This content is provided by the Americans for Tax Reform Foundation.

Current Law

The 2001 tax relief bill (EGTRRA), drastically reduced the impact of the death tax over the course of a decade, so that it was eliminated entirely for one year in 2010 — a good year to die, joked a number of pundits. The bill lowered marginal rates and increased the applicable exclusion amount, but it also included a provision allowing individuals to carry over exclusion dollars that were unused by their spouse at the time of his or her death. This “portability” measure effectively increased the applicable exclusion for many households, in some instances putting millions of dollars beyond the reach of the federal government.

The death tax rose from the grave at the end of 2010, with a Bush-era top rate of 35% and an applicable exclusion amount of $5 million ($5.12 million in 2012).

Scheduled Changes

In 2013, the death tax will revert to its antiquated, pre-2001 form. The applicable exclusion amount will plummet to $1,000,000, and the top marginal rate will leap twenty points to 55%. A 5% surtax will also return, to be levied on estates between $10 million and $17 million. This raises the top effective rate of the death tax to 60%.

ATRF Analysis

According to research by the Tax Policy Center, if the current death tax expires, then the resulting, stricter exemption threshold will force 114,600 estates to file for the tax in 2013 — this represents a 13-fold increase from the previous year’s 8,800 estates, and countless wasted hours filling out tax paperwork. Of that cohort, an unfortunate 52,500 will be liable for the tax, way up from 3,300.

While those 52,500 taxpayers only represent 2% of those who die each year, no one should be fooled into thinking that the effects of this tax fall only on the proverbial “one percent.” The economic incidence of the death tax is far broader, because it causes many wealthy individuals to save less, choosing instead to retire early or, as Milton Friedman put it, “dissipate their wealth on high living.” This reduction in savings means a concomitant reduction in investment, lessening the flow of capital to businesses and organizations where countless ordinary Americans are employed.