As part of its annual look at budget scenarios, which includes a wide array of tax and revenue options, the Congressional Budget Office (CBO) recently released an analysis of four different options for the estate tax and the revenue effects of each option.

As part of its annual look at budget scenarios, which includes a wide array of tax and revenue options, the Congressional Budget Office (CBO) recently released an analysis of four different options for the estate tax and the revenue effects of each option.

Below are the four options examined (and the additional revenue saved – if any – by each over the ten-year period 2004-13):

• Retain estate/gift taxes, but freeze the amount of wealth exempted from any taxation ($1.5 million for individuals; $3 million for couples), as well as the top marginal tax rate (47 percent) at 2005 levels (10-year cost: $10.0 billion)
  
  
• Retain estate/gift taxes, but permanently set wealth exemption at $3.5 million and top tax rate at 50%, starting in 2004 (-$77.1 billion)
  
  
• Permanently repeal estate tax in 2004; retain gift tax, with a $1 million exemption and various allowances in the calculation of the basis of the transferred assets (-$357.0 billion)
  
  
• Make 2001 repeal provisions permanent in 2010 (-$161.7 billion)

In addition to outlining these various options and their effects, the report provides a comprehensive and accessible overview of the estate tax. It notes that the fact that the 2001 tax cut legislation “sunsets,” or ends on December 31, 2010, and because all provisions for estate tax repeal also sunset and revert back to the law as it was before the 2001 legislation took effect “estate tax planning [has been made] significantly more complicated." Recognition of this problem has prompted many who worked against repeal in 2001 to devise a plan for reform of the estate tax that could be permanent, and thereby allow for a simplification of estate planning, while preserving this most progressive of all taxes and ensuring that only the wealthiest estates pay it.

The report concludes with a brief overview of the arguments made by repeal and reform advocates. Among the more commonly heard arguments from both sides, namely those centered around the value of the estate tax in preventing greater concentrations of wealth and in promoting charitable donations, the CBO report introduced another practical concern around the use of repeal to protect small businesses: though repeal advocates usually place the protection of small businesses at the top of their list in arguing for estate tax repeal, this CBO analysis points out that even with total repeal of the federal estate tax, many small businesses will still have to file a state estate tax return.

The full report is available online.