Tax Policy Center
A Model of the Estate Tax
Urban Institute and Brookings Institution
Len Burman
Bill Gale
Jeff Rohaly
April 29, 2004
Presentation for
AFET Steering Committee
Changes in Transfer Tax Exemptions and
Rates Due to EGTRRA, 2002-2011
Tax Policy Center
Calendar Year
Urban Institute and Brookings Institution
Estate and GST Tax
Transfer Exemption
Highest Estate and
Gift Tax Rates
2001*
$675,000
60%
2002
$1 million
50%
2003
$1 million
49%
2004
$1.5 million
48%
2005
$1.5 million
47%
2006
$2 million
46%
2007
$2 million
45%
2008
$2 million
45%
2009
$ 3.5 million
45%
2010
N/A (taxes repealed)
35% (gift tax only)
2011
* Pre-EGTRRA law
$1 million
60%
Tax Policy Center
Revenue and Returns
Urban Institute and Brookings Institution
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Pre-EGTRRA
Number
Estate
Taxable
Tax
50.8
21.7
51.3
22.3
52.9
23.1
43.3
22.6
37.9
23.3
37.0
24.8
40.3
27.1
43.4
29.7
47.6
33.0
49.3
35.4
54.3
39.2
57.0
42.9
61.1
47.0
64.7
51.7
Current Law
Number
Estate
Taxable
Tax
50.8
21.7
28.5
17.9
31.5
19.7
19.1
17.6
20.5
19.4
13.1
17.1
14.5
18.3
15.9
20.1
7.2
15.0
0.0
0.0
54.3
39.2
57.0
42.9
61.1
47.0
64.7
51.7
Tax Policy Center
Urban Institute and Brookings Institution
Need for a
Distributional Model
• Necessary for evaluating
burden of whole tax
system
• Calculate winners and
losers under reform
options
Tax Policy Center
Modeling Strategy
Urban Institute and Brookings Institution
• Pretend all owe estate tax
– Use SCF data to impute wealth,
liabilities onto tax model
– Calibrate to match published
estate tax tabulations
– Assign average level of
deductions, credits
– Calculate estate tax liability (if
any) for each record
• Use mortality probability to
calculate expected estate tax
Tax Policy Center
Urban Institute and Brookings Institution
Estate Tax
Computation
• Gross Estate = Assets - Liabilities
• Taxable Estate = Gross Estate - Deductions
• Calculate Tentative Tax
• Tax = Tentative Tax - Credits
Tax Policy Center
Assets Imputed
Urban Institute and Brookings Institution
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Cash
Tax-exempt bonds
Taxable bonds
Stock
Retirement assets
Life insurance
Other financial assets
Vehicles
Personal residences
Other real estate
Farm assets + land
Active business
Passive assets
Other nonfinancial assets
Tax Policy Center
Liabilities
Urban Institute and Brookings Institution
• Mortgage and home
equity line of credit
• Real estate debt
• Farm debt
• Credit card balances
• All other debt
Explanatory Vars
Tax Policy Center
Urban Institute and Brookings Institution
•
•
•
•
•
•
•
# dependents
age brackets
income
taxable interest
tax-ex interest
dividends
farm + business
income
•
•
•
•
•
•
•
rental income
pension
capital gains
negative income
zero dummies
itemize
schedule dummies
Tax Policy Center
From NW to Estate
Urban Institute and Brookings Institution
• Randomly assign
deductions
• Married people--tax is
optional
– 80% don’t pay
– assign average marital
deduction to others
• Assume maximum death
tax credit
Tax Policy Center
