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CBO Analyzes Estate Tax Alternatives

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Repealing the federal estate tax would increase the federal budget deficit by about $502 billion over the 10-year period starting in 2010, a Congressional Budget Office analyst predicts.

Current law calls for the estate tax to vanish in 2010, but to spring back to 2001 exemption and tax rate levels in 2011. If Congress let the estate tax system return to the 2001 exemption and tax rate levels, that would reduce the deficit by about $420 billion, the analyst, Pamela Greene, writes in a CBO issue brief.

Members of the House voted earlier this month to pass H.R. 4154, the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Act of 2009, a bill that would continue the estate tax exemption and top tax rate at 2009 levels. The bill is now under consideration in the Senate, but it appears to have stalled.

Continuing the estate and gift tax rules that have been in effect in 2009 would cost about $234 billion from 2010 to 2019 if the exemption amount were not indexed for inflation, and about $244 billion over that period if the exemption amount were indexed for inflation, Greene estimates.

The 2009 estate tax exemption is $3.5 million for an individual and $7 million for a couple, and the top 2009 estate tax rate is 45%.

The 2001 estate tax exemption was $1 million for an individual and $2 million for a couple, and the top estate tax rate was 55%.

Greene suggests in the brief that Congress could supplement or replace the estate tax with an inheritance tax.

An inheritance tax “would be applied separately to each person inheriting assets,” Greene writes. “The inheritance tax could be set up so that heirs with lower income or less wealth paid a lower tax than did heirs with higher income or more wealth, so that smaller inheritances would be taxed at lower rates than larger inheritances, or so that closer relatives paid lower taxes than more distantly related heirs.”

Replacing the estate tax with an inheritance tax would require more taxpayers to file returns, but it might eliminate some tax planning strategies now used to reduce estate and gift taxes, Greene writes.

The CBO estate tax proposal review is available here.


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