The federal estate tax, also known as the inheritance tax, is primarily paid by the estates of multi-millionaires and billionaires before their assets are passed to their heirs. It was created nearly 100 years ago to raise revenue from those with the greatest ability to pay, encourage charitable giving and put a brake on the concentration of wealth and power. Conservatives call it the “death tax” in order to mislead people to believe that all Americans pay the tax. But the truth is the vast majority of deaths — 99.9% — will not trigger estate taxes in 2014.
Currently, the tax is assessed only on estates with assets exceeding $5.3 million ($10.6 million per married couple). Families with an estate worth less than those amounts pay nothing. Most families with estates worth $10.6 million or more do careful planning to avoid the tax. Tax loopholes let many wealthy families greatly reduce what they pay or pay no taxes at all. The estate tax is graduated — like the income tax — with a top rate of 40%. However, the average effective tax rate is 17% for those 1 out of 700 deaths that result in paying an estate tax.
Very wealthy Americans have many ways to avoid paying their fair share in taxes. Some billionaires pay a lower federal tax rate than an average worker. Large portions of the incomes of the very rich are never taxed at all.
American society is rapidly becoming divided between the extremely rich — the top 1% — and everyone else. Huge family fortunes are passed down from generation to generation, creating a new American aristocracy. The estate tax is a small step toward leveling the playing field. And revenues generated by the estate tax — $14 billion in 2013 from 2,667 deaths — help fund essential services enjoyed by all.
Conservatives misleadingly imply that every American will have to pay the estate tax when he or she dies. But this is pure propaganda — only 1 out of every 700 deaths results in paying estate taxes.
Conservatives claim that many small, family-owned farms and businesses must be sold to pay estate taxes. But in the entire country just 20 small, family-owned farms and businesses owe any estate tax a year. Virtually none of them get sold to pay the estate tax.
Conservatives claim that the estate tax constitutes “double taxation” because it applies to assets that already have been taxed once as income. But large estates consist mostly of “unrealized” capital gains that have never been taxed, like income from Wall Street investments and from real estate.
The estate tax will currently raise about $225 billion over 10 years. President Obama wants to restore its parameters to 2009 levels — a $3.5 million exemption for an individual ($7 million couple) and a 45% top rate. This reform and others he proposed will raise $131 billion more over 10 years, and affect three estates for every 1,000 deaths.
There is a significant effort among conservatives to repeal the estate tax — with no plans to replace the $225 billion in revenue that would be lost over a decade. A bill (H.R. 2429) to do that, authored by Rep. Kevin Brady (R-CA), has a majority in the U.S. House cosponsoring it.
Drawn from Americans for Tax Fairness’ 2014 Tax Fairness Briefing Booklet.