Tax Policy Center Urban Institute and Brookings Institution A Model of the Estate Tax Len Burman...

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Tax Policy CenterUrban Institute and Brookings Institution

A Model of the Estate Tax

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

Calendar Year

Estate and GST Tax Transfer Exemption

Highest Estate and Gift Tax Rates

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2010 N/A (taxes repealed) 35% (gift tax only)

* Pre-EGTRRA law

2001* $675,000 60%

2011 $1 million 60%

Revenue and Returns

Number Taxable

Estate Tax

Number Taxable

Estate Tax

2001 50.8 21.7 50.8 21.7

2002 51.3 22.3 28.5 17.9

2003 52.9 23.1 31.5 19.7

2004 43.3 22.6 19.1 17.6

2005 37.9 23.3 20.5 19.4

2006 37.0 24.8 13.1 17.1

2007 40.3 27.1 14.5 18.3

2008 43.4 29.7 15.9 20.1

2009 47.6 33.0 7.2 15.0

2010 49.3 35.4 0.0 0.0

2011 54.3 39.2 54.3 39.2

2012 57.0 42.9 57.0 42.9

2013 61.1 47.0 61.1 47.0

2014 64.7 51.7 64.7 51.7

Pre-EGTRRA Current Law

Need for a Distributional Model

• Necessary for evaluating burden of whole tax system

• Calculate winners and losers under reform options

Modeling Strategy

• 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

Estate Tax Computation

• Gross Estate = Assets - Liabilities

• Taxable Estate = Gross Estate - Deductions

• Calculate Tentative Tax

• Tax = Tentative Tax - Credits

Assets Imputed

• 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

Liabilities

• Mortgage and home equity line of credit

• Real estate debt• Farm debt• Credit card balances• All other debt

Explanatory Vars

• # 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

From NW to Estate

• Randomly assign deductions• Married people--tax is

optional– 80% don’t pay– assign average marital

deduction to others

• Assume maximum death tax credit

Modeling QFOBI

• 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

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

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

Distribution of Estate Tax by Cash Income, 2001

Lowest Quintile 2.6 0.4 0.0Second Quintile 3.2 0.5 0.0Middle Quintile 11.5 2.4 0.1Fourth Quintile 21.1 5.3 0.1

Top Quintile 61.1 89.9 0.4All 100.0 100.0 0.3

AddendumTop 10 Percent 40.5 80.3 0.5

Top 5 Percent 28.2 70.5 0.6Top 1 Percent 8.9 44.1 0.7

Top 0.5 Percent 5.2 34.8 0.8Top 0.1 Percent 1.5 18.8 0.7

Cash Income Class Percent of Tax

Estate Tax/Income

(Percent)

Percent of Taxable Returns

Distribution of Estate Tax by Economic Income, 2001

Lowest Quintile 0.0 0.0 0.0Second Quintile 0.0 0.0 0.0Middle Quintile 0.3 0.0 0.0Fourth Quintile 8.0 1.2 0.0

Top Quintile 91.5 98.5 0.4All 100.0 100.0 0.3

AddendumTop 10 Percent 72.2 96.0 0.6

Top 5 Percent 52.7 91.1 0.7Top 1 Percent 14.7 64.2 0.9

Top 0.5 Percent 8.5 51.8 0.9Top 0.1 Percent 1.9 26.7 0.8

Percent of Taxable Returns

Estate Tax/Income

(Percent)

Economic Income Class

Percent of Tax

Distribution of Estate Vs. Income Tax, 2001

Lowest Quintile -1.2 0.4 -1.8 0.0Second Quintile -1.1 0.5 -0.7 0.0Middle Quintile 4.4 2.4 5.4 0.0Fourth Quintile 14.1 5.3 14.8 1.2

Top Quintile 83.8 89.9 82.3 98.5All 100.0 100.0 100.0 100.0

AddendumTop 10 Percent 69.3 80.3 67.2 96.0

Top 5 Percent 56.6 70.5 54.5 91.1Top 1 Percent 34.5 44.1 32.7 64.2

Top 0.5 Percent 27.8 34.8 26.4 51.8Top 0.1 Percent 16.7 18.8 15.5 26.7

Percent of Estate Tax

Cash Income Economic IncomePercent of Income Tax

Percent of Estate Tax

Income Class Percent of Income Tax

Distribution of Estate Tax by Amount Paid, 2001

0 50.8 50.0 0.0 0.0Less than 10 3.3 3.2 17.1 0.1

10-25 4.4 4.3 75.5 0.325-50 6.1 6.0 212.5 1.0

50-100 9.9 9.8 702.5 3.2100-200 8.6 8.5 1,216.6 5.6200-500 9.9 9.7 3,320.3 15.3

500-1,000 4.1 4.1 2,849.2 13.11,000-2,000 2.9 2.8 4,046.0 18.72,000-5,000 1.3 1.3 3,866.2 17.8

