President Joe Biden’s American Families Plan suggests eliminating the step-up basis tax process.
We should describe this proposal differently. What it actually entails is reimposing the death tax upon middle-class families. Eliminating the step-up basis will also reduce the taxation of billionaire estates while increasing the taxation of the family house or business being passed on. Why would a supposed liberal want to support something like this?
The simplest answer is that many liberals are not just at war with the rich. They’re also against that modest middle-class independence that more and more families achieve over the generations. If we have the resources to pay our own college bills, buy a house, or fund a pension, then what need do we have for a big and intrusive government?
The estate tax has always been one of the most hated impositions. Still, the issue was largely put to bed by raising the tax-free exemption until it became an irrelevance for near all of us (that exemption being the amount that can be inherited before tax is payable, which has risen from $675,000 in 2000 to $11.58 million today).
The current system is being sold as an unfairness we need to be rid of. Capital gains tax is only payable when an investment is sold. But when people inherit something — some stocks, a business, grandma’s house, etc. — the price that the profit is calculated from is the market value at death. This is the “step up.” The starting value for the inheritors is not the price the investment was bought at but the value at inheritance. Some thus argue that capital gains are not being paid. They contend that if we eliminate the step-up basis, capital gains will start being paid.
This is to make the error of looking at only one part of the tax system.
After all, we must ask the question: Why does the tax system step up those values? The answer is that if we don’t, we’re going to get some pretty strange results for the estate tax. For example, think of Amazon CEO Jeff Bezos’s hopefully long-delayed death. Will Bezos’s estate — leave aside foundations, gifts, and all that — value his Amazon stock at $185 billion, the market value? Or at $10,000, his purchase cost? For that’s what the step-up basis does. The valuation for estate tax purposes is to “step up” to the market value from the original purchase cost so that it is then possible to calculate the estate tax on the market value of the estate.
The inheritors then get the assets, and their capital gains tax dues start at the current market price. But that’s because we’ve just insisted on valuing them at that market value for estate tax purposes. With the current system, Bezos’s estate pays 40% of $185 billion minus the $11.58 million exemption for the Amazon stock alone. Call that $74 billion. Without the step-up basis, the Amazon stock is at purchase price, $10,000, no estate tax is payable. The step-up basis is how we tax large estates. So, why would we abolish this?
Well, because for some liberals — enough of them for this to be a serious administration proposal — the error rests in taking the middle classes out of the death tax by raising the exemption. The aim is to reimpose it under a different name. Instead of the estate tax on the inheritance, they want to charge capital gains on the assets inherited. Those who inherit will then owe capital gains tax on the full rise in value from purchase price instead of that stepped-up basis from the time of inheritance. The effect of this is almost exactly the same as lowering the exemption again. The reason it’s being proposed this way is that we the public out here are just fine with only the rich paying the estate tax.
The Biden administration is, quite seriously and with a straight face, thus suggesting that the law be changed so that we don’t tax the estates of multibillionaires by eliminating the step-up basis but that we do tax the capital gains on grandma’s modest house. They’re also claiming that they’re liberals. It’s not possible to believe the claim given their suggestion.
