a model of the estate tax len burman bill gale jeff rohaly april 29, 2004 presentation for

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


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2010 N/A (taxes repealed) 35% (gift tax only)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%


Revenue and ReturnsNumber Taxable

Estate Tax

Number Taxable

Estate Tax

2001 50.8 21.7 50.8 21.72002 51.3 22.3 28.5 17.92003 52.9 23.1 31.5 19.72004 43.3 22.6 19.1 17.62005 37.9 23.3 20.5 19.42006 37.0 24.8 13.1 17.12007 40.3 27.1 14.5 18.32008 43.4 29.7 15.9 20.12009 47.6 33.0 7.2 15.02010 49.3 35.4 0.0 0.02011 54.3 39.2 54.3 39.22012 57.0 42.9 57.0 42.92013 61.1 47.0 61.1 47.02014 64.7 51.7 64.7 51.7

Pre-EGTRRA Current Law


Need for a Distributional Model

• Necessary for evaluating burden of whole tax system

• Calculate winners and losers under reform options


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


Estate Tax Computation

• Gross Estate = Assets - Liabilities

• Taxable Estate = Gross Estate - Deductions

• Calculate Tentative Tax

• Tax = Tentative Tax - Credits


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


Liabilities

• Mortgage and home equity line of credit

• Real estate debt• Farm debt• Credit card balances• All other debt


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


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


Modeling QFOBI

• 1/5 of potential eligibles take it

• We assign QFOBI randomly

• Other strategies?– P(QFOBI) depends on

expected gain


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


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


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


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


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


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

TotalNumber

(thousands)Amount

($millions)Percent of

Total

All Estate Tax Returns


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 ReturnsNumber Percent of

Tax

Farms and Businesses Under $5 Million


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

Number Percent of Returns

Percent of Tax

Estate Tax ($1,000)


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)


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


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


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


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

Taxa

ble

Farm

s an

d B

usin

esse

s Under $5M

All

a model of the estate tax len burman bill gale jeff rohaly april 29, 2004 presentation for

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