 most common myths about it:
- Myth 1: The estate tax is best characterized as the “death tax.”
Reality: Everybody dies, but only the richest 2 in 1,000 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 the estate tax wouldn’t significantly worsen the deficit because the tax doesn’t raise much revenue.
Reality: Extending the temporary estate tax cut enacted in 2010 rather than restoring the 2009 rules would add billions of dollars to deficits.
- Myth 4: The cost of complying with the estate tax nearly equals 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 taxes.
- 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 income.
Reality: Large estates consist to a large 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 15 percent, the same as the capital gains rate.
Reality: To match the effective tax rate on capital gains, the top estate tax rate would need to be about 45 percent.
- Myth 8: Eliminating the estate tax would encourage people to save and thereby make more capital available for investment.
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 capital available for investment than increase it.
- Myth 9: The estate tax unfairly punishes success.
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.
- Myth 10: 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.