More than 5,000 0.4 0.4 5,375.0 24.8All 101.6 100.0 21,680.8 100.0

Net Estate Tax ($ thousands)

Percent of Total

Number (thousands)

Amount ($millions)

Percent of Total

All Estate Tax Returns

Small Farms and Businesses, 2001

0 2,840 73.6 0.0Less than 100 690 17.9 8.9

100-500 210 5.4 26.0500-1,000 50 1.3 16.5

1,000-2,000 60 1.6 34.02,000-5,000 10 0.3 14.5

More than 5,000 0 0.0 0.0All 3,860 100.0 100.0

Estate Tax ($1,000) Percent of Returns

NumberPercent of

Farms and Businesses Under $5 Million

All Farms and Businesses, 2001

0 2,870 71.6 0.0Less than 100 700 17.5 1.9

100-500 210 5.2 5.6500-1,000 50 1.2 4.0

1,000-2,000 80 2.0 10.62,000-5,000 60 1.5 17.4

More than 5,000 30 0.7 60.5All 4,010 100.0 100.0

All Farms and Businesses3

NumberPercent of

ReturnsPercent of

Estate Tax ($1,000)

Revenue Options, All Sunset 2010

2005-09 2005-14

Current Law Baseline 89.9 270.8Options Sunset 12/13/101. $3.5M Exemption, 45% Top Rate -26.7 -11.12. Option 1 Plus Index -29.4 -15.13. $5M Exemption, 35% Top Rate -53.4 -44.34. $5M Exemption, 45% Top Rate -42.0 -30.15, $10M Exemption, 35% Top Rate -68.2 -62.86. $1.5M Exemption, 48% Top Rate 30.0 61.37. $2M Ex., $5M QFOBI, 48% Rate 9.5 35.31 + $5M QFOBI) -27.2 -11.61 + $10M QFOBI -27.9 -12.51 + Unlimited QFOBI -31.3 -16.8

Change in Estate Tax Liability ($bil)

Permanent Revenue Options vs. Current Law

10-Year Revenue Change

1. $3.5M Exemption, 45% Top Rate -112.82. Option 1 Plus Index -127.13. $5M Exemption, 35% Top Rate -179.84. $5M Exemption, 45% Top Rate -151.55. $10M Exemption, 35% Top Rate -217.06. $1.5M Exemption, 48% Top Rate 40.47. $2M Ex., $5M QFOBI, 48% Rate -13.71 + $5M QFOBI) -113.81 + $10M QFOBI -115.71 + Unlimited QFOBI -124.0

Permanent Options v. Permanent Baseline

10-Year Estate Tax Gain

1. $3.5M Exemption, 45% Top Rate 68.12. Option 1 Plus Index 53.73. $5M Exemption, 35% Top Rate 1.04. $5M Exemption, 45% Top Rate 29.45. $10M Exemption, 35% Top Rate -36.26. $1.5M Exemption, 48% Top Rate 221.27. $2M Ex., $5M QFOBI, 48% Rate 167.1

Option 1: Distribution of Estate Tax, 2004

Lowest Quintile 0.0 0.0 0.0 0.0Second Quintile 0.0 0.0 0.0 0.0Middle Quintile 0.0 0.0 0.0 0.0Fourth Quintile 0.0 0.0 0.0 0.0

Top Quintile 4.4 99.8 99.7 0.2All 4.4 100.0 100.0 0.1

AddendumTop 10 Percent 4.4 99.7 99.6 0.2

Top 5 Percent 4.4 99.7 99.6 0.3Top 1 Percent 4.0 90.9 97.4 0.5

Top 0.5 Percent 3.2 71.2 92.4 0.7Top 0.1 Percent 0.8 18.3 57.7 0.7

Estate Tax/Income

(Percent)

Economic Income Class

Taxable Returns (1,000s)

Percent of Returns

Percent of Tax

Taxable Farms and Businesses by Size of Exemption, 2004

3010 0

1 3.5 5 10

Exemption in $millions

s Under $5M

Tax Policy Center Urban Institute and Brookings Institution A Model of the Estate Tax Len Burman...

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