ECONOMIC AND BUDGET ISSUE BRIEF

Federal Estate and Gift Taxes

The federal government uses a linked set of taxes on 

estates, gifts, and generation-skipping transfers to tax 

transfers of wealth from one generation to the next and to 

limit the extent to which wealth can be given away during 

life to avoid taxation at death. Federal taxes on transfers 

of wealth at death have been enacted in various forms 

since 1797, initially to raise revenue during crisis or war, 

and have been modified periodically over time.1

 The 

United States has collected revenues from the current 

form of the tax—an estate tax—since 1916. A gift tax, 

first introduced in 1924, prevents wealthy individuals 

from avoiding the estate tax by transferring wealth while 

they are alive.

Federal transfer taxes have historically made up a relatively small share of total federal revenues—accounting 

for 1 percent to 2 percent of total revenues in most of the 

past 60 years. The Congressional Budget Office (CBO) 

projects that, under current law, federal revenues from 

estate and gift taxes will be $420 billion, or 1.2 percent of 

total revenues, over the 2010–2019 period. 

Since 1977, less than 2 percent of adults who die each 

year have typically left estates large enough to be taxable. 

Because of recent increases in the amount of an estate 

that is exempt from taxation, a relatively small percentage 

of estates are taxable today. In 2007, 17,400 taxable estate 

tax returns were filed; most were for deaths in 2006, representing about 0.7 percent of adult deaths in that year. 

The average tax rate for taxable estates—calculated as the 

estate tax liability divided by the value of the net taxable 

estate (the value minus certain deductions, such as charitable bequests and bequests to a spouse)—has remained 

near 25 percent since the 1940s, even as the share of 

estates subject to the tax fluctuated because of changes in 

the value of the effective exemption amount.

The Economic Growth and Tax Relief Reconciliation Act 

of 2001 (EGTRRA) phased out the estate tax beginning 

in 2001, primarily by increasing the amount of an estate 

that is exempt from taxation and by reducing the top 

marginal tax rate (the rate that applies to the last dollar of 

an estate). Under that law, the effective exemption 

amount is $3.5 million in 2009, and the top marginal 

tax rate is 45 percent. In 2010, the estate tax is temporarily repealed. Starting in 2011, the estate tax is reinstated 

with an effective exemption amount of $1 million and a 

maximum marginal tax rate of 55 percent (plus a 5 percent surtax on taxable transfers between $10.0 million 

and $17.184 million). 

The scheduled repeal of the estate tax in 2010, followed 

by a reversion to a $1 million effective exemption amount 

thereafter, has raised interest in modifying the estate tax. 

Proposals include making permanent the repeal of the 

estate tax; maintaining the current system of estate taxation, with estates paying tax on amounts exceeding a 

specified exemption amount; and replacing the estate tax 

with an inheritance tax. The House of Representatives 

recently passed legislation (H.R. 4154) that would permanently retain the estate and gift taxes at the parameters 

in place for 2009.

CBO A series of issue summaries from

the Congressional Budget Office

DECEMBER 18, 2009

1. For a thorough description of the history of wealth transfer taxes, 

see Barry W. Johnson and Martha Britton Eller, “Federal Taxation 

of Inheritance and Wealth Transfers,” in Robert K. Miller and 

Stephen J. McNamee, eds., Inheritance and Wealth in America

(New York: Plenum Press, 1998), pp. 61–90; Darien B. Jacobson, 

Brian G. Raub, and Barry W. Johnson, “The Estate Tax: Ninety 

Years and Counting,” SOI Bulletin (Summer 2007), pp. 118–128, 

www.irs.gov/pub/irs-soi/ninetyestate.pdf; and John R. Luckey, 

A History of Federal Estate, Gift, and Generation-Skipping Taxes, 

CRS Report for Congress 95-444 (Congressional Research 

Service, January 16, 2009).
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Table 1.

Federal Transfer Tax Rates and Effective Exemptions, by Year of Transfer

Source: Congressional Budget Office.

a. In 2001 and in years after 2010, a 5 percent surtax is imposed on wealth transfers between $10.0 million and $17.184 million. The 

surtax is designed to recapture the benefits of the graduated rate structure of the estate tax and results in an effective marginal tax 

rate of 60 percent on wealth transfers in that range.

How the United States Taxes 

Transfers of Wealth

The federal government levies three types of taxes on 

transfers of wealth:

B An estate tax on the net value of assets transferred to 

other individuals when a person dies,

B A gift tax on the value of gifts that a person gives to 

others during that person’s lifetime, and

B A generation-skipping transfer tax on some transfers 

of wealth at death to certain heirs.

All three taxes contain provisions that effectively exempt 

some portion of the transfer from taxation. Table 1 summarizes legislated changes to estate and gift taxes since 

2001. 

Estate Tax

The executor of the estate of someone who dies in 2009 

must file a federal estate tax return and pay federal estate 

taxes within nine months of the date of death if the value 

of the gross estate exceeds $3.5 million.2

 The gross estate 

generally includes all of the decedent’s assets, his or her 

share of jointly owned assets, gifts and gift taxes paid 

within three years of death, and, in certain cases, life 

insurance proceeds. The value of the estate’s assets is usually determined as the market value on the date of death. 

A fixed credit, known as the unified credit, effectively 

exempts the first $3.5 million of the estate from taxes in 

2009, and a tax rate of 45 percent is applied to the value 

of the taxable estate that exceeds $3.5 million. The effective exemption becomes unlimited for deaths in 2010, 

effectively repealing the estate tax, and drops to $1 million in 2011.

