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The Federal Estate Tax: Will It Rise From the Grave in 2011 or Sooner?

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Download Special Report No. 179

Special Report No. 179

The scheduled but nevertheless unexpected repeal of the federal estate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. in 2010 and the prospect of its reinstatement in 2011 bring debate over the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. , or “death tax,” to the fore again.

Some of the arguments are new: Would it be constitutional for Congress to reinstate the estate tax retroactively for 2010? But some of the arguments are a century old or more: Does the estate tax accomplish any worthwhile social purpose? Is it a good way to raise revenue?

Here we condense and update some earlier Tax Foundation studies on this age-old topic, with specific reference to the recent, surprising death and potential new life for the estate tax.

Key Findings
• The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001, also known as the Bush tax cut of 2001, began phasing out the estate tax. The rate dropped from 55% in 2001 to 45% in 2009 to full repeal in 2010; meanwhile, the exemption level rose steadily as well, from $1 million to $3.5 million.

• The repeal is only scheduled to be in effect for one year, 2010, after which the estate tax is scheduled to revert to 2001 law. President Obama has proposed making 2009 law permanent, and most tax analysts believe that is the most likely legislative outcome.

• On the pro-repeal side, the one-year repeal in 2010 is seen as a great improvement in tax policy that should be made perma­nent because the tax is unfair, preposterously complex and far more economically damaging per dollar of tax collected that any other individual tax.

• Many opponents of repeal consider any tax on the nation’s wealthiest people, dead or alive, as the best sort of tax. They never liked EGTRRA or President Bush’s subsequent tax cuts as a package, and they particularly disliked the repeal of estate taxation.