Wealth for the Common Good

Campaign: Progressive Estate Tax Reform

Levy a significant estate tax on grand fortunes.
Revenue potential: $60 billion per year

The estate tax, under current law, will expire in 2010, then revert to the 2000 status quo the following year. Congress needs to reform the estate tax in 2009 to avoid the confusion this public policy roller coaster will create — and make sure that the fortunes amassed over recent decades do not escape taxation.

In December 2009, the House of Representatives passed legislation to permanently extend the current exemption level of $3.5 million for individuals ($7 million for couples), and a maximum tax rate on estates of 45 percent.

As of Jan. 1, the estate tax is suspended for the duration of 2010. This is because the Senate failed to act before the end of 2009. But it’s not too late: Some leaders, recognizing the fiscal irresponsibility of this act, have promised to take action in the early part of the year to restore the tax. When the Senate takes up this issue, it should not dilute the tax from its 2009  level.

Please help us urge Congress to restore the estate tax. Visit our friends United for a Fair Economy for a toll-free number and information you can use to call your members. Tell them to restore the estate tax retroactively to Jan. 1, 2010.

Over the long term, we support reform that would put in place steeply graduated tax rates and has the potential to raise $60 billion per year (see Key Provisions of Progressive Estate Tax Reform, below).

Wealth for the Common Good is working in coalition with Americans for a Fair Estate Tax. Our partners include United for a Fair Economy, Center on Budget and Policy Priorities, Citizens for Tax Justice, OMB Watch, and American Federation of State, County, and Municipal Employees (AFSCME).

Background

Description: The future of the estate tax will likely be addressed in 2009. President Obama advocates freezing the estate tax at current 2009 exemption levels — $3.5 million and $7 million for a couple — and indexing these thresholds for inflation.

Why action now? Under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax will disappear totally in 2010. The entire Act then sunsets in 2011, restoring the estate tax to the year 2000 wealth exemption level — $1 million per spouse — and tax rate schedule. Since 2001, opponents of the estate tax have pushed for “permanent repeal,” but have failed to win enough votes. All observers agree that Congress, for the sake of estate tax planning and predictability, needs to settle the estate tax future before 2010.

Why retain the estate tax? The estate tax remains our nation’s only federal tax on inherited wealth. A century ago, President Theodore Roosevelt called for estate and inheritance taxes to slow the build-up of concentrated wealth in the hands of a few. The federal estate tax, enacted in 1916, has been in effect ever since. A reformed estate tax that takes a meaningful bite out of huge private fortunes would raise $1 trillion in revenue over the next decade, provide a powerful incentive for charitable giving, and help reduce our nation’s staggering inequalities in asset ownership.

The estate tax, as Bill Gates Sr. has written, “is a means by which wealthy people pay back the society and the commonwealth that has made their wealth possible.” Eliminating the estate tax — or gutting it with irresponsible reforms — would shift our nation’s revenue obligations onto lower-income taxpayers and future generations. We urgently need legislation that retains an estate tax robust enough to both raise badly needed revenue and put a break on America’s ever more narrowly concentrated wealth.

Key Provisions of Progressive Estate Tax Reform

  • A wealth exemption at $2 million. Setting the exemption at $2 million for individuals and $4 million for couples would freeze the wealth exemption at the 2008 level. At this level, only multi-millionaires and billionaires — who make up just one of every 200 decedents — would pay any estate tax.
  • Wealth exemption indexed to inflation. The amount of wealth exempted should be indexed to inflation on an annual basis. This will reduce the need for legislation to revise the exemption level in the future.
  • Progressive rate structure. Instead of the current flat estate tax rate, a graduated rate structure. The rate should be 45 percent for estates between $2 million and $5 million, 50 percent for estate values between $5 million and $10 million, and 55 percent for estates valued over $10 million. In practice, after deductions for charitable giving, the actual effective tax rate would be considerably lower.
  • Restoration of state credit. Before 2001, the estate tax provided a credit, against federal estate tax liability, for state estate or inheritance taxes. Given this credit, almost all states had some form of estate or inheritance tax, often explicitly tied to the level of the federal credit. The 2001 law reduced and then repealed the credit. Since 2001, in about 27 states, inheritance and estate taxes have either expired automatically, because they were tied to the existence of the federal credit, or been repealed. Restoring the state credit would reduce federal estate tax revenue. But this step would encourage states to complement otherwise regressive state tax systems with a progressive estate tax.
  • Administrative reforms. Real legislation would simplify estate and gift tax planning by relinking the two taxes under uniform rules and by allowing a surviving spouse to automatically acquire the unused estate tax credit of a deceased spouse.

For More Information

United for a Fair Economy has been working to preserve and reform the federal estate tax since 1999. Visit their website for more background on this issue.

Jonathan Weisman, “Obama Plans to Keep Estate Tax: Democrats Want to Freeze Levy at Current Levels Instead of Letting It Expire Next Year,” The Wall Street Journal, January 12, 2009.

Center on Budget and Policy Priorities, “The Estate Tax: Myths and Realities,” October 11, 2007.

Bill Gates Sr. and Chuck Collins, Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes (Beacon Press, 2003).

“Spending Millions to Save Billions: The Campaign of the Super Wealth To Kill the Estate Tax” by Conor Kenny and Chuck Collins, Public Citizen and United for a Fair Economy (April 2006).