There are also ongoing discussions as to whether the repeal of the estate tax should be made permanent or altered to apply to fewer estates. Before the estate tax is permanently repealed it is important to understand the alternatives to repeal and the distributional and foregone tax costs of the various options being considered. The Urban-Brookings Tax Policy Center has produced preliminary estimates of the distributional effects of some of the options reportedly under consideration and examines some of the implicit tradeoffs as well as some of the unintended consequences of repeal.

Current tax law allows a 15% tax rate on Long term Capital Gains income and qualified domestic dividend income. This 15% rate is set to expire at the end of 2008. In tax year 2009, the dividend income tax rate will be raised to the same rate as ordinary income and the long term capital gain tax rate will be raised to 20% for all taxpayers above the 15% bracket (a 10% capital gain rate applies for taxpayers in the 15% bracket).

On August 1, 2006, the House passed H.R. 5970 which proposes that the 15% capital gain tax rate be extended to 2015. Under this tax bill the estate tax would also be reinstated up to year 2015, exempting estates of less than $5 million in assets; Estates of $5 to $25 million in assets will pay a statutory tax rate of 15%; and estates with more than $25 million in assets will have a statutory tax rate of 30%. Also under this proposed bill the state tax death credit is repealed and no deduction is allowed for state estate taxes paid. The 5% surtax is also repealed.

The final outcome of the estate tax bill is yet to be determined. However, the indications are that an estate tax will be reinstated after year 2010, albeit the tax rate will be lower than current laws mandate.