A Model of the Estate Tax

1
A Model of the Estate Tax Len Burman  Bill
Gale Jeff Rohaly   April 29, 2004 Presentation
for AFET Steering Committee
2
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N/A (taxes repealed)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
 
 
 
 
 
3
Revenue and Returns
4
Need for a Distributional Model

• Necessary for evaluating burden of whole tax
  system
• Calculate winners and losers under reform options

5
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

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Estate Tax Computation

• Gross Estate Assets - Liabilities
• Taxable Estate Gross Estate - Deductions
• Calculate Tentative Tax
• Tax Tentative Tax - Credits

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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

8
Liabilities

• Mortgage and home equity line of credit
• Real estate debt
• Farm debt
• Credit card balances
• All other debt

9
Explanatory Vars

• 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

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From NW to Estate

• Randomly assign deductions
• Married people--tax is optional
• 80 dont pay
• assign average marital deduction to others
• Assume maximum death tax credit

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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

12
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

13
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

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Distribution of Estate Tax by Cash Income, 2001
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Distribution of Estate Tax by Economic Income,
2001
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Distribution of Estate Vs. Income Tax, 2001
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Distribution of Estate Tax by Amount Paid, 2001
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Small Farms and Businesses, 2001
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All Farms and Businesses, 2001
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Revenue Options, All Sunset 2010
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Permanent Revenue Options vs. Current Law10-Year
Revenue Change
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Permanent Options v. Permanent Baseline10-Year
Estate Tax Gain
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Option 1 Distribution of Estate Tax, 2004
24
Taxable Farms and Businesses by Size of
Exemption, 2004