For us old timers, the most gratifying thing about the “income inequality” agenda the president is going to discuss at the SOTU Address tonight is the proposal for a change in the tax treatment of inherited capital assets. WaPo’s Matt O’Brien offers a nice, simple explanation:
Unless you’ve inherited money, you might not realize that there’s a pretty big loophole that lets heirs avoid a lot of capital gains from ever being taxed. It’s called “step-up basis,” and the Congressional Budget Office (CBO) estimates it will cost the government about 0.3 percent of GDP the next decade.
Here’s how it works. Now, imagine you bought $1 million worth of stocks that are worth $10 million by the time you pass away. That’s a $9 million capital gain you’d owe tax on, which, at the 23.2 percent rate, works out to a little more than $2 million check for Uncle Sam—unless you leave the stock to, say, your kids.
Then it’s like your capital gain never happened, at least from the taxman’s perspective. That’s because the capital gain your heirs are taxed on isn’t based on the original price, or basis, that you bought it at. It’s based on the base that they receive it at. So, in this case, your kids would only owe taxes on any gains above $10 million. This, as you could guess, helps the people who have the most money to leave to their families the most.
There would be important exceptions to the proposed abolition of the so-called “step-up basis” for taxation of inherited capital gains, and taxes thus paid at death would reduce the already limited exposure of inheritances to estate taxation. But in general, Obama is attempting the first real attack on inherited wealth in a very long time, ending decades of defensive maneuvering by progressives to avoid abolition of estate taxes. And because it focuses on a blatantly inequitable valuation of capital gains–taxed at lower rates than ordinary income to begin with–it largely avoids the “death tax” debate.
Yeah, tonight’s speech will create some uncomfortable moments for trust fund babies.