But when the estate tax is completely repealed, along with it will go a little feature called the "stepped-up basis," which basically forgives, at death, the capital gains tax on all profits accumulated during a person's lifetime. As a result of the repeal, every American who leaves appreciated property to children and grandchildren will send their descendants a 15-percent tax bill as well. Nobody mentioned that? Darn, they forgot.We're talking about all kinds of things people routinely inherit - a house, stocks and bonds, vacant land, rental property, family homes and farms, and small businesses.
Tuesday, August 23, 2005
Here's an appeal that all tax-hating Americans can get behind...
If the estate tax (or "death tax" in the Republican lexicon), which affects less than 2 percent of the population, is repealed, the plan is to shift that burden onto a much more sizeable portion of the population. Therefore, it is much more likely that while Paris Hilton and Bill Gates will get more tax relief, you, me and all of your friends and family who will inherit any kind of capital gains will get taxed more. This should scare anyone who hates paying taxes to an administration and Congress that is squandering our money. Here is what will happen in more detail if the estate tax is repealed:
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Um, I think this article is talking about the "compromise" plan. The Republicans can't get the estate tax permanently repealed because they don't have the super-majority needed to overcome the Dem filibuster. The provisions in the article seem to be what Dems asked for as part of the compromise, but I'm not sure. If the article isn't talking about the compromise, then it's kind of worthless, because the author has little knowledge of the actual bill being considered.
This does not refer to a Democratic compromise plan. It refers to Bush's proposal, which eliminates the "stepped-up basis" rule. The stepped-up basis rule meant that when an inherited asset that increased in value from when it was first purchased was sold, the capital gains would not be taxed. The point the article makes is that not only does Bush's proposed estate tax repeal diminish revenue (in times of a deficit) and undermine egalitarian values, but it also levels additional costs on people, even those who might support the "death tax" though such support would be of no benefit to them.
It still is futile to be talking about this when the bill hasn't even been written yet. But I digress...
After talking with some of my work colleagues, I learned more about this. Back when the bill was originally passed, the Democrats wanted to repeal the "step-up basis." The compromise back then was that the "step-up basis" could be retained for any inheritance up to $1.3 million. So if you're inheritance is $1.2999999... million you pay nothing. If you it's $1.3001 million you only pay tax on the .0001 million. Under the Republican plan for permanent repeal, there would be no tax on the inheritance, not even capital gains.
The "step-up in basis" may have to be repealed in order to get enough Democrats to sign the bill, though. And even then, the $1.3 million threshold, which is quite large chunk of change considering the small sums used in the misleading example in the article, will probably be retained in the "carry-over basis" rules.
There is no futility in debating something that is being proposed as part of a bill, just because there is no bill yet. By that logic, we shouldn't talk about a lot of things.
I think what you're saying though is since Bush hasn't endorsed a bill yet, it's futile to try and figure out who's trying to raise inherited captial gains taxes. My main concern and why I cited this article about the stepped-up tax proposal is that not only is revenue being lost from repealing the estate tax, but this loss is being passed over to people of lesser means to cover a tax cut for people who acquire great wealth that they did not earn.
I realize that, and that's something I know we're going to disagree on. The inheritance tax is wrong on simple principle: it's a tax on income that's already been taxed. Nevertheless, the discussion is made futile by the fact that you say, "here is what will happen...if"; since the bill hasn't been written you can't know something WILL happen.
Anyway enough semantics. Most of those people in the top 2% don't pay it to begin with; so your loss of revenue argument doesn't really hold. The way to get out of it: signed checks of the amount of inheritance to be deposited in the heir's bank account prior to the death of the relative - and it's been done like that for hundreds of years.
Oh, I forgot the main point. The fact remains that the article's assertion that "every American" who inherits will receive a 15% tax still remains false.
Well the argument that we might as well get rid of a whole tax because some people find ways to get around it is an argument I've heard before and an argument I equate with letting tax cheats get away with what they do. In the case of someone who gives their inheritance away before they die, there's nothing that can be done about that. Why the repeal if no one is paying it anyway? In fact, Bush's estate tax repeal has been estimated to cost 294 billion in revenue over ten years. That's not chump change (especially not for a country which is running a huge deficit). http://www.cbpp.org/5-25-00tax.htm
I don't see how, if the stepped-up basis is repealed, somoene can avoid paying 15% on capital gains that they inherit, if that is the rate at which capital gains are taxed. The writer is saying that all capital gains that were accrued over the deceased person's lifetime will be taxed to the inheritor. He's not saying that every American who inherits will be taxed...if I inherited my great uncle's baseball bat, obviously I wouldn't be taxed on that.
"As a result of the repeal, every American who leaves appreciated property to children and grandchildren will send their descendants a 15-percent tax bill as well."
That's from the bit you quoted. I know what he's saying, but what he is saying is wrong. Should they get rid of the inheritance tax, the Republican bill would also get rid of the stepped-up basis because there would be no inheritance tax to pay. The Republicans wish to make so that if you pass on money, property, etc to your heirs, it will not be taxed no matter how much or how little. You may disagree with the appropriateness of doing this, but that's what is planned, NOT what this article is talking about.
Should the Republicans need to compromise with the Dems once again, as they did the first time, then the stepped-up basis will be repealed and the "carry-over basis" will replace it, doing what this article contends. But this will only happen should Democrats filibuster the bill unless it provides for the "carry-over basis."
The Republicans wish to make so that if you pass on money, property, etc to your heirs, it will not be taxed no matter how much or how little.
This fails to differentiate between an estate tax and a capital gains tax. The Republican proposal, which is a repeal of the estate tax, merely abolishes the tax that was applied to estates over a certain value. The estate tax is the only thing that I know of that Republicans want to repeal permanently. Just because one is exempt from that specific tax does not mean one is exempt from another tax, such as the capital gains, unless the Republicans make some sort of provision that eliminates any sort of tax on an inheritance. As far as I know, this is not what they are doing.
I've looked at several other articles about the subject, and all of them state that with the estate tax repeal comes the repeal of "stepped up basis."
http://nreionline.com/finance/investors/real_estate_help_hindrance/
Have I gotten you to admit that capital gains taxes are bad?!!!?
Yeah, the capital gains tax comes when you sell the inherited estate. Upon looking at my sentence you quoted, it looks misleading. Once you inherit, it becomes part of your income and assets; the Reps would like to get rid of the "transaction fee," if you will.
The capital gains tax can be anywhere from 5 to 28% depending on your income and the type of property you're selling. The highest rate used to be was 50% before the GOP majority.
And yes, the repeal of the estate tax comes with the repeal of the stepped up basis because, to repeat for the third time, I think, it is/was the only way for the Senate to overcome the Dem. filibuster. If the Dems would just allow the repeal to go through, the stepped up basis would still be there. But they insist on this compromise.
And with that I'm done on this one. I'm tired of repeating myself over and over again without a counterargument addressing my comments specifically.
Of course I'm not against capital gains taxes (in fact, I think they are founded on an important premise), but I don't think people with smaller inheritances should have to pay for a tax cut for people with larger inheritances.
I think the best case scenario right now would be retaining the estate tax at its current level, which I believe is taxing estates at 1.5 million. The worst case scenario is if both the estate tax is repealed and stepped up basis is in place, because a whole lot of money is lost, and far from being "double taxed" as you say, people can escape getting taxed altogether on any capital gains in this situation. For instance, by letting a stock appreciate without being capitalized on until after it is passed on to an heir, those assets escape both the capital gains and estate taxes.
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