Return the Estate Tax to Clinton-Era Parameters

In 2026, the estate tax applies to estates above a $15 million ($30 million for joint filers) exemption threshold according to a rate schedule that quickly rises to 40 percent.

This option returns the estate tax to the estate tax law in effect in 2000. The estate tax per-person exemption is cut to $675,000 and no longer indexed for inflation, and the top tax rate rises to 55 percent for taxable estates and gifts. Reducing the per-person exemption and increasing the top tax rate on estates would significantly increase the scope of the estate tax, as well as the revenue it raises. It would also reduce returns to saving, encouraging consumption during a taxpayer’s lifetime rather than saving.

Domestic saving would fall, and foreign investment into the US would increase, causing more of the returns to American investment to flow to foreigners. The smaller budget deficit would reduce federal government borrowing and interest payments to foreigners, offsetting some of the decline in domestic saving, but this option would still result in a decrease in GNP. These estimates do not account for the increased compliance burden that would result from this option.

On a conventional basis, this option would decrease the primary deficit by $1,106.5 billion over the budget window. Long-run GDP would be unchanged, while long-run GNP would fall by 0.10 percent. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 166.1 percent by 2056.

On average, taxpayers would see decreases in their after-tax incomes of 0.6 percent in 2036 and the long run, concentrated within the top quintile.