CBO Examines the Taxation of Wealth Transfers

December 18, 2009

The federal government uses a linked set of three taxes on estates, gifts, and generation-skipping transfers to tax transfers of wealth at each generation and to limit the extent to which wealth can be given away during life to avoid taxation at death. A scheduled temporary repeal of the estate tax in 2010 has raised interest in modifying such taxes on transfers of wealth. Already, the House has passed legislation (H.R. 4154) that would permanently extend estate and gift tax law as it stands in 2009. Today CBO released a brief discussing the existing taxes on transfers of wealth and policy options for changing them.

How the United States Taxes Transfers of Wealth

The federal government levies three types of taxes on transfers of wealth:

  • An estate tax on the net value of assets transferred to other individuals when a person dies,
  • A gift tax on the value of gifts that a person gives to others during that persons lifetime, and
  • A generation-skipping transfer tax on some transfers of wealth at death to certain heirs.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) reduced revenue from the estate tax relative to previous law beginning in 2001, primarily by increasing the amount of an estate that is effectively exempt from taxation and by reducing the top marginal tax rate (the rate that applies to the last dollar of an estate). Under that law, the effective exemption amount rose from $675,000 in 2001 to $3.5 million in 2009, and the top marginal tax rate dropped from 55 percent to 45 percent. In 2010, the estate tax is temporarily repealed. Starting in 2011, the estate tax is reinstated with an exemption amount of $1 million and a maximum marginal tax rate of 55 percent (plus a 5 percent surtax on taxable transfers between $10.0 million and $17.184 million, which was also in effect in 2001).

Estate and Gift Tax Collections

Since 1977, less than 2 percent of adults who die each year typically leave estates large enough to be taxable. Because of recent increases in the amount of an estate that is exempt from taxation, a relatively small percentage of estates are taxable today. Federal transfer taxes have historically made up a relatively small share of total federal revenuesaccounting for 1 percent to 2 percent of total revenues in most of the past 60 years.

Under current law, revenues from estate and gift taxes will total $420 billion, 1.2 percent of revenues, over the 20102019 period, CBO forecasts. About $364 billion (87 percent) of that total is from estate tax receipts, and the remaining $56 billion (13 percent) is from gift tax receipts. Estate and gift tax receipts as a percentage of total receipts will drop over the next two years (see Figure 1) and, because of the changes currently set in law, the pattern of receipts will be irregular.

Estate and Gift Tax Receipts As A Percentage of Total Receipts, Fiscal Years 1945-2019

Receipts from estate taxes will decline in 2010 and almost disappear in 2011, before rising to about $32 billion in 2012, CBO estimates. In contrast, gift tax receipts will probably surge to a very high level in 2011, reflecting the scheduled declinein 2010of the top rate for gift taxes from 45 percent to 35 percent. After the enactment of EGTRRA in 2001, taxpayers cut their taxable giving of gifts by more than half, partly in anticipation of the repeal of the estate and generation-skipping transfer taxes and the reduction in the tax rate on gifts to 35 percent in 2010. CBOs forecast of gift tax receipts reflects the reversal of that behavior in 2011, when the tax on gifts given in 2010 will be due.

Policy Options for Changing the Taxation of Wealth Transfers

The repeal of the estate tax in 2010 followed by the reversion to a $1 million exemption amount has led many policy makers to seek changes to current law. The House-passed legislation (H.R. 4154) would permanently retain the estate and gift taxes at the parameters in place for 2009. In its August 2009 report Budget Options, Volume 2, CBO discussed a number of other options for modifying estate and gift taxes, including permanently extending the law in effect in 2009 (but unlike H.R. 4154, adjusting the exemption amounts for the estate and GST taxes for inflation) and permanently repealing the estate tax. The brief discusses those options, as well as an option to replace the estate tax with an inheritance tax. Adopting one of those options for modifying estate and gift taxes would reduce federal revenues by amounts ranging from $234 billion to more than $500 billion over the 2010-2019 period, according to estimates by the staff of the Joint Committee on Taxation.

This brief was prepared by Pamela Greene of CBOs Tax Analysis Division.