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204 IRET Congressional Advisory 1 (2006)

handle is hein.taxfoundation/iretcgadv0201 and id is 1 raw text is: INSTITUTE FOR RESEARCH ON THE ECONOMICS OF TAXATION IRET is a non-profit 501 (c)(3) economic policy research and educational organization devoted to informing the public about policies thait will promote growth and efficient operation of the market economy. June 7, 2006 Advisory No. 204 ESTATE TAX REPEAL CONSIDERED BY SENATE The Senate is expected to vote this week on permanent repeal of the estate tax. The House of Representatives has already voted to make repeal permanent, by passing H.R. 8. The debate is being influenced again by the revenue estimate of the cost of repeal prepared by the Congressional Joint Committee on Taxation (JCT). The JCT estimate is not credible. Repeal would raise, not lower federal revenues. We have written before about peculiar assumptions underlying the JCT work in this area. Sadly, those peculiarities continue to poison the estimates and the debate. We all Pay thI burden on ev4 Background larly punishe The estate and gift tax businesses, an (federal transfer tax) collects a salers. It small amount of revenue but formation, wi does a great deal of economic and hurts wor damage. It is the third or fourth layer of tax on the same income (income saved rather than income consumed).' It discourages capital formation and productivity growth, which reduces wages and hurts workers. It is one of the least efficient federal taxes, in that its high marginal rates create a lot of economic distortion per dollar of revenue raised. If income redistribution is the objective of the tax, there are less damaging ways to achieve it. In 2001, Congress voted to phase the estate tax out. The Economic Growth and Tax Relief Recon- ciliation Act of 2001 raised the unified credit and reduced estate and gift tax rates through 2009, and repealed the estate tax (but not the gift tax, which would remain in force) for the year 2010, the last year of the (then) budget window. However, if no further action is taken, the estate tax would re-emerge in 2011, and the unified credit amounts and rates for both taxes would revert to pre-2001 levels in 2011. As a revenue offset for the estate tax repeal in 2010, the Act ended the step-up in basis at death for capital gains on assets in estates, as of 2010. Under old treatment, the tax basis for the heir of an e' estate tax. It is a eryone. It particut- s owners of smnall d discourages other retards capital ,ich reduces wvages -kers. inherited asset is not the original price paid by the decedent, but the price at his or her death. Accrued gains are forgiven. Under the 2001 Act, the decedent's original price basis would generally carry over to the heirs, and the capital gains, when taken, would be subject to the 15 percent tax rate on long term gains, and to regular tax rates on short term gains.2 The Act continues a limited step-up to shelter small estates not now subject to the estate tax from the added capital gains levy.3 The Senate vote on H.R. 8 The Senate would follow the House action by voting on H.R. 8, to repeal the estate and generation skipping tax permanently as of 2010, continuing thereafter the 2001 Act's substitution of carry-over basis for the step-up at death, as moderated by the limited step-up to protect small estates. The gift tax would remain, at the reduced tax rate of 35 percent as provided in the 2001 Act. e~em km A * * gg~ g ~gg

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