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
Tax Policy CenterUrban Institute and Brookings Institution
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2010 N/A (taxes repealed) 35% (gift tax only)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%
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban 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 CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban 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 CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
Liabilities
• Mortgage and home equity line of credit
• Real estate debt• Farm debt• Credit card balances• All other debt
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban 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 CenterUrban 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 CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax
Farms and Businesses Under $5 Million
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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
Tax
Estate Tax ($1,000)
Tax Policy CenterUrban Institute and Brookings Institution
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)
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
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
Tax Policy CenterUrban Institute and Brookings Institution
Taxable Farms and Businesses by Size of Exemption, 2004
340
3010 0
440
11090
30
0
50
100
150
200
250
300
350
400
450
500
1 3.5 5 10
Exemption in $millions
Tax
able
Far
ms
and
Bu
sin
esse
s Under $5M
All