Who Is Paying Estate Taxes?

There is a push in Washington to repeal theestate tax (or "death tax"; as its critics like to term it). Who wouldbenefit from such a repeal? Very few estates, it turns out. A close look at thenumbers reveals that only a tiny fraction of estates pay any taxes at all, andonly a small percentage of these pay the top tax rate.

In 1998, for example, only 47,000 estates--lessthan 2 percent of all estates--owed taxes. This is thanks to the large tax exemptions for estates. The estate tax applies only to estates valued atmore than $675,000, meaning that a married couple can now exempt $1.35 millionfrom tax. This amount will increase incrementally until it reaches $1 million($2 million for couples) in 2006. Moreover, each person can give up to $10,000annually to a family member (or anyone else) tax free. There is no limit on howmany individual $10,000 gifts can be given. Finally, spouses can transfer assetsto one another completely exempt from tax.

The estate tax is also progressive, meaning thatmost of the estates that do owe a tax pay far less than the maximum rate. Thetop federal tax rate of 39 percent applies only to estates valued at more than$3 million. In 1998, the estates of between $600,000 and $1 million paid onaverage only 5.9 percent of their value in estate taxes. The average tax forthese estates was $46,000 and they paid only 4.5 percent of all estate taxes. Bycontrast, more than half of the estate taxes in 1998 were paid by the 2,900largest estates—all worth $5 million or more.

Those advocating for repeal of the estate taxclaim that it breaks up family farms and small businesses. How extensive is thisproblem? According to Internal Revenue Service figures for 1998, only 1,418 ofthe 47,000 taxable estates held more than half of their value in either farm orsmall business assets. These estates paid only 1 percent of all estate taxescollected in that year.

While a repeal of the estate tax would indeedassist the wealthiest sliver of the population, it also would deprive the nationof more than $20 billion in revenues—a shortfall we all might have to help repay.

For more on estate taxation, click here.