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Podcast: The Estate Tax

July 14, 2009

In this podcast we will discuss the basics of the Estate Tax. I’m Shannon Spillane and I’m joined by the Center’s Director of Federal Tax Policy, Chuck Marr.

1. Chuck, there’s been a lot of debate in recent years about the estate tax. What exactly is it?

A: The estate tax is a tax on the assets that get transferred from one generation to the next when someone dies. It only applies to very wealthy families.

2. So not everyone has to pay an estate tax?

A: Definitely not. Over 99% of estates are not taxed at all and that’s because there’s a big exemption level that excludes most every estate in the United States.

3. What is that current exemption level?

A: Right now it’s set at $3.5 million per person and $7 million per couple. This means that if you have an estate worth $7 million you pay no estate tax whatsoever. About one in every 400 estates pays any estate tax at all.

4. So what about estates that are big enough to be taxed? How much do they owe in taxes?

A: On average, Shannon, people who pay the estate tax pay about 20 cents on the dollar in tax or 20 percent tax rate overall. What’s interesting though, what you need to keep in mind, is that much of this money has never been taxed before. It’s in the form of capitals gains that have never been realized and they’ve paid no tax on it whatsoever.

5. Some people seem to think that taxable estates owe 45 percent of their value in tax, because that’s the tax rate. Can you explain why that’s mistaken?

A: The rate actually is lower than the 45 percent statutory rate. This is because people do not pay tax on the entire estate. Like we talked about before, there’s an exemption of $7 million dollars. So on this portion of their estate, no tax is applied. The estate tax does not start to kick in until you get assets above $7 million. In addition, things like charitable contributions are deductible.

Moreover, wealthy people also use very, very complex planning techniques to avoid the estate tax so on a bottom line basis you find that they are only paying about at a rate of about 20 cents on the dollar.

6. So, if the estate tax affects so few people, tell me why it gets so much attention?

A: Well, what we’ve seen is a very effective campaign by a very small group of very wealthy families in the United States that have run a very aggressive and expensive campaign, and in a way, they’ve used family farmers and family businesses and sort of held them, farmers, up as a poster child for the estate tax and sort of hid behind them, and created and generated this very extensive campaign, and politics have worked very well for them.

7. Well, what about those claim that the estate tax has dire consequences for family farms and small businesses?

A: They’re incorrect. This has been a very misleading and frustrating part of this debate. Because as we know, family farms and small businesses tend to be small. You have a $7 million exemption so most family farms and small businesses do not pay any estate tax. In fact, the Tax Policy Center, which is a very respected institute in Washington, has estimated that only 80 small business and family farms in the entire country will owe any estate tax in 2009. The Congressional Budget Office has found that nearly all of the small business and farm estates that would owe any tax in 2009 also have plenty of liquid assets to pay that tax without having to touch the farm or the business.

8. So what can you tell us about the future of the estate tax?

A: The future is very much in limbo. Right now you have this exemption level set at $7 million per couple. Next year, the estate tax actually is repealed completely. And the following year, the exemption level drops back to a level of just $1 million. So there’s going to be a big debate about what to do with the estate tax. Some people want to get rid of it completely. We think this would be a major mistake. Our government is running very large budget deficits. If we repeal the estate tax, deficits will go up even more, pressure will grow to cut health care, education, and other programs that people need and want. Sacrificing these key priorities in order to give a tax cut to people who already are extremely wealthy is not a good trade-off.

9. So what’s the best solution?

A: We think it’s very important to keep a robust estate tax in the law and at a minimum we should keep what the law is today, which again, exempts over 99% of estates, so 99% of estates are completely tax-free as it is today.

Thank you for joining us, Chuck.