The House has voted to reduce, then repeal the estate tax. The current tax reform not only would repeal the tax on those estates, it also would allow a large share of their income to escape any taxation at all. This creates a giant inefficient and inequitable loophole for the very wealthy. If the estate tax is to be repealed, it would make sense to follow practice in past proposals by taxing capital gains on assets held at death.
Capital gains are taxed when someone sells capital assets. Taxpayers can avoid paying capital gains tax simply by holding on to their assets until they die. Under current law, the basis of assets held until death is “stepped-up” to the asset’s market value at the time of death, allowing an heir to sell the asset without owing any tax.
Without a step-up in basis, income from the increased value of assets that is passed on to heirs wouldn’t be taxed either as capital gains or as part of their estate. It simply wouldn’t be taxed at all.
People who can pass assets to heirs tax free have a strong incentive to hold them while they are still living and avoid tax on a large share of their income. If Congress wants to repeal the estate tax, there are approaches to address this problem of allowing capital gains to escape taxation. Hopefully members of Congress will realize this and pass tax legislation that doesn’t increase the deficit and is fair to all.
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Michael Degenhart, State College