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Monday, July 13, 2009

The federal estate tax provides a substantial revenue stream to the government that could be a key source of funding for health care reform, education and drawing down our federal deficit. Paid by only one quarter of one percent of all estates, it is the most progressive of all federal taxes.

Since 2001, revenue from the estate tax has shrunk continuously due to tax cuts instituted by the Bush Administration. According to current law, the federal estate tax is set to expire entirely in 2010 and then resume at 2001 levels the following year. Prior to this happening, it is expected that Congress will pass new legislation that sets a standard exemption level going forward.

In anticipation of the debate, the President has proposed keeping the estate tax within the 2009 parameters. This allows for an individual exemption of $3.5 million and taxes eligible estates at 45 percent. The White House has also proposed indexing the exemption levels for inflation, which would allow the real value of the exemption to be maintained over time.

Not everyone agrees. Others have called for raising the individual exemption to $5 million and lowering the tax rate to 35 percent. But a new paper released by the Center on Budget and Policy Priorities estimates that instituting these parameters would cost the federal government $118 billion* between 2012-2021, when compared to the White House proposal.

Now is not the time to reduce government revenue. Because of the severity of the current recession, the federal government must make major investments to help spur recovery. Any estate tax revenue lost over the next ten years will likely result in other tax increases or significant reductions in key investments. And attempts to offset reductions in the estate tax with other tax increases would represent a tax shift away from the wealthiest families in the country to families with more moderate means.

*This figure includes $91 billion in lost revenue and $27 billion in increased interest payments on the debt.

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