Regular readers know my two hot buttons are Elizabeth Warren and the estate tax (even though unless my lottery number hits I have no chance of ever paying the estate tax – I guess thinking about it my greatest fear should be the Warrenization of America. I digress).
Knowing the history of the estate tax which was intended to be temporary (several times) and the fact taxes have been paid on the money more than once before it reaches heirs, this tax is little more than an envy tax to get back at successful people. If the tax applied to lower wealth levels, everyone would feel that way, it’s all relative.
Now read this excerpt from Bloomberg View. It talks about a provision in the tax code that allows capital gains to escape taxation at the death of the owner. But does it really? Upon death there is no capital gains tax on accumulated wealth, but there is an estate tax. What this argues for is taxing the capital gains upon death and then taxing the net value of the estate again under the estate tax. Let’s say you bought a stock for $50,000 many years ago. When you die it’s worth $100,000 and today your heirs pay $39,000 in estate tax. The proposed change would first tax the $50,000 capital gain say at 28% and then tax the remaining $86,000 at 39% under the estate tax for a total tax of $47,540 or nearly 48%. In either case, nothing escapes taxation, it’s either an income tax or a estate tax or under the proposal both.
Actually it makes sense to always treat capital gains as capital gains, but that’s it, you don’t tax the same money a second time as an estate. Yes, few people actually pay an estate tax, yes there is a $10 million plus exclusion for married couples, but that’s not the point, at least my point. The point is that regardless of the amount, the accumulated net material value of a persons life should be free to pass to anyone that person chooses without being confiscated by government.
The single best idea in Obama’s plan is the proposal to bring unrealized capital gains more fully into the tax base. Under current law, vast fortunes comprising unrealized capital gains can escape income tax altogether. That’s because heirs benefit from “step-up basis” relief.
Take a moment to understand just how absurd this idea is. Under any plausible definition, unrealized capital gains are “income.” Since we tax income, the question is not whether unrealized capital gains should be taxed but when and how. No question of principle arises; it’s a practical matter. The simplest way would be to treat the gains as realized on the death of the owner.
This isn’t what happens. Suppose your father has stocks worth a billion dollars, acquired decades earlier for a fraction of their current value. If he sells them before he dies, the gains will face capital-gains tax, and you and his other heirs stand to inherit the net proceeds. If he doesn’t sell them, the assets are passed down with the value stepped up to the current price. (The estate tax would then apply in either case.) Hey presto: For income-tax purposes, gains accumulated over the years simply disappear. By Clive Cook, Bloomberg View 1-21-15
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