Deductions can reduce the amount of an estate that is 

taxable. Allowable deductions include charitable 

bequests, debts, and the full value of transfers to a surviving spouse. Because each spouse can use the unified 

credit, married couples can effectively double the amount 

exempt from estate taxes (to $7.0 million in 2009) 

through careful tax planning; any tax that is due is usually 

paid when the surviving spouse dies. For 2009, the 

amount of any estate or inheritance taxes paid to a 

state government is also deducted from the value of the 

estate. (For additional details, see Box 1.) Before 2002, 

federal estate taxes were reduced by a credit (rather than a 

Year

2001 0.675 37 55 a 0.675 55 a 100 0

2002 1.0 41 50 1.0 50 75 25

2003 1.0 41 49 1.0 49 50 50

2004 1.5 43 48 1.0 48 25 75

2005 2.0 43 47 1.0 47 0 100

2006 2.0 45 46 1.0 46 0 100

2007 2.0 45 45 1.0 45 0 100

2008 2.0 45 45 1.0 45 0 100

2009 3.5 45 45 1.0 45 0 100

2010 1.0 35 0 100

2011 and Beyond 1.0 41 55 a 1.0 55 a 100 0

Deduction

Federal Treatment of

States' Wealth

Rate (Percent) Transfer Taxes (Percent)

Estate Tax

(Millions of dollars) Bottom Credit

Gift Tax

Repealed

Exemption 

Top

Unlimited Repealed

Exemption

(Millions of dollars)

Top Rate

 (Percent)

2. Most federal estate tax revenues for deaths in calendar year 2009 

will be received in fiscal year 2010.
ECONOMIC AND BUDGET ISSUE BRIEF

FEDERAL ESTATE AND GIFT TAXES 3

deduction) for the state taxes on inherited wealth.3

Under current law, that deduction will revert to a tax 

credit in 2011.

Gift Tax

In 2009, a taxpayer may make an annual tax-free gift of 

up to $13,000 to each recipient. (Married couples may 

exclude $26,000 of gifts per recipient, and taxpayers may 

make unlimited tax-free gifts to spouses and charities.) 

The annual limit is indexed for inflation. The recipient of 

the gift does not have to include the amount of the gift in 

his or her taxable income. A donor pays tax on gifts above 

that amount during his or her life only when the cumulative amount of annual gifts above the $13,000 limit 

exceeds the $1 million gift tax exemption. The effective 

estate tax exemption and the $1 million gift tax exemption are not cumulative; when a person who has given 

gifts dies, the estate tax exemption is reduced by the 

total amount of the gift tax exemption used during the 

decedent’s life. In all years, pure carryover basis applies to 

assets given during life, meaning that the recipient of a 

gift assumes the basis of the donor—generally the original cost of the asset—for computing capital gains. 

Generation-Skipping Transfer Tax

The generation-skipping transfer (GST) tax is levied at 

the highest estate tax rate (45 percent in 2009) on transfers directly from a decedent to an heir who is more than 

one generation younger than the decedent, such as a 

grandchild. The exemptions for the GST tax and the 

estate tax are the same, and married couples can again 

double-up on the exemption with estate planning. GSTs 

are also subject to applicable estate and gift taxes, making 

the total tax on GSTs so high that very few estates make 

Box 1.

State Taxes on Inherited Wealth

Before the passage of the Economic Growth and Tax 

Relief Reconciliation Act (EGTRRA) in 2001, estates 

received a credit against their federal estate tax liability for any estate, inheritance, legacy, or succession 

tax paid to a state. Under EGTRRA, the credit for 

those state taxes was phased out over four years and 

replaced by a deduction. The Congressional Budget 

Office estimates that converting to a deduction 

caused federal estate tax revenues to be about 

$3.4 billion higher in 2006 than they would have 

been if the credit had been retained. 

Before EGTRRA, every state levied such taxes in a 

way that ensured that their tax collections on transfers of wealth at death were at least the maximum 

amount the federal government allowed to be taken 

as a credit. In fact, 24 states pegged their estate tax 

statutes to the federal tax code in such a way that 

eliminating the tax credit for state taxes on wealth 

transfers would have effectively reduced the states’ 

receipts from such taxes to zero. In 2001, taxable 

estates claimed credits for over $6.2 billion in estate 

and inheritance taxes paid to states.

Faced with losing significant amounts of revenue 

because of the changes in EGTRRA, many states 

acted to retain an estate tax, and others decided to 

have no estate, inheritance, or gift taxes. As of 2009, 

23 states continued to collect either an estate or 

inheritance tax, either by changing their statutes to 

decouple them from the federal statute or by retaining or enacting estate or inheritance taxes that are not 

tied to the federal tax.1

 States’ taxes on inherited 

wealth fell from 1.4 percent of their total tax receipts 

in 2000 to 0.7 percent in 2008.2

1. Elizabeth McNichol, State Taxes on Inherited Wealth 

Remain Common: 23 States Levy an Estate or Inheritance Tax

(Washington, D.C.: Center on Budget and Policy Priorities, 

December 16, 2009). 

2. U.S. Census Bureau, Annual Survey of State Government Tax 

Collections (2000, 2008), www.census.gov/govs/statetax/

index.html.

3. A tax deduction reduces the amount of income or wealth subject 

to taxation, whereas a tax credit directly reduces the amount of tax 

owed. A tax credit of, say, $1,000 reduces tax liability by more 

than does a tax deduction of the same amount.
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Figure 1.

Estate and Gift Tax Receipts as a 

Percentage of Total Receipts, 

Fiscal Years 1945 to 2019

(Percent)

Source: Congressional Budget Office based on data in Budget of 

the United States Government, Fiscal Year 2010: Historical Tables, Table 2.5, www.whitehouse.gov/omb/budget/

Historicals.

such transfers. Under current law, the GST tax will be 

repealed for 2010 and reinstated in 2011.

