Fortunately, when the Democrats released the details of their proposed tax hikes on Monday, they did not include a waiver of topping up the cost base of assets held at death. The entire estate planning industry breathed a huge collective sigh of relief.
Why write about a proposal that is now debatable? Because the fact that it has been seriously considered says a lot about the state of our policy and the role of the tax code in promoting social policy.
The concept of topping up is quite simple: at death, the cost base of assets held directly by a person is increased to the value of those assets on the date of death (or six months after death, if selected).
As a result of this increase, the capital gains tax due in the event of a later sale or sale of the assets is calculated on the difference between the realizable value and the increase; the increase in value between the testator’s acquisition of assets and death “escapes” the profit tax.
Modern class warriors condemn this tax result as “unjust” and in the interest of “tax equality” strive to have it deleted. In doing so, however, they overlook or ignore the past, the rationale for the destination, and the practical difficulties associated with its abolition.
We have seen this film twice before. For the first time in the Tax Reform Act of 1976, the increase in the assessment base in the event of death was abolished. It was replaced by a “carryover regime” which required extensive, complicated and continuous bookkeeping. The proposed rules were heavily criticized as impracticable and the base top-up returned.
With the Economic Growth and Tax Relief Reconciliation Act of 2001, inheritance tax was completely repealed and replaced by a carry-over base regulation, but only for the 2010 calendar year enables the estate representatives of deceased persons who died in 2010 to either pay the inheritance tax or to take over the transfer basis. The result was confusion, frustration and mixed results – the opposite of tax equality.
The difficulties in the past in implementing a repeal of the step-up (and adhering to a carry-over basis) speak for its fundamental impracticability. The reasons for its persistence are more compelling.
The federal government levies an inheritance tax on the value of a testator’s estate at the time of death. This value includes all built-in reinforcements. Eliminating the increase would mean that the built-in profit that would be transferred to the heir would be taxed again in the event of a future sale or sale by the heir. The resulting double taxation of profits is difficult to see as “fair”, at least for the taxpayer.
Robert Rubin of the Wall Street Journal recently cited the resistance of the “Rural Democrats” as the reason for the omission of the proposed repeal of the government in the final plan. This probably relates to the very real concerns of farmers and small business owners about the difficulty of keeping their businesses family-owned for generations.
As originally proposed, phasing out would have involved the realization (and taxation) of all built-in profits in excess of $ 1 million. This could have forced heirs to liquidate their main family wealth and income sources just to pay the death tax.
And phasing it out would not only have harmed the rich. The dramatic rise in house prices in recent years has left many moderate-income families sitting on large unrealized real estate gains. In fact, Howard Gleckman and Robert McClelland of the Urban-Brookings Tax Policy Center recently estimated that the government’s top-up proposal would have affected 2% of the deceased earning less than $ 400,000, a group they pledged not to pay taxes on raise.
It is said that the two certainties in life are death and taxes. The combination of the two harbors the risk of invoking a third: the law of unintended consequences.
The fact that this proposal got this far in the tax reform process says a lot about our current overly political approach to public finance. In a rush to find sources of funding for ambitious spending plans, some policy makers are willing to ignore both the history and the practical and economic ramifications of a proposal that promises any revenue regardless of the social cost. And if it looks like it’s “soaking the rich”, so much the better.
We deserve better, more serious, and more responsible consideration of all proposals that impose financial burdens on our citizens and make it difficult for them to legitimately pursue their own personal and family goals. Tax policy should not be used as a tool to track social change. Wishful thinking maybe, but hope always gushes forever.
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