Modeling QFOBI
Urban Institute and Brookings Institution
• 1/5 of potential eligibles take
it
• We assign QFOBI randomly
for baseline simulations
• To estimate effect of QFOBI
increases, we assume 100%
take-up
– Upper bound on cost
Tax Policy Center
Urban Institute and Brookings Institution
Two Measures of
Income
• Cash Income
– AGI plus items excluded
from income such as
pensions, IRAs, health
insurance, and transfers
• Economic Income
– Assumes imputed return to
capital
– Adjusted for family size
Tax Policy Center
Urban Institute and Brookings Institution
Economic Income is
Better Measure
• Many people with low or even
negative realized income are
extremely wealthy
– Economic income says that if
you have $10 million of stock,
you are high income, even if
you sell none of it and have
business losses
• But cash income is easier to
explain to noneconomists
Tax Policy Center
Urban Institute and Brookings Institution
Distribution of Estate Tax
by Cash Income, 2001
Estate
Tax/Income
(Percent)
Percent of
Taxable
Returns
Percent of
Tax
Lowest Quintile
Second Quintile
Middle Quintile
Fourth Quintile
Top Quintile
All
2.6
3.2
11.5
21.1
61.1
100.0
0.4
0.5
2.4
5.3
89.9
100.0
0.0
0.0
0.1
0.1
0.4
0.3
Addendum
Top 10 Percent
Top 5 Percent
Top 1 Percent
Top 0.5 Percent
Top 0.1 Percent
40.5
28.2
8.9
5.2
1.5
80.3
70.5
44.1
34.8
18.8
0.5
0.6
0.7
0.8
0.7
Cash Income Class
Tax Policy Center
Urban Institute and Brookings Institution
Distribution of Estate Tax
by Economic Income, 2001
Economic Income
Class
Estate
Tax/Income
(Percent)
Percent of
Taxable
Returns
Percent of
Tax
Lowest Quintile
Second Quintile
Middle Quintile
Fourth Quintile
Top Quintile
All
0.0
0.0
0.3
8.0
91.5
100.0
0.0
0.0
0.0
1.2
98.5
100.0
0.0
0.0
0.0
0.0
0.4
0.3
Addendum
Top 10 Percent
Top 5 Percent
Top 1 Percent
Top 0.5 Percent
Top 0.1 Percent
72.2
52.7
14.7
8.5
1.9
96.0
91.1
64.2
51.8
26.7
0.6
0.7
0.9
0.9
0.8
Tax Policy Center
Urban Institute and Brookings Institution
Distribution of Estate
Vs. Income Tax, 2001
Income Class
Cash Income
Percent of
Percent of
Income Tax
Estate Tax
Economic Income
Percent of
Percent of
Income Tax
Estate Tax
Lowest Quintile
Second Quintile
Middle Quintile
Fourth Quintile
Top Quintile
All
-1.2
-1.1
4.4
14.1
83.8
100.0
0.4
0.5
2.4
5.3
89.9
100.0
-1.8
-0.7
5.4
14.8
82.3
100.0
0.0
0.0
0.0
1.2
98.5
100.0
Addendum
Top 10 Percent
Top 5 Percent
Top 1 Percent
Top 0.5 Percent
Top 0.1 Percent
69.3
56.6
34.5
27.8
16.7
80.3
70.5
44.1
34.8
18.8
67.2
54.5
32.7
26.4
15.5
96.0
91.1
64.2
51.8
26.7
Tax Policy Center
Urban Institute and Brookings Institution
Distribution of Estate Tax
by Amount Paid, 2001
Net Estate Tax ($
thousands)
0
Less than 10
10-25
25-50
50-100
100-200
200-500
500-1,000
1,000-2,000
2,000-5,000
More than 5,000
All
Number
(thousands)
50.8
3.3
4.4
6.1
9.9
8.6
9.9
4.1
2.9
1.3
0.4
101.6
All Estate Tax Returns
Percent of
Amount
Total
($millions)
50.0
3.2
4.3
6.0
9.8
8.5
9.7
4.1
2.8
1.3
0.4
100.0
0.0
17.1
75.5
212.5
702.5
1,216.6
3,320.3
2,849.2
4,046.0
3,866.2
5,375.0
21,680.8
Percent of
Total
0.0