Estate and Gift Tax Collections

Since 1945, estate and gift tax receipts have consistently 

remained near or below 2 percent of federal revenues. In 

recent years, they have been less than 1.5 percent of federal tax revenues (see Figure 1). 

Under current law, revenues from estate and gift taxes will 

total $420 billion, or 1.2 percent of revenues, over the 

2010–2019 period, CBO forecasts (see Table 2). About 

$364 billion (87 percent) of that total is from estate tax 

receipts, and the remaining $56 billion (13 percent) is 

from gift tax receipts, an unusually large portion of which 

are concentrated in fiscal year 2011.4

The pattern of those receipts is irregular during the first 

few years because EGTRRA has complicated the strategic 

use of gifts to transfer wealth to heirs before a benefactor’s 

death—a significant element of estate planning for many 

taxpayers. The law gave taxpayers an incentive to defer 

taxable gifts until 2010, when the gift tax rate would be 

lower than in earlier years. It also gives people an incentive to make gifts in 2010 at the 35 percent gift tax rate 

rather than wait until 2011 or thereafter, when most 

gifts would be taxed at a rate of 55 percent and bequests 

to heirs would be taxed at rates between 41 percent and 

55 percent.

CBO’s projections of estate and gift tax receipts reflect 

those incentives. Despite the repeal of the estate tax in 

2010 (which will result in virtually no estate tax receipts 

in 2011), CBO projects that gift tax receipts will be much 

higher than usual in 2011, primarily because of taxable 

gifts given in 2010 (when the tax rate on gifts is reduced 

to 35 percent) in anticipation of the scheduled return in 

2011 of an effective exemption amount of $1 million for 

estates and generation-skipping transfers and a top marginal tax rate of 55 percent.5

 Most of those receipts are 

from deferred and accelerated gifts that would otherwise 

have been given in other years. Projected receipts after 

2011 primarily reflect the more stable estate tax rates and 

effective exemption amounts in current law.

The share of estates that were taxable rose substantially 

between 1950 and the mid-1970s, when that share 

reached almost 8 percent, but has declined sharply since 

then (see Figure 2 on page 7). Since 1977, generally 

about 1 percent to 2 percent of adults who died each year 

have left estates large enough to be taxable. In 2000, 

before EGTRRA was enacted, 51,200 estates were taxable, representing 2.2 percent of adult deaths in that year. 

EGTRRA reduced the percentage of estates that were taxable. For example, 17,400 taxable estate tax returns were 

filed in 2007; most were for deaths in 2006, when the 

effective exemption amount was $2 million, representing 

about 0.7 percent of adult deaths in that year.

The impact of inflation on fixed exemption amounts 

explains much of the growth in the share of estates that 

4. Generation-skipping transfer taxes account for only about onehalf of one percent of estate and gift tax receipts, although the 

GST tax serves an important role in preventing the erosion of 

estate and gift tax bases.

1945 1960 1975 1990 2005 2020

0

0.5

1.0

1.5

2.0

2.5

3.0

Actual Proj.

5. In 2001 and in years after 2010, a 5 percent surtax is imposed on 

wealth transfers between $10.0 million and $17.184 million. The 

surtax is designed to recapture the benefits of the graduated rate 

structure of the estate tax and results in an effective marginal tax 

rate of 60 percent on wealth transfers in that range.
ECONOMIC AND BUDGET ISSUE BRIEF

FEDERAL ESTATE AND GIFT TAXES 5

Table 2.

CBO’s Projections of Receipts from Estate and Gift Taxes, August 2009

(Billions of dollars)

Source: Congressional Budget Office.

were taxable between 1950 and the mid-1970s (see Figure 2 on page 7). The amount of an estate exempt from 

taxation remained at $60,000 from 1942 through 1976. 

Inflation eroded the value of that exemption over time, 

making an increasing share of estates taxable. Starting 

with the Tax Reform Act of 1976, a series of laws resulted 

in annual increases in the amount of estates and gifts 

exempt from taxation, until the effective exemption 

amount reached $600,000 in 1987 (slightly above 

$1 million in 2008 dollars).6

 The nominal value of that 

exemption remained fixed through 1997 (the inflationadjusted value of the exemption declined between 

1987 and 1998) and has been increased sharply since 

then, reaching $2.0 million in 2005 and $3.5 million in 

2009, culminating in a one-year unlimited exemption in 

2010. After 2010, the effective exemption amount drops 

to $1 million.

Larger estates pay a significant portion of the estate tax. 

In 2007, taxes on gross estates valued at more than 

$20 million were 36 percent of total estate taxes for that 

year, and taxes on gross estates valued at more than 

$10 million accounted for 55 percent of total estate taxes.

Since the 1940s, estate and gift tax payments have averaged about 25 percent of the net taxable estate (the value 

of the estate after allowable deductions but before subtracting the effective exemption amount).The underlying 

structure of the estate tax provides for graduated tax rates, 

under which smaller estates face a lower tax rate. In recent 

years, increases in the amount of the estate exempt from 

taxation and reductions in the highest marginal tax rates 

exempted smaller estates from the estate tax and made the 

rate structure much flatter (that is, it reduced the difference between the highest and lowest marginal tax rates). 

The net result was that the average tax paid by the now 

smaller number of taxable estates rose slightly for returns 

filed from 2005 through 2007, to about 27 percent of the 

value of the net taxable estate.

