The Federal Estate Tax: History, Law, and Economics

Abstract:     
This manuscript traces the evolution of the estate tax since its enactment. It provides a brief legislative history and description of the structure and features of the tax through 2013. Next it reviews the fiscal contribution of each of the estate and gift taxes through the turbulent recent years. In addition, it provides trends on the number of individuals and households touched by the tax as reflected by the number of returns filed over time through 2011. Furthermore, it also provides a comprehensive review of the behavioral effects of the tax. Estate and gift taxes may have considerable implications for economic behavior. The latter include the effects on saving, labor supply, charitable giving, migration, capital gains realizations, and timing of transfers among others.

The estate tax is the only wealth tax levied by the Federal government. It was enacted in 1916, and its scope was expanded to encompass gifts as well. It evolved over the years into the current Unified Transfer Tax which consists of the estate, gift, and generation skipping transfers taxes. The major features of the tax in effect in 2013 reflect a maximum tax rate of 55 percent and an exemption of $1,000,000, with a full exemption for spousal and charitable bequests. The tax provides for a credit for state death taxes at a maximum rate of 16 percent of the federal taxable estate, which effectively reduces the Federal marginal tax rate for the wealthiest estates to a maximum of 39 percent. Temporary features of the tax introduced in 2001 and modified in 2010, with an exemption of $5 million and maximum tax rate of 0.35, are dramatically different and provide more relief than those in effect in 2013 and beyond.

The text expands on previous drafts by covering recent changes in the estate tax as well as documenting their consequences.

Number of Pages in PDF File: 92

Keywords: Estate Tax, Gift Tax, History, Behavioral Effects

JEL Classification: H24, H31

working papers series