	Introduction

The Economic Growth and Tax Relief Act of 2001 (EGTRRA; P.L. 107-16 ), among other tax cuts, provided for a gradual reduction in the estate tax. Under EGTRRA, the estate tax exemption rose from $675,000 in 2001 to $3.5 million in 2009, and the top tax rate fell from 55% to 45%. As with other provisions of EGTRRA, the tax revisions expire in 2011, returning the tax provisions to their pre-EGTRRA levels. The exemption would revert to $1 million (a value that had already been scheduled for pre-EGTRRA law) and the rate to 55% (with some graduated rates). President Obama proposed a permanent extension of the 2009 rules (a $3.5 million exemption and a 45% tax rate), and the House provided for that permanent extension on December 3, 2009 ( H.R. 4154 ). One of these proposals, to reform the Grantor Retained Annuity Trust (GRAT), is included in H.R. 4849 . An election can be made for 2010 to apply either 2010 or 2011 rules. Under the rules for 2011 and 2012, a spouse can inherit any unused exemption. At the same time, the gift tax is tax exclusive (the tax is imposed on the gift net of the tax) whereas the estate tax is tax inclusive (the tax is applied to the estate inclusive of the tax). As indicated earlier, the exemption in 2009 was $3.5 million, the exemption is scheduled at $5 million for 2011 and 2012, and in 2013 the estate tax will revert to an exemption of $1 million, absent a change in the statute. The level of the exemption affects not only the revenue but the number of estates that are subject to the tax. At the same time, there are proposals, including those in President Obama's budget, to restrict practices considered as abuses. Thus, the cost of keeping the 2009 rules in place retroactively to 2010, with a $3.5 million exemption and a 45% tax rate, would be compared to no estate tax in 2010; therefore there would be a revenue gain compared to no estate tax. In 2011, the scheduled rules ($1 million exemption, 55% rate) are estimated to produce a liability of $34.4 billion; the $3.5 million exemption, 45% rate a revenue of $18.2 billion, and the $5 million exemption/35% rate a revenue of $11.4 billion. With the $1 million exemption, about half of the estates subject to tax have assets of under $2 million and almost 80% have assets of under $3.5 million, and these estates would be eliminated from estate tax coverage with either the $3.5 million or the $5 million exemption. Most distributional analyses of taxes are reported relative to income. Evidence on the effect of the tax on small business suggests that the taxable business estates are a small share of all taxable estates and a small share of estates of all business decedents. These returns account for 0.2% and 0.4% of returns paying estate tax. Regardless of the data source used, the evidence suggests two important characteristics of businesses and the estate tax: businesses pay a small fraction of the estate tax and a tiny fraction of total estates of businesses and farmers are liable for the tax. Nevertheless, according to a recent CRS study, the effect on overall charitable giving is likely to be small: moving from the $1 million exemption with a 55% tax rate to the $3.5 million exemption with a 45% tax rate would be projected to lower charitable giving by 1%; moving to the $5 million exemption with a 35% rate would be projected to reduce giving by 2%. These include portability of the spousal exemption, changing the rules on certain trusts, restricting minority discounts, and conforming definitions of fair market value for estates and heirs. A provision in the Administration's budget proposals would require this value to be the same and is projected to raise $3 billion over 10 years. For the $3.5 million exemption, 45% rate effective in 2009, 96% of the tax falls on the top quintile of the income distribution, 72% falls in the top 1%, and 42% in the top 0.1%. Effects on savings are uncertain in direction but likely small.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16), among other tax cuts, provided for a gradual reduction and elimination of the estate tax. Under EGTRRA, the estate tax exemption rose from $675,000 in 2001 to $3.5 million in 2009, and the rate fell from 55% to 45%. In 2010, the estate tax was eliminated. The estate tax changes, however, were scheduled to sunset in 2011, when the exemption would have become $1 million (as scheduled in pre-EGTRRA law) and the tax rate would return to 55%.
There was general agreement that some sort of estate tax would be retained. A proposal to make the 2009 rules ($3.5 million exemption and 45% rate) permanent was included in President Obama's 2010 and 2011 budget outlines and was passed by the House in December 2009 (H.R. 4154). Senate Democratic leaders supported the plan to enact the 2009 rules permanently (and make them retroactive to 2010). The Senate Republican leadership proposed a $5 million exemption and 35% rate. This latter provision was adopted for a two-year period, through 2012. At that point the exemption will revert to the pre-EGTRRA law. For estates of decedents in 2010, either the 2010 or 2011 rules can be elected. Spouses can inherit unused exemptions.
With any of the exemption levels, few estates are affected by the tax. In 2011, the shares of estates taxed are projected by one study to be 1.76%, 0.25%, and 0.14% for the exemption levels of $1 million, $3.5 million, and $5 million, respectively. These numbers would grow to 3%, 0.46%, and 0.23% by 2019. The revenue yield in 2011 is projected to be $34.4 billion, $18.2 billion, and $11.4 billion for the $1 million exemption/55% rate, $3.5 million exemption/45% rate, and the $5 million exemption/35% rate. The estate tax accounts for a small share of revenue.
The estate tax is a highly progressive tax; it not only applies to the largest estates, but within the distribution of estates a large share is concentrated in the over $20 million estate level: 72% for the $5 million/35% rate. Because of exclusions, the effective tax rates are smaller than the statutory rate, with an average of 14% for the $5 million exemption/35% rate. When distributed with respect to income, 96% falls in the top quintile of the income distribution, 72% in the top 1%, and 42% in the top 0.1%, under the $3.5 million exemption/45% rate.
Although concerns have been raised about the effects of the tax on small businesses and farmers, estimates indicate that the share of estate taxes paid by small business estates under the proposed revisions would be small (16% to 18%) and the share of estates of small business owners taxed is small (about 0.2% of decedents with at least 50% of their assets in businesses). Evidence suggests that the number of returns with inadequate liquid assets to pay the estate tax is negligible.
Other effects are likely small. The effects on savings are uncertain but likely small relative to the economy because the tax is small. Moving to either the $3.5 million plan or the $5 million plan would be projected to decrease charitable contributions by a small amount: 1% to 2%. Recent evidence suggests that the costs of administration and compliance are around 7% of revenues.
Structural reforms that might be considered are inheritance of spousal exemptions, and some reforms directed at abuses. A provision to restrict Grantor Retained Annuity Trusts (GRATS), which can be used to virtually eliminate estate tax by providing an annuity with a remainder, is contained in H.R. 4849. Other provisions in President Obama's budget outline include restricting discounts for estates left to family partnerships and conforming fair market value for purposes of the estate tax and future capital gains realizations for heirs.