The Impact of Estate and Gift Taxes

Like most taxes, estate and gift taxes affect taxpayers’ 

behavior, particularly their decisions about how much to 

save, work, and give to charity. The taxes also affect people’s decisions about when to sell appreciated assets and 

when and how to transfer wealth to others. A frequently 

expressed concern is whether the estates of owners of 

family farms and small businesses can afford to pay estate 

taxes without liquidating assets. 

Consumption, Saving, and Work Effort

The estate tax could have varying effects on consumption, saving, and work effort, depending on people’s 

motives for leaving bequests to heirs. Consensus is lacking about which motives predominate or even about 

whether people work and save more or less as a result of 

estate and gift taxes.7

 A lower estate tax makes it cheaper 

for people to leave money to their heirs, which could 

encourage people to work more or save more to leave 

larger bequests. But a lower estate tax also means that 

2010-

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2019

23.6 25.7 20.9 14.5 1.1 31.7 37.0 40.0 42.7 45.2 47.8 50.5 53.4 363.9

2.4 3.2 1.4 1.0 14.7 3.4 1.9 3.6 5.5 6.0 6.3 6.6 6.9 55.8 ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ _____

Total 26.0 28.8 22.3 15.4 15.7 35.1 38.9 43.6 48.2 51.2 54.1 57.1 60.3 419.7

Type of Tax

Estate

Gift

Actual

Projected

6. The Tax Reform Act of 1976 also made substantial changes to 

estate and gift taxes. It imposed the tax on generation-skipping 

transfers and created the unified framework for estate and gift 

taxes—that is, a single, unified estate and gift tax credit and tax 

rate schedule. 

7. For a discussion of those issues, see Donald J. Marples and Jane G. 

Gravelle, Estate and Gift Taxes: Economic Issues, CRS Report 

RL30600 (Congressional Research Service, December 4, 2009); 

and James R. Hines Jr., Joel Slemrod, and William G. Gale, eds.,

Rethinking Estate and Gift Taxation (Washington, D.C.: Brookings 

Institution Press, 2001). 
6 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

people can make the same after-tax bequest with a smaller 

amount of savings, which might induce them to work 

and save less. Alternatively, some people might acquire 

wealth largely for other purposes and leave it as a bequest 

only if they died before they expected to. In that case, 

changes to the estate tax would have little effect on 

saving or work effort. Furthermore, to the extent that a 

lower estate tax increases the size of bequests after taxes, 

potential recipients may work less or increase their consumption.8

 The empirical evidence on the effect of the 

estate tax on consumption, saving, and work effort is 

inconclusive.

Family Farms and Small Businesses

A commonly expressed concern is the effect of the estate 

tax on family farms and small businesses, including the 

possibility that heirs may be forced to liquidate the business to pay the estate tax. As with the general public, 

most owners of family farms and small businesses are 

unlikely to owe estate tax. About 2.1 percent of farmers 

(1,137) and 2.4 percent of small-business owners (8,291) 

who died in 2005 had to file estate tax returns.9

The vast majority of estates, including those of farmers 

and small-business owners, had enough liquid assets to 

pay the estate taxes they owed in 2005.10 However, estates 

involving farms or small businesses are slightly less likely 

than other estates to have sufficient liquid assets to cover 

their estate taxes. In 2000, when the effective estate tax 

exemption amount was $675,000, 138 (or about 8 percent) of the estates of farmers who left enough assets to 

owe estate taxes faced a tax payment that exceeded their 

liquid assets, compared with about 5 percent of all estates 

that owed taxes. Those numbers are upper bounds, however, because the definition of liquid assets used on estate 

tax returns excludes some money held in trusts, which 

could also be used to pay estate taxes. The increase in the 

exemption amount since 2000 probably further mitigated the impact on small businesses. Moreover, the 

estate tax currently includes several provisions that 

owners of family farms and small businesses can use to 

mitigate its effect. For example, heirs are allowed to pay 

the tax in installments over 15 years at low interest rates, 

and several special valuation provisions allow some assets 

to be assessed at less than their market value.11

The complexity of the estate tax, especially for estates 

with illiquid assets, such as farms and closely held businesses, might make complying with the tax costly. 

Although estimates of estate planning costs vary widely, 

the most comprehensive analysis of compliance costs 

finds that they amounted to about 7 percent of estate tax 

receipts in 1999.12 Those costs are likely to be higher for 

estates with less liquidity; special rules apply to such 

8. See David Joulfaian, Inheritance and Saving, Working Paper 

12569 (Cambridge, Mass.: National Bureau of Economic 

Research, October 2006); and Douglas Holtz-Eakin, David 

Joulfaian, and Harvey S. Rosen, “The Carnegie Conjecture: Some 

Empirical Evidence,” Quarterly Journal of Economics, vol. 108, 

no. 2 (May 1993), pp. 413–436.

Some evidence suggests that the recipient of a bequest that 

increases his or her financial resources is slightly more likely to 

become an entrepreneur and develop a successful small business. 

However, the evidence also suggests that children with parents 

who were successful entrepreneurs are more likely to be successful 

entrepreneurs themselves, regardless of the size of their financial 

inheritance. See Douglas Holtz-Eakin, David Joulfaian, and 

Harvey S. Rosen, “Sticking It Out: Entrepreneurial Survival and 

Liquidity Constraints,” Journal of Political Economy, vol. 102, 

no. 1 (February 1994), pp. 53–75; Douglas Holtz-Eakin, David 

Joulfaian, and Harvey S. Rosen, “Entrepreneurial Decisions and 

Liquidity Constraints,” Rand Journal of Economics, vol. 23, no. 2 

(Summer 1994), pp. 334–347; and Thomas Dunn and Douglas 

Holtz-Eakin, “Financial Capital, Human Capital, and the Transition to Self-Employment: Evidence from Intergenerational 

Links,” Journal of Labor Economics, vol. 18, no. 2 (April 2000), 

pp. 282–305. A summary of the literature about the effect of 

financing constraints on entrepreneurship can be found in 

William Kerr and Ramana Nanda, Financing Constraints and 

Entrepreneurship, Working Paper 15498 (Cambridge, Mass.: 

National Bureau of Economic Research, November 2009).

