Estate Tax Increase on the Middle Class

Max Sawicky sawicky at epinet.org
Wed Aug 2 08:36:34 PDT 2000


Hey Max (and anybody else),

As I understand it, the estate tax "cut" includes its elimination for the richest 2% but also includes the elimination of "stepped up basis", meaning the end of the practice of passing on the increased value of stock tax free to hiers and starting the clock on capital gains at its value then. With the new system, as I understand it, the heirs will have to pay capital gains based on its increase in value from when the deceased first bought it. --------

Right.

NN: If this is accurate, won't this make the estate tax "cut" really an increase in taxes on middle class inheritors who always received their shares not only tax free but with reduced potential capital gains.

[mbs] The carry-over offsets some of the revenue loss from the repeal of the estate tax. Whether it shakes out as a net cut or increase for an individual depends on how much of the estate consisted of untaxed capital gains accumulation, what rate it was taxed under the estate tax, and the circujstances of the heir (i.e., marginal tax rate, when he/she cashes out, etc.). It isn't clearly a middle class tax increase.

Note that compared to pure income taxation, use of the carry-over is still a tax cut since it defers tax and reduces the rate.

The crucial thing about the provision is that it was tried in the past and was immediately repealed because it was thought to be unadministrable. For the heir to pay tax under this system, he/she must have records from the donor as to the costs of purchase of all inherited assets. In their paper (on the Brookings web site), Gale and Slemrod predict this will happen again; so the carry-over, while good in and of itself in principle, could be characterized as a bait-and-switch device. It makes repeal of the E&G tax more palatable (and reduces its budgetary cost) but is not likely to survive subsequently.

NN: And if true, why aren't the GOP and Dem backers of this plan getting slammed for screwing the middle class with a tax increase?

[mbs] To know exactly who is affected you need to do a micro-simulation exercise. The simulations done by CTJ fold the 'increase' into the overall effect and find the total proposal to be overwhelmingly regressive.

Don't forget that since we're talking about two percent of decedents and taxable estates tha tmust exceed $1.3 million or so now, "middle class" is a real stretch in any allusion to those who pay this tax.

NN: Of course, in the abstract, getting rid of stepped-up basis is the right thing to do, but doing so through abolishing the estate tax seems a pretty bad exchange. -- Nathan Newman

Right. On grounds of tax administration and fairness, appraising the estate at death and taxing it is better. Note that this entails taxing some assets that have already been taxed, and others that have not. Best of all would be a two-part device which hit the latter just as hard as the income tax hits everything else.

Meanwhile, on the progressive tax cut front, Cherry and my UUCC is going to be introduced in legislation in September. Hopefully it will roil the presidential debate, then get passed next year.

mbs



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