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Snapshot for September 13, 2005.

Death and taxes (part II): Wealthiest estates account for most of revenue generated by estate tax

The vast bulk of estate tax revenue is paid by a minority of taxable estates, thus most taxable estates contribute very little to overall estate tax revenue.  Consequently, the number of estates subjected to the tax could be drastically reduced with relatively little revenue loss or effect on the federal budget deficit.

The distribution of estates by size is shown by the red bars in the chart below.  Out of 66,000 estate tax returns filed in 2003, the vast majority were worth between $1 and $2.5 million, for which the average tax rate was 5.1% (see Death and Taxes—part I).  The chart’s green bars show the distribution of assets in estates by estate size.  For instance, the highest category of estates—those worth more than $20 million—represented over 20% of the total value of all the taxed estates.   At the same time, these estates were a disproportionately tiny share of the total returns filed—a little over 1%. 

This lop-sided pattern of estate value relative to number of returns filed is also evident in the chart’s blue bars, which show the share of total estate taxes paid.  The top 3.1% of returns filed accounted for 39.5% of revenues collected.  This chart shows that if the bottom three-quarters of current estate tax filers were exempted from the tax entirely, only 18.3% of the revenue would be lost.

The average rates of tax themselves overstate what might be called a typical rate of tax.  The Congressional Budget Office found that in 2000, the average rate of estate tax, among those who pay any tax, was 18.5%, but for the median estate of this group, the average tax rate was a significantly lower 10.6%.  A tiny number of very large estates can push the average well above the median.

Another widespread concern is that the tax is burdensome on small businesses and farms.  The recent report from the Congressional Budget Office provides new analysis of this question.  Current law provides a variety of special breaks for estates that qualify as including the assets of a family-owned business.  It turns out that the average size of estates in such returns exceeds the overall average size of estates.  The estates of farmers are about 90% of the size of both average and median estates.  Thus, the breaks amount to perverse, preferential treatment for relatively large “family business” estates, or for “family farm” estates that are close to average or typical size.

This Snapshot was written by EPI economist Max B. Sawicky.