9. Marples and Gravelle, Estate and Gift Taxes.

10. Congressional Budget Office, Effects of the Federal Estate Tax on 

Farms and Small Businesses (July 2005).

11. For a discussion of some of these provisions, including the qualified family-owned business interest provision, minority discounts, 

and special-use valuation, see Congressional Budget Office, Effects 

of the Federal Estate Tax on Farms and Small Businesses; and Jane G. 

Gravelle and Steven Maguire, Estate Taxes and Family Businesses: 

Economic Issues, CRS Report RL33070 (Congressional Research 

Service, November 27, 2009). 

12. Charles Davenport and Jay A. Soled, “Enlivening the Death-Tax 

Death-Talk,” Tax Notes, vol. 84 (July 26, 1999), pp. 591–630.
ECONOMIC AND BUDGET ISSUE BRIEF

FEDERAL ESTATE AND GIFT TAXES 7

Figure 2.

Estate Tax Returns

Source: Congressional Budget Office based on data from the 

Internal Revenue Service.

a. Data for taxable estate tax returns are from Internal Revenue 

Service, SOI Bulletin, vol. 28, no. 4 (Spring 2009), Table 17, 

pp. 222–223, www.irs.gov/pub/irs-soi/09sprbul.pdf. Data 

are shown only for years for which Statistics of Income (SOI) 

data are available. Data after 2004 are CBO estimates based on 

information from various SOI Bulletins, www.irs.gov/taxstats/

indtaxstats/article/0,,id=210646,00.html.

b. The exemption is unlimited in 2010 and is therefore not 

shown in the figure. Inflation-adjusted data after 2008 are CBO 

projections. 

estates, with the goal of ameliorating the tax burden.13

However, it is difficult to identify how much of the costs 

of estate planning result directly from the estate tax as 

opposed to the costs of general estate planning, which 

would be needed even in the absence of the tax.

Charitable Giving 

Most gifts to charity are either charitable bequests specified in a decedent’s will or charitable donations made 

during life. The tax code may influence the amount of 

giving by affecting both the cost of giving (relative to that 

of other possible uses for the money) and the amount of 

wealth available to individuals to give. The estate tax and 

the individual income tax affect both factors.

Charitable bequests are exempt from the estate tax, thus 

lowering the price of charitable bequests relative to fully 

taxable bequests to heirs. A charitable organization 

receives one dollar for every dollar left as a charitable 

bequest, whereas an heir might receive 55 cents for every 

dollar left as a bequest (with a marginal estate tax rate of 

45 percent). However, the estate tax lowers the potential 

size of an inheritance, which might make an individual 

less likely to donate to charity. 

Larger estates bequeath a larger percentage of their assets 

to charity than do smaller estates. Estates valued at less 

than $20 million bequeathed 5 percent ($7.3 billion) 

of their assets to charity, compared with 21 percent 

($12.4 billion) of assets for taxable estates valued at 

over $20 million. Most studies have found that the 

estate tax clearly increases charitable bequests and probably increases charitable donations during life.14

1943 1953 1963 1973 1983 1993 2003 2013

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

(Millions of dollars)

Adjusted for

Inflation

Not Adjusted for

Inflation

(Percent)

1943 1953 1963 1973 1983 1993 2003

0

1

2

3

4

5

6

7

8

Effective Exemption for the Estate Tax, by

Year of Death, 1943 to 2019b

Taxable Estate Tax Returns, as a

Share of Adult Deaths, 1943 to 2006a

13. For more information about the rules applying to family-owned 

businesses and their possible economic effects, see Joint Committee on Taxation, Taxation of Wealth Transfers Within a Family: 

A Discussion of Selected Areas for Possible Reform,” JCX-23-08 

(April 2, 2008), pp. 14–24. For a summary of much of the 

research on the cost of complying with the estate tax, see 

William G. Gale and Joel Slemrod, “Overview,” in Hines, 

Slemrod, and Gale, eds., Rethinking Estate and Gift Taxation.

14. David Joulfaian, “On Estate Tax Repeal and Charitable Bequests,” 

Tax Notes, vol. 123 (June 8, 2009), pp. 1221–1229; and Congressional Budget Office, The Estate Tax and Charitable Giving

(July 2004). 
8 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Figure 3.

Gift Tax Receipts, Fiscal Years 1945 to 2019

(Billions of 2008 dollars)

Source: Congressional Budget Office based on data in David Joulfaian, The Federal Gift Tax: History, Law, and Economics, OTA Paper 100 

(Department of the Treasury, Office of Tax Analysis, November 2007), Table 6, p. 44, www.ustreas.gov/offices/tax-policy/library/

ota100.pdf; and Internal Revenue Service Data Books, various years, www.irs.gov/taxstats/article/0,,id=211513,00.html. Data 

after 2008 are CBO projections.

The Timing of Wealth Transfers

Estate and gift taxes, in combination with the progressive 

income tax schedule, create a number of incentives for 

taxpayers to transfer wealth to their relatives as gifts during life instead of through bequests at death.15 How 

much those taxes affect the amount of gifts is not clear, 

but in timing their wealth transfers, the wealthy appear to 

be very responsive to their expectations of changes in tax 

rates and to differences between estate and gift tax rates. 

