June 17, 2003
REPEAL OF THE ESTATE TAX WOULD BE COSTLY,
YET WOULD BENEFIT ONLY A FEW, VERY LARGE ESTATES
By Joel Friedman and Andrew Lee
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The House of Representatives is scheduled to continue its tax-cutting spree this week when it considers legislation to make permanent the repeal of the estate tax. According to Joint Committee on Taxation estimates, this measure would cost $162 billion through 2013. These revenue losses would be on top of the $350 billion tax cut that the President signed on May 28 and the $82 billion expansion of the Child Tax Credit that the House passed last week. If the House adopts estate tax repeal, it will have passed tax cuts officially totaling nearly $600 billion in less than one month. These tax cuts should be seen in the context of the House Republican leadership’s desire to enact the full $1.3 trillion in tax cuts allowed under this year’s Congressional budget plan. House Majority Leader Tom DeLay, noting the tax-cut allocation in the budget resolution, stated, "We intend to use every dollar of it."(1)
The debate surrounding the estate tax can be seen as a choice between eliminating the tax altogether and reforming it by increasing the exemption level and lowering the top rate. The 2001 tax-cut legislation lowers the top estate tax rate to 45 percent by 2007, increases the estate tax exemption to $3.5 million — $7 million for a couple — by 2009 and then repeals the estate tax altogether in 2010. The repeal expires at the end of 2010, as part of the general expiration of all provisions of the 2001 tax law at that time. Following the 2010 sunset, the estate tax reverts to prior law, with an exemption of $1 million and a top rate of 55 percent.
The sharply higher cost of permanent repeal, compared to retaining and reforming the estate tax with an increased exemption level and a lower top rate, would worsen the long-term budget outlook, which has deteriorated markedly since the 2001 tax-cut package was enacted. The principal impact of eliminating rather than reforming the estate tax would come in the years beyond the current ten-year budget window, when the baby boom generation begins to retire and the Social Security and Medicare systems come under increasing pressure.
Moreover, permanent repeal of the estate tax cannot be viewed as an isolated proposal. As a result of the 2001 tax-cut legislation and the new tax-cut measure that just became law, the tax code is now filled with provisions that expire or "sunset" artificially. The supporters of these tax cuts have made it clear they intend to push not only for making repeal of the estate tax permanent but for continuing most or all of these tax cuts past their sunset dates. Brookings Institution economists William Gale and Peter Orszag have found that if all of the provisions in the tax code that are scheduled to expire in the coming years are extended, the cost of extending these measures will total $430 billion a year by 2013. Unless these tax-cut extensions are "paid for," their cost will equal 2.4 percent of Gross Domestic Product, which is three times the average size of the projected shortfall in the Social Security Trust Fund over the next 75 years.(2)
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1. Mark Wegner and April Fulton, "Two Sides Keep Firing Shots In Battle Over Child Tax Credit," CongressDaily, June 4, 2003.
2. William Gale and Peter Orszag, "Sunsets in the Tax Code," Tax Notes, June 9, 2003.