Joulfaian: The Federal Estate Tax: History, Law, and Economics

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 2011 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 in effect in 2010 reflect provisions introduced in 2001 which are dramatically different than those in effect in 2011 and beyond.

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. Next it reviews the fiscal contribution of each of the estate and gift taxes. 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. 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.

This manuscript is a work in progress and is made available given the timeliness of the subject. It is a companion to my earlier "The Federal Gift Tax: History, Law, and Economics" manuscript which exclusively focused on the gift tax. Comments, corrections, and feedback are greatly appreciated.