For example, when the Tax Reform Act of 1976 raised 

the maximum gift tax rate from 57.75 percent to 70 percent, gift tax receipts quadrupled in the months between 

the law’s enactment and its effective date (see Figure 3).

After the enactment of EGTRRA in 2001, taxpayers cut 

their taxable gift giving by more than half, partly in anticipation of the repeal of the estate and generation-skipping 

transfer taxes and the reduction in the tax rate on gifts to 

35 percent in 2010. Under current law, CBO anticipates 

a surge in taxable gifts in 2010, as seen by the spike in 

CBO’s forecast of gift tax receipts in 2011, when the tax 

on gifts given in 2010 will be due.

The gift tax is retained under EGTRRA even in 2010, 

when the estate tax and the generation-skipping transfer 

tax are repealed. The gift tax serves an important role in 

protecting the income tax base and discouraging wealthy 

individuals from using gifts and the progressive income 

tax rate schedule to reduce taxation. In the absence of a 

gift tax, a high-income taxpayer could give assets with a 

low tax basis but a high current value as a gift to an individual in a lower tax bracket, who could sell them and 

pay taxes at his or her lower tax rate.16 That recipient 

could then give the proceeds back to the high-income 

taxpayer. Similarly, a high-income taxpayer could give an 

asset that generates a lot of taxable income to someone in 

a lower tax bracket, who would pay less tax on that 

income. By taxing large lifetime transfers of wealth, the 

gift tax discourages those types of transactions and the 

resulting loss of revenue. 

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

0

2

4

6

8

10

12

14

16

Actual Projected

15. In a progressive tax schedule, the tax rate increases as the taxable 

amount increases.

16. Current law specifies that gifts of assets receive carryover basis—

generally the original cost of the asset.
ECONOMIC AND BUDGET ISSUE BRIEF

FEDERAL ESTATE AND GIFT TAXES 9

Capital Gains Realizations

The current treatment of capital gains in the tax code 

allows an individual to avoid realizing capital gains by 

holding onto assets until death. As a result, the purchaser 

of an asset that has appreciated may be reluctant to sell it 

(the lock-in effect), thereby reducing realizations of capital gains during his or her lifetime (see Box 2). However, 

the step-up in basis at death under estate tax law (except 

in 2010) eliminates the incentive for the individual who 

inherits the asset to hold on to it, because no capital gains 

tax is due on any appreciation that occurred before the 

asset was inherited.17

The estate tax, however, reduces the benefit of holding an 

asset until death, even with a step-up in basis. No income 

tax would be due on the appreciation of the asset when it 

was bequeathed, but the entire value of the asset (including its basis) would be part of the estate subject to the 

estate tax. Some research suggests that, on net, higher 

estate taxes result in slightly higher capital gains realizations and that reducing estate tax rates could result in 

lower realizations.18

Under current law, a modified carryover basis will apply 

in 2010 to the first $1.3 million of inherited capital gains 

($4.3 million for married couples). To the extent that 

inherited assets receive carryover basis instead of steppedup basis, individuals who expect to die in 2010 with a 

large estate may be more willing to sell appreciated assets 

before death, and some unrealized capital gains and losses

Box 2.

The Estate Tax and Capital Gains

The interaction between the income tax treatment of 

capital gains and the estate tax treatment of inherited 

assets is an important part of estate taxation. Under 

the income tax, when an asset is sold for more than 

the price at which it was purchased, the seller realizes 

a capital gain, which generally is subject to income 

taxation. The taxable gain is measured as the difference between the cost of purchasing the asset (its 

basis) and the value of the asset when the gain is 

realized. 

Individuals can avoid paying tax on capital gains by 

holding the assets until death. Capital gains on appreciated assets in an estate are not subject to income 

taxation when the owner dies. In addition, except in 

2010, heirs receive stepped-up basis on inherited 

assets. In that treatment, the basis of the asset is 

generally measured as an asset’s fair market value on 

the date of the decedent’s death rather than as the 

original price the decedent paid for the asset. Capital 

gains taxes will be due only if the heir sells the asset, 

and the heir is liable only for capital gains tax assessed 

on the increase in the asset’s value from the date it 

was inherited until the date it is sold. 

When the estate tax is temporarily repealed in 2010, 

the calculation of basis for assets transferred from a 

decedent changes. In 2010, a “modified carryover 

basis” will be used for inherited assets. Under pure 

carryover basis, the basis of assets in the hands of an 

heir is generally the same as it was in the hands of the 

decedent. Under modified carryover basis, selected 

assets have their basis stepped-up by up to $1.3 million and by an additional $3 million for assets left to 

a surviving spouse. The basis of any assets that do not 

receive that step-up is generally measured as the price 

that the decedent originally paid for the asset. 

17. As described in Box 2, under stepped-up basis, the basis of an 

asset for tax purposes is generally measured as an asset’s fair market 

value on the date of the decedent’s death.

18. Gerald Auten and David Joulfaian, “Bequest Taxes and Capital 

Gains Realizations,” Journal of Public Economics, vol. 81, no. 2 

(2001), pp. 213–229.
10 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

may be unlocked.19 However, heirs of assets that received 

carryover basis may be less likely to sell them, because 

capital gains tax is due when they are sold.

