• Background: Applies to >2% of population, generates 1.5% of tax revenue, lowered/abolished by Pres Bush
• Opposing Argument: Forces liquidation of assets, inefficient
• Supporting Argument: Only affects the wealthiest, opposition's claims are exaggerated, most progressive tax
• Recent legislative activity: 2000 abolished by Congress and vetoed by Clinton, 2001 reduced by Bush and set to end in 2010

Background

The Estate tax, often called the "death tax", is a levy on the estates of the deceased in the United States. The tax is applied to about 2% of Americans and generates roughly 1.5% of total tax revenue. Current laws tax those with taxable estates over $2 million. This was among several taxes to be cut in 2001, when the minimum value at which an estate can be taxed increased from $675,000 to $3.5 million and decreased the rate of taxation from 55% to 45%. The tax will be eliminated altogether in 2010 but will be reinstated in 2011 when the 2001 tax cuts expire. America's estate tax is one of the highest in the world. Most other countries only tax inheritances and at a much softer rate. Using trust funds, insurance, and leaving donations to charities will exempt portions of the estate from taxation.

Opposing Argument

The elimination of this tax is pursued widely by many fiscal conservatives, primarily from the Republican base, who argue that the tax has forced older, wealthy individuals, small businesses and farms to shift their assets to reduce risks and preserve capital to avoid taxation. When these economic actors are forced to make this choice, they argue, the overall economy loses valuable investments and potential jobs. It is also argued that the estate tax disregards individual property rights, because if unable to pay the tax, inherited assets are seized by the IRS. Congressional Republicans argue that the compliance fees are just as high as the revenue and it serves as a second tax on income.

Supporting Argument

Supporters claim that the effect of the Estate tax is limited, and rarely causes harm while it is necessary for the federal budget. "A study by the Congressional Budget Office shows that in 2000 (ie, before the recent evisceration) only 1,659 farms and 485 small business were liable for the estate tax, almost all of which had sufficient liquid assets to pay it. The rest can stretch their tax payments over many years." (Source: The Economist) The estate tax provides desperately needed source of revenue when the budget deficit has covered between 3.5-4.5% of GDP. The levy generates 0.3% of GDP at the late-1990s rate (although President Bush's tax cuts are decreasing the rate and expected revenue), which is enough to account for half of the social security deficit as the baby-boomers move into retirement (Source: The Economist). Estate tax proponents call it America's most progressive, since it only affects the top income earners who are receiving twice as much of the country's gross income as they did twenty years ago.

Recent Legislative Activity

In recent years, the "death tax" has become a top political issue in the United States. In 2000, congressional Republicans voted to abolish it for good but President Clinton resurrected it by wielding his veto power. The 2001 Bush tax reforms raised the value of an estate that can be taxed and lowered the rate of taxation. The tax will end in 2010. In 2006 former Senate majority leader Bill Frist (R-TN) introduced a bill that reduced estate taxes by exempting $5 million of a single person's estate and $10 million of a couple's from taxation by 2015. The maximum rate would fall from 46% to 30%. A federal minimum wage increase phased in over three years was inserted into the bill to garner Democratic support. This effort was rejected in August 2006 (Source: New York Times).