Asymmetrical Information

I'm missing where you believe the elimination of the step-up would increase revenues to offset the loss of revenues on the elimination of the estate tax.

Are you assuming the $1.3m exemption from step-up is the same amount as the current exemption from the estate tax?

If you keep the $1.3m exemption in both cases, then how can taxable subject income be greater in the case of the elimination of the estate tax and step-up basis. (e.g., $5m asset, taxable basis $1m. Currently, $3.7m would be subject to higher estate tax rates. In your case, the heir would receive the $5m asset, and be subject to 15% capital gains taxes on the $4m unrealized gain upon sale) Seems like the treasury receives less revenue under the elimination of the step-up scenario, and later. I must be missing something in your scenario. thanks.

Perhaps the JCT considers the elimination of the step-up for all assets, without the $1.3m exemption you mention above.

All of this is in flux, but my understanding of the current law (which is pretty good) and the compromise bill (not as good, but I've been told what passed the house) is that there is NO relation between the estate tax exemption and stepped-up basis. In other words, regardless of whether you paid estate tax on something, once inherited, its basis is stepped up.

The amount exempted from the estate tax therefore avoids both forms of taxation permanently.

I believe the JCT was scoring the complete elimination of stepped-up basis (a part of the total repeal package never discussed by opponents or proponents), which means figuring out how much in embedded capital gains avoids taxation each year through this mechanism.

When Warren Buffet dies, will his estate pay 60% death tax or $50 billion? Hell no! The govt will be lucky to see $50,000 and will probably get $50.

The death tax only applies to people who are thrifty enough to pass on a headstart the their own children - which goal any liberal will tell you is shamefully selfish.

To finish the thought, the $1.3 million step-up exemption (described indirectly here)is per decedent and can be allocated among the assets. In your example, then the basis of the estate's assets goes from 1 million to 2.3 million and the remainder of 2.7 million would be a taxable capital gain to the heirs (as opposed to a $4 million gain without the exemption). I don't know whether the JCT allowed for this proposed exemption or not. It also isn't clear to me if that exemption existed under the most recent full repeal proposal.

My preference, of course, is full repeal, including eliminating all step-up provisions. Pay a capital gains tax when you liquidate. Nice low rate, no forced liquidation, big reduction in unproductive activity, takes death itself out of the equation and something closer to a consumption tax orientation.

Agree with Dreck's last comment. It is a relief, if true, that someone has found a way to prevent the loss of revenue said to occur with repeal of the death tax. This revenue loss is the primary argument against repeal. One suspects that opponents of repeal really believe that the tax breaks up large estates and is therefore democratic. Nothing could be less democratic than the tax dodge of turning a large estate into an unaccountable foundation armed with great wealth that sets forth to remake the world in the vision, not of the founder who, as often as not, has already benefited society through successful entrepreneurship, but of the staff hired to administer it.

Doesn't repeal of the estate tax + elimination of the step-up completely fix the problem that some people have to liquidate assets (e.g. sell the family farm) to pay the estate tax? Seems like the way it should have been designed in the first place. I guess, however, it's too simple for the intrusive-government crowd.

One pragmatic reason for the step-up in basis is that it replaces the need for finding an original basis buried in the decedant's paperwork somewhere [which may not be possible in all cases] with the need for having the property appraised at the time of death.

-dk

> This revenue loss is the primary argument against repeal.

Politics is rarely about revenue, especially in this case.

To be seen as "sticking it to the rich" is far more important to significant fraction of estate tax supporters than actually doing so or revenue.

Mindles, in my example, the $5m inheritance results in a deferred capital gains tax of about $400k ($2.7m *15%), whereas under the current estate tax scenario, there would be a current tax of approximately $1.5m ($5m asset less $2m exemption for a married couple, *50% estate tax rate [not sure about that rate, could be 47% now]).

I can't see in which scenarios deferred capital gains tax would exceed the estate tax, therefore I don't understand how they believe the shift would be revenue neutral. My guess would be that they do not consider an exemption amount from the elimination step-up. (e.g., you inherit a $550k fair value home from your mother whose basis is $50k, you have a deferred cap gains tax of $75k.) That would be the only way this would work (I believe that is what you're describing as your preference). Although it might be revenue neutral, it would save money for those inheriting large estates at the expense of those inheriting moderate estates, and would likely prompt alot more whining from the likes of Sol and Jimbo that taxpayers now have to pay additional cap gains tax on assets that were previously exempt.

Sol - the government will not be getting much from Warren Buffett, you are correct. That's because he's giving his estate away to charity, if you've been reading the news. He's lived a relatively thrifty life (for a billionaire) and will be using his fortune for the betterment of society. That's about as unselfish as you can get.

Jimbo, what the hell is 'undemocratic' about an individual bequeathing his or her wealth to a foundation of his or her choosing or his or her founding, who will dispense with the assets in accordance with the decedents wishes. As far as this being a 'tax dodge', do you also believe that individuals should not receive a tax deduction for their donations to their alma mater, church or other charitable organization?

[I've amended this comment slightly at 12:45]

First of all, anything that passes under an exemption gets stepped-up basis. So assets/gains that were completely untaxed now have a built-in capital gain.

Second, what your example is missing is that the $5 million estate has engaged in estate planning techniques and trust creation which demonstrably can a) double the exemption b) take advantage of the step-up while removing the assets from the taxable estate c) taken gains out of the estate through split interest techniques d) taken advantage of minority discounts in family limited partnerships. Remove the punitive estate tax rate and these techniques, which have significant costs and inconveniences, are not attractive.

I can't locate the JCT study NRO has cited, but presumably it assumes that many appreciated assets that are transferred outside of the estate revert back to inherited/gifted.

This document suggests that half of all gains arent't taxed due to step-up.

Here's a study (source unknown to me) which seems to pin it on accelerated pre-death realization of gains.

More posts like this please.

As a member of the lower-middle class, I see it as an obsticle in moving upward. It's another complication that I will have to waste time and money on, possibley making costly mistakes, to avoid. People already in the group have developed the institutional knowlege to deal with this. People most likly to be hurt by this are up-and-comers without time or resources to spare.

Get rid of it.

Comments are Closed.