Policy Options for Changing the 

Taxation of Wealth Transfers 

The House of Representatives recently passed legislation 

(H.R. 4154) that would permanently extend estate and 

gift tax law as it stands in 2009—that is, with an effective 

exemption amount of $3.5 million for the estate tax and 

the generation-skipping transfer tax, with no adjustment 

for inflation, and a tax rate of 45 percent. In its August 

2009 report Budget Options, Volume 2, CBO discussed a 

number of other options for modifying estate and gift 

taxes, including permanently extending the law in effect 

in 2009 (but unlike H.R. 4154, adjusting the exemption 

amounts for the estate and GST taxes for inflation) and 

permanently repealing the estate tax.

20

This brief examines those three alternatives and a fourth, 

which would apply an inheritance tax to each person 

inheriting assets. All three estate tax options examined in 

this brief, including H.R. 4154, would retain the gift tax 

with a $1 million exemption amount, but that sum 

would not be indexed for inflation, thus reducing its 

value over time.21 An inheritance tax would probably be 

combined with modifications of the existing estate and 

gift taxes. CBO discusses those particular options to 

highlight the key issues involved in changing the taxation 

of wealth transfers; as always, the agency makes no recommendations regarding policy choices.

The three options that provide specific ways to modify or 

repeal the estate tax would reduce federal revenues. An 

inheritance tax could increase or decrease revenues, 

depending on how it is structured, including any associated changes to the estate and gift taxes.

The Congress could instead choose to make no changes 

to current law and allow the estate tax to expire at the end 

of 2009 and reappear in 2011 with an effective exemption amount of $1 million and a top tax rate of 55 percent (see Table 1 on page 2). CBO projects that revenues 

from estate and gift taxes under current law will total 

$420 billion over the 2010–2019 period (see Table 2 on 

page 5).

Permanently Repeal the Estate Tax

The first option would make EGTRRA’s provisions for 

estate and gift taxes in 2010 permanent. Thus, the estate 

and the generation-skipping transfer taxes would not be 

reinstated, and the gift tax exemption would remain at 

$1 million. In addition, this option would permanently 

retain the modified carryover basis that EGTRRA specifies in 2010 for some transferred assets. This set of 

changes would have the largest impact on revenues and 

would elicit the largest behavioral response from taxpayers. The staff of the Joint Committee on Taxation estimates that those changes together would reduce revenues 

by $502 billion between 2010 and 2019 (see Table 3).

The revenue loss from repealing the estate tax exceeds 

CBO’s forecast of estate and gift tax revenues under current law because changes to estate tax law would affect 

receipts from individual income taxes by inducing 

changes in capital gains realizations. People inheriting 

assets with carryover basis are more likely to hold on to 

them rather than to sell them and pay more capital gains 

tax than they would have owed under stepped-up basis. 

Hence, repeal would reduce revenues from capital gains 

taxes. A permanent repeal would also significantly reduce 

gift tax receipts, because wealthy individuals would be 

unlikely to make taxable gifts when they could instead 

make tax-free bequests at death. 

The revenue loss would be slightly offset because charitable bequests and lifetime charitable giving would be likely 

to fall as a result of repeal, increasing individual income 

tax revenues. However, the existing income tax deduction 

for charitable gifts would remain and would continue to 

19. In fact, very wealthy individuals who believe that they will die in 

2010 and believe that the estate tax will be repealed in that year 

have an incentive to sell certain assets with capital losses before 

they die. Under the law’s modified carryover basis regime, certain 

unused capital losses can be used by the estates of people who die 

in 2010 to increase the available basis step-up above $1.3 million 

(or $4.3 million for spouses). 

20. Congressional Budget Office, “Modify the Estate and Gift 

Tax Provisions of EGTRRA,” Budget Options, Volume 2 (August 

2009), Revenue Option 48, pp. 239–241. The staff of the Joint 

Committee on Taxation (JCT) provided the revenue estimates for 

those options. The JCT’s revenue estimates are based on CBO’s 

March 2009 baseline; that baseline differs slightly from CBO’s 

August 2009 baseline, which is used elsewhere in this brief.

21. Because the gift tax serves an important role as a backstop to the 

income tax, repealing it or raising the exemption amount would 

reduce federal revenues.
ECONOMIC AND BUDGET ISSUE BRIEF

FEDERAL ESTATE AND GIFT TAXES 11

Table 3.

Estimated Change in Revenues from Modifications to Estate and Gift Taxes

(Billions of dollars)

Sources: The staff of the Joint Committee on Taxation and the Congressional Budget Office.

a. The two variations of this option would set the exemption amounts for the estate tax and the generation-skipping transfer tax at 

$3.5 million and the tax rate at 45 percent. The second variation indexes the exemption amount for the estate tax and the generationskipping transfer tax for inflation and is an updated estimate of the option presented in the Congressional Budget Office’s August 2009 

report Budget Options, Volume 2.

increase such giving above the amounts that would be 

seen if the gifts were motivated by altruism alone. 

Repealing the estate tax would simplify the tax system 

and would eliminate the need for large estates to file 

estate tax returns and pay estate tax. Although repeal 

would reduce the filing burden on estates, it would 

increase recordkeeping for estates with very large capital 

gains and for their heirs, who would have to know the 

basis of any asset they inherited. Some assets would 

receive stepped-up basis; for other assets, heirs would 

have to determine and document the price the decedent 

paid, despite the difficulty of tracking asset values across 

generations. Carryover basis would also be difficult for 

the Internal Revenue Service to administer. 

Repeal would eliminate a progressive element of the federal system because only relatively large estates are taxed. 

Because heirs probably bear at least a portion of the burden of the estate tax, the tax may be less progressive when 

measured against the assets of heirs than when measured 

against the decedent’s estate, but to the extent that heirs 

of taxable estates are wealthier than average, the estate tax 

still contributes to the overall progressivity of the federal 

tax system.22 Raising other federal taxes to make up for 

the revenues lost from repealing the estate tax might shift 

more of the federal tax burden to less affluent households. 

