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This presentation provides a model of the estate tax, detailing changes in transfer tax exemptions and rates from 2002 to 2011. It discusses the need for a distributional model to assess the burden of the tax system, presenting a strategy to calculate estate tax liability and impute wealth and liabilities onto the tax model. The computation process, imputed assets, and liabilities are explained, along with the methodology for estimating the impact of the Qualified Family-Owned Business Interest (QFOBI) deduction. Different measures of income are compared, highlighting the importance of economic income in assessing wealth. The distribution of estate tax by cash and economic income in 2001, small farms and businesses, and various revenue options are also analyzed.
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A Model of the Estate Tax Len Burman Bill Gale Jeff Rohaly April 29, 2004 Presentation for AFET Steering Committee
2001* $675,000 60% 2011 $1 million 60% Changes in Transfer Tax Exemptions and Rates Due to EGTRRA, 2002-2011 Highest Estate and Gift Tax Rates Calendar Year Estate and GST Tax Transfer Exemption 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$1.5 million 47% 2006 $2 million 46% 2007 $2 million 45% 2008 $2 million 45% 2009 $ 3.5 million 45% 2010 N/A (taxes repealed) 35% (gift tax only) * Pre-EGTRRA law
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
# 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 Explanatory Vars
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 for baseline simulations • To estimate effect of QFOBI increases, we assume 100% take-up • Upper bound on cost
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
Permanent Revenue Options vs. Current Law10-Year Revenue Change
Permanent Options v. Permanent Baseline10-Year Estate Tax Gain
