March 16, 2005


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A new Center report shows that the estate tax can be reformed in a way that would exempt large numbers of estates from the tax while preserving much-needed revenue that would be lost if the tax were permanently repealed.

Under current law, the estate tax will be repealed entirely in 2010, only to return the following year when the tax cuts enacted in 2001 expire.  The Administration favors repealing the estate tax permanently.  That, however, would cost nearly $1 trillion over the first decade that repeal would be extended (when the added interest payments on the debt are included), significantly worsening the nation’s already severe long-term budget problems.  On the other hand, most in Congress do not favor letting the tax return to its pre-2001 form, which would exempt the first $1 million of an estate’s value from the tax and set the top tax rate at 55 percent.

Therefore, many in Congress are looking to reform the estate tax rather than repeal it.  Two possibilities are to retain the tax in its 2008 form, when the exemption level will be $2 million for an individual ($4 million for a married couple) and the top tax rate will be 45 percent, or in its 2009 form, when the exemption level will be $3.5 million for an individual ($7 million for a couple) and the top tax rate will be 45 percent.  An analysis of estimates prepared by the Urban Institute-Brookings Institution Tax Policy Center finds that:

How Many Small Farms or Businesses Would Face Estate Taxes Under Different Exemption Levels?

Exemption level

Number of taxable estates in 2011 in which a small business or farm comprises the majority of the estate

$1.0 million


$2.0 million


$3.5 million


At these higher exemption levels, very few small businesses and farms in the nation would be subject to the estate tax, as the table at right shows.

How Much Estate Tax Revenue Would
Be Preserved if the Estate Tax Were Reformed Rather Than Repealed?

If the top tax rate

… and the exemption level were:

… the share of estate tax revenue that would be preserved is:


$2.0 million

68 percent


$3.5 million

44 percent


$2.0 million

21 percent


$3.5 million

13 percent

Also, the vast majority of the benefits of lowering the rate would flow to the largest estates. Over one-third of the gains from cutting the rate from 45 percent to 15 percent (at a $2 million exemption) would go to the 4 percent of taxable estates worth over $20 million, saving each of them an average of about $8 million.

The Tax Policy Center estimates that, under an estate tax with a $2 million exemption and a 45 percent top rate, taxable estates would on average pay an effective tax rate of only 18 percent in 2011, meaning that only 18 percent of the estate’s total value would be due in estate taxes.  With a $2 million exemption and a 15 percent rate, the effective rate for taxable estates would be only 6 percent on average in 2011.

The nation’s daunting fiscal problems raise serious questions about the affordability of repealing the estate tax permanently.  Reforming the tax instead could preserve much-needed revenue.  But a reform that relies on low estate tax rates has the same problem as permanent repeal:  it would lose massive amounts of revenue and worsen the long-term budget outlook.