Repealing the estate tax would spare all family farms and 

small businesses from the tax. It would also reduce state 

income tax revenues for states that have not broken the 

link between their estate taxes and federal statutes governing estate taxes.

Make 2009 Law Permanent Without Indexing the 

Exemption Amounts

The second option, which is identical to H.R. 4154, 

would keep the tax rate at 45 percent and maintain the 

effective exemption amounts for the estate and GST taxes 

at $3.5 million beginning in 2010 and not adjust them

2010- 2010-

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019

-1.0 -18.8 -41.5 -48.3 -53.7 -58.6 -63.0 -68.4 -72.0 -76.6 -163.3 -501.9

Without indexing (H.R. 4154) 0.5 -0.6 -18.3 -21.8 -25.4 -28.7 -31.1 34.0 -35.9 -38.3 -65.7 -233.6

With indexing 0.5 -0.7 -18.6 -22.3 -26.0 -29.6 -32.4 -35.8 -38.1 -41.1 -67.2 -244.2

Memorandum: 

Estate and Gift Tax Revenues 

Under Current Law 15.4 15.7 35.1 38.9 43.6 48.2 51.2 54.1 57.1 60.3 148.8 419.7

Estate Tax

Make 2009 Law Permanenta

Total

Modification

Permanently Repeal the 

CBO's Projections of 

22. David Joulfaian, Inheritance and Saving, discusses the average 

pre- and postinheritance wealth of a sample of heirs. A discussion 

of the relative burden of the estate tax on heirs or donors is in 

Lily L. Batchelder and Surachai Khitatrakun, Dead or Alive: 

An Investigation of the Incidence of Estate and Inheritance Taxes,

3rd Annual Conference on Empirical Legal Studies Papers 

(October 28, 2008), http://ssrn.com/abstract=1134113.
12 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

for inflation.23 The stepped-up basis would continue to 

apply to assets transferred from a decedent, and a deduction for state taxes on inherited wealth would be provided. The exemption amount for the gift tax would 

remain at $1 million. Those changes would reduce revenues by $234 billion over 10 years, according to the JCT. 

Retaining the estate tax at the parameters in effect for 

2009 would affect people’s behavior less than would 

repealing the tax. Relative to current law, it would 

increase the number of estates resulting from deaths in 

2010 that would be subject to the estate tax, but after 

2010 it would lower the number of estates that would 

pay that tax. After 2010, raising the effective exemption 

to $3.5 million would reduce charitable giving, thus raising individual income tax receipts (charitable gifts made 

during life are deductible from taxable income). Compared with repeal, however, setting the effective exemption at $3.5 million would increase charitable giving. The 

retention of the deduction for a state’s estate and inheritance taxes in this option would raise revenues compared 

with the reversion to a credit for state taxes as scheduled 

under current law.

Setting the effective exemption amount at $3.5 million in 

2010 would nearly eliminate the incentive to make large 

taxable gifts to relatives in 2010, reducing projected gift 

tax receipts in 2011. It would increase receipts from estate 

and gift taxes between 2011 and 2013, because taxpayers 

would no longer shift wealth transfers from those years 

into 2010 to reap the benefits of the 35 percent tax on 

gifts and the repeal of the GST tax in that year. 

Make 2009 Law Permanent and Index the 

Exemption Amounts

The third option would make 2009 law permanent while 

also indexing the amount of the estate and GST exempt 

from taxation. This option would reduce revenues but 

would avoid the phenomenon in which inflation erodes 

the value of the exemption amount, resulting in a larger 

share of the population being required to pay the tax over 

time. The JCT estimates that those changes would reduce 

revenues by $244 billion over 10 years, about $11 billion 

more than not indexing the estate tax exemption amount 

for inflation. 

Create an Inheritance Tax

An inheritance tax provides an alternative method for 

taxing transfers of wealth. It would be applied separately 

to each person inheriting assets. The inheritance tax 

could be set up so that heirs with lower income or less 

wealth paid a lower tax than did heirs with higher income 

or more wealth, so that smaller inheritances would be 

taxed at lower rates than larger inheritances, or so that 

closer relatives paid lower taxes than more distantly 

related heirs.24 Most countries that tax wealth transfers 

use inheritance taxes rather than estate and gift taxes. 

There is no consensus as to whether such a tax system 

would be more or less complex than the current one. 

Although an inheritance tax might eliminate certain taxplanning strategies used to reduce estate and gift taxes, it 

would require more taxpayers to file returns, and estates 

would still need to keep records and file information 

returns. 

24. For a discussion of inheritance taxes, see Lily L. Batchelder,

Taxing Privilege More Effectively: Replacing the Estate Tax with an 

Inheritance Tax, Hamilton Project Discussion Paper 2007-07 

(Washington, D.C.: Brookings Institution, June 2007).

23. For further information, see Joint Committee on Taxation,

Technical Explanation of H.R. 4154, The “Permanent Estate 

Tax Relief for Families, Farmers, and Small Businesses Act 

of 2009,” JCX-57-09 (December 3, 2009), www.jct.gov/

publications.html?func=startdown&id=3637; and Estimated Revenue Effects of H.R. 4154, The “Permanent Estate Tax Relief for 

Families, Farmers, and Small Businesses Act of 2009,” JCX-58-09 

(December 3, 2009), www.jct.gov/publications.html?func=

startdown&id=3638.

This brief was prepared by Pamela Greene. It and other 

CBO publications are available at the agency’s Web site 

(www.cbo.gov).

Douglas W. Elmendorf

Director