TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, January 29, 2015

Three Cheers for the Death Tax!

The Daily Beast, Three Cheers for the Death Tax!, by Michael Tomasky:

Of all the Obama proposals unveiled in the State of the Union address, the one that’s probably drawn the most right-wing fire is the one that would close an inheritance capital-gains tax loophole. ... Undertaxing inherited wealth is ... immoral. ...

[T]he estate tax doesn’t start until $5.43 million per person or $10.86 million per couple. That’s high enough that only the wealthiest .15 percent of Americans pay any estate tax. Among the 3,780 U.S. households that owed any estate tax in 2013, their average tax rate was 16.6 percent.

Center for American Progress, Report of the Commission on Inclusive Prosperity (Jan. 15, 2015):

Combined with the United States’ generous estate tax structure, the step-up in basis rule creates very low effective tax rates on inherited wealth. The Congressional Budget Office estimates that the step-up in basis rule will reduce federal revenues by $644 billion over 10 years, with 21 percent of that subsidy going to the top 1 percent of income earners.

Basis

Step-up in basis is a particularly valuable subsidy for the wealthiest estates. A study published by the Federal Reserve [Robert B. Avery, Daniel Grodzicki & Kevin B. Moore, Estate vs. Capital Gains Taxation: An Evaluation of Prospective Policies for Taxing Wealth at the Time of Death (Federal Reserve Board, 2013)] estimates that unrealized capital gains comprise 55 percent of the total value of estates worth more than $100 million.

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Comments

In a progressive tax system, whose is the appropriate tax rate to apply to the income? The decedent, who earned the money, or the heir, who will spend the money?

This article presumes the former, but the question deserves to be raised and debated. Especially when the article claims that the tax break "benefits the wealthy" who are not even around to enjoy that benefit. The original CBO report does raise the issue, but only in a footnote.

Posted by: AMT buff | Jan 29, 2015 12:32:32 PM

Of course the basis adjustment (it goes both ways) disproportionately helps/hurts the wealthy. It's the wealthy who pay most of the capital gains taxes. A "loophole" can only help someone who has to pay taxes in the first place; except in the case of "loopholes" such as the earned income tax credit which disproportionately benefits the poor.

On a serious note, it will be interesting to see if these proposals to eliminate the basis adjustment go anywhere and in what form and what their effects will be on transfer taxes (gift, estate and GST).

Posted by: Well, Duh!! | Jan 29, 2015 12:57:12 PM