0.1
0.3
1.0
3.2
5.6
15.3
13.1
18.7
17.8
24.8
100.0
Tax Policy Center
Urban Institute and Brookings Institution
Small Farms and
Businesses, 2001
Estate Tax ($1,000)
0
Less than 100
100-500
500-1,000
1,000-2,000
2,000-5,000
More than 5,000
All
Farms and Businesses Under $5 Million
Percent of
Percent of
Number
Tax
Returns
2,840
690
210
50
60
10
0
3,860
73.6
17.9
5.4
1.3
1.6
0.3
0.0
100.0
0.0
8.9
26.0
16.5
34.0
14.5
0.0
100.0
Tax Policy Center
Urban Institute and Brookings Institution
All Farms and
Businesses, 2001
Estate Tax
($1,000)
0
Less than 100
100-500
500-1,000
1,000-2,000
2,000-5,000
More than 5,000
All
All Farms and Businesses3
Percent of
Percent of
Number
Returns
Tax
2,870
700
210
50
80
60
30
4,010
71.6
17.5
5.2
1.2
2.0
1.5
0.7
100.0
0.0
1.9
5.6
4.0
10.6
17.4
60.5
100.0
Tax Policy Center
Urban Institute and Brookings Institution
Revenue Options, All
Sunset 2010
Change in Estate Tax
Liability ($bil)
2005-09
2005-14
Current Law Baseline
Options Sunset 12/13/10
1. $3.5M Exemption, 45% Top Rate
2. Option 1 Plus Index
3. $5M Exemption, 35% Top Rate
4. $5M Exemption, 45% Top Rate
5, $10M Exemption, 35% Top Rate
6. $1.5M Exemption, 48% Top Rate
7. $2M Ex., $5M QFOBI, 48% Rate
1 + $5M QFOBI)
1 + $10M QFOBI
1 + Unlimited QFOBI
89.9
270.8
-26.7
-29.4
-53.4
-42.0
-68.2
30.0
9.5
-27.2
-27.9
-31.3
-11.1
-15.1
-44.3
-30.1
-62.8
61.3
35.3
-11.6
-12.5
-16.8
Tax Policy Center
Urban Institute and Brookings Institution
Permanent Revenue
Options vs. Current Law
10-Year Revenue Change
1. $3.5M Exemption, 45% Top Rate
2. Option 1 Plus Index
3. $5M Exemption, 35% Top Rate
4. $5M Exemption, 45% Top Rate
5. $10M Exemption, 35% Top Rate
6. $1.5M Exemption, 48% Top Rate
7. $2M Ex., $5M QFOBI, 48% Rate
1 + $5M QFOBI)
1 + $10M QFOBI
1 + Unlimited QFOBI
-112.8
-127.1
-179.8
-151.5
-217.0
40.4
-13.7
-113.8
-115.7
-124.0
Tax Policy Center
Urban Institute and Brookings Institution
Permanent Options v.
Permanent Baseline
10-Year Estate Tax Gain
1. $3.5M Exemption, 45% Top Rate
2. Option 1 Plus Index
3. $5M Exemption, 35% Top Rate
4. $5M Exemption, 45% Top Rate
5. $10M Exemption, 35% Top Rate
6. $1.5M Exemption, 48% Top Rate
7. $2M Ex., $5M QFOBI, 48% Rate
68.1
53.7
1.0
29.4
-36.2
221.2
167.1
Tax Policy Center
Urban Institute and Brookings Institution
Option 1: Distribution
of Estate Tax, 2004
Economic Income
Class
Taxable
Returns
(1,000s)
Percent of
Returns
Percent of
Tax
Estate
Tax/Income
(Percent)
Lowest Quintile
Second Quintile
Middle Quintile
Fourth Quintile
Top Quintile
All
0.0
0.0
0.0
0.0
4.4
4.4
0.0
0.0
0.0
0.0
99.8
100.0
0.0
0.0
0.0
0.0
99.7
100.0
0.0
0.0
0.0
0.0
0.2
0.1
Addendum
Top 10 Percent
Top 5 Percent
Top 1 Percent
Top 0.5 Percent
Top 0.1 Percent
4.4
4.4
4.0
3.2
0.8
99.7
99.7
90.9
71.2
18.3
99.6
99.6
97.4
92.4
57.7
0.2
0.3
0.5
0.7
0.7
Tax Policy Center
Taxable Farms and Businesses by
Size of Exemption, 2004
Urban Institute and Brookings Institution
Taxable Farms and Businesses
500
Under $5M
440
450
All
400
350
340
300
250
200
150
110
90
100
30
50
30
10
0
0
1
3.5
5
Exemption in $millions
10