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The estate tax is set to expire this year, and President Obama has proposed making it permanent at 2009 levels, which includes a $3.5 million threshold($7 million for couples) and a 45% top tax rate.  This would be projected to bring into the government coffers around $25 billion per year.  This is seen as a modest, at best, estate tax by most.  There is only one problem: the step-up basis of capital gains at death.

The step-up basis of capital gains at death essentially removes all capital gains taxation from individuals when they die.  So Warren Buffett, for instance, could die and his $40 billion will not be taxed.  Mark Zuckerberg and heirs, when he dies, will pay no capital gains taxes on his $25 billion or so, and if he simply borrows against it for the remainder of his life, that incredible income will never be taxed.  This could become $100 billion by the time he passes, and neither Zuckerberg nor his heirs will pay a tax on any of it.

Who does this benefit?  Overwhelmingly the capital in this country is built up by millionaires and billionaires.  According to a tax policy center analysis, 75% of the benefits of preferential treatment of capital gains accrue to the top 1% of income earners.

How much does this cost?  According to the Office of Management and Budget, $61.5 billion in 2012.  So, as an estimate, let's say that 75% of this benefit goes to the top 1% and see what kind of tax revenue we get from the estates of the super-wealthy.

Under the Obama plan:

$3.5 million exemption at 45% rate=$25 billion
75% of roughly $60 billion step-up basis of capital gains=-$45 billion

Net effects of Obama estate tax plan and step-up basis of capital gains at death=$25 billion dollars given to the top 1%.  Mind you, a similar analysis will show that perhaps $40 billion will be given to the top 1% when the rates revert back to 20%.

A much better plan would be to do a Simpson-Bowles style reform with lower rates that are revenue neutral for earners under $250,000.  One of S-B best aspects was to get the capital gains rate to 28% and remove the step-up basis of capital gains at death.  A little more estimation for the revenue effects of a plan such as this:

75%(28%/15%)$60 billion=$85 billion
Obama estate tax plan=$25 billion
Total revenue=$110 billion from the top 1%

This is more than the $80 billion the top 2% will pay if the Senate middle class tax cut bill is passed, and more in line with what is needed in terms of revenue and progressivity.

We should not be giving the top 1% a $40 billion gift every year.


Would you prefer Bernie Sanders' estate tax proposal raising $35 billion and keeping the step-up basis of capital gains at death or Obama's estate tax proposal with the elimination of the step-up basis of capital gains at death?

57%16 votes
14%4 votes
28%8 votes

| 28 votes | Vote | Results

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