1. Tax Policy Center Urban Institute and Brookings Institution A Model of the Estate Tax Len Burman Bill Gale Jeff Rohaly April 29, 2004 Presentation for AFET Steering Committee

2. Tax Policy Center Urban Institute and Brookings Institution Changes in Transfer Tax Exemptions and Rates Due to EGTRRA, 2002-2011 Calendar Year Estate and GST Tax Transfer Exemption Highest Estate and Gift Tax Rates 2002 $1 million50% 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$1.5 million 47% 2006 $2 million 46% 2007 $2 million 45% 2008 $2 million 45% 2009 $ 3.5 million 45% 2010 N/A (taxes repealed) 35% (gift tax only) * Pre-EGTRRA law 2001* $675,000 60% 2011 $1 million 60%

3. Tax Policy Center Urban Institute and Brookings Institution Revenue and Returns

4. Tax Policy Center Urban Institute and Brookings Institution Need for a Distributional Model Necessary for evaluating burden of whole tax system Calculate winners and losers under reform options

5. Tax Policy Center Urban Institute and Brookings Institution 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

6. Tax Policy Center Urban Institute and Brookings Institution Estate Tax Computation Gross Estate = Assets - Liabilities Taxable Estate = Gross Estate - Deductions Calculate Tentative Tax Tax = Tentative Tax - Credits

7. Tax Policy Center Urban Institute and Brookings Institution 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. Tax Policy Center Urban Institute and Brookings Institution Liabilities Mortgage and home equity line of credit Real estate debt Farm debt Credit card balances All other debt

9. Tax Policy Center Urban Institute and Brookings Institution 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

10. Tax Policy Center Urban Institute and Brookings Institution 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

11. Tax Policy Center Urban Institute and Brookings Institution Modeling QFOBI 1/5 of potential eligibles take it We assign QFOBI randomly Other strategies? –P(QFOBI) depends on expected gain

12. Tax Policy Center Urban Institute and Brookings Institution 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. Tax Policy Center Urban Institute and Brookings Institution 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

14. Tax Policy Center Urban Institute and Brookings Institution Distribution of Estate Tax by Cash Income, 2001

15. Tax Policy Center Urban Institute and Brookings Institution Distribution of Estate Tax by Economic Income, 2001

16. Tax Policy Center Urban Institute and Brookings Institution Distribution of Estate Vs. Income Tax, 2001

17. Tax Policy Center Urban Institute and Brookings Institution Distribution of Estate Tax by Amount Paid, 2001

18. Tax Policy Center Urban Institute and Brookings Institution Small Farms and Businesses, 2001

19. Tax Policy Center Urban Institute and Brookings Institution All Farms and Businesses, 2001

20. Tax Policy Center Urban Institute and Brookings Institution Revenue Options, All Sunset 2010

21. Tax Policy Center Urban Institute and Brookings Institution Permanent Revenue Options vs. Current Law 10-Year Revenue Change

22. Tax Policy Center Urban Institute and Brookings Institution Permanent Options v. Permanent Baseline 10-Year Estate Tax Gain

23. Tax Policy Center Urban Institute and Brookings Institution Option 1: Distribution of Estate Tax, 2004

24. Tax Policy Center Urban Institute and Brookings Institution Taxable Farms and Businesses by Size of Exemption, 2004