Tax Analysts Blog

Republicans Want to Repeal the Estate Tax Because Too Much Is Never Enough

Posted on Apr 15, 2015

It’s tax day, so it must be time for another round of showboating on Capitol Hill. The majority party usually takes the lead on these things, so Republicans have decided to mark our national anti-holiday by voting to repeal the estate tax.

This year, however, we’re getting Repeal 2.0: less defensible and even more expensive! Just eliminating the tax isn’t good enough. What America needs is a better, sweeter repeal -- elimination enhanced with some tweak to further ease the burden of the beleaguered 1 percenters (or 0.2 percenters, since that’s the percentage of estates that actually pay the tax under current exemptions).

The GOP solution? Repeal the estate tax while also preserving the step-up in basis for capital gains taxes. That way, we can ensure that gains in asset value are never taxed, whether they’re real or inflation-driven.

Because that’s good tax policy.

Plus, we can keep all the money locked in place. Rich people with appreciated assets will understand that under no circumstances should they ever sell those assets, even if the money might be better invested elsewhere. Better to keep everything locked down tight until you keel over, at which point your heirs can do whatever they want because they won’t owe any taxes at all.

Because that’s good tax policy.

Sarcasm aside, this combination of tax “reforms” is uniquely terrible. It would more or less destroy the CGT entirely. “Anybody who can afford not to would never sell an asset during life again,” observed Duke Law School professor Larry Zelenak in comments to Bloomberg.

Ed McCaffery of the University of Southern California Gould School of Law agrees. “When you look at the bill, it actually doesn’t make sense; it would get a bad grade in a law school final exam,” he said. “That is telling old people, clutch onto things until they die. That’s not how the American economy works.”

For my money – and admittedly, it’s not my money, since I don’t expect the tax to be an issue for my heirs – repeal is a bad idea under any circumstances. But it’s an especially bad idea when paired with a continuation of stepped-up basis.

This seems like an issue tailor-made for Democrats. If you can’t make a viable populist argument in the face of this kind of class legislation, then it’s time to throw in the towel as a left-leaning political party. President Obama seems to agree, and White House officials have been quick to denounce the pending legislation.

But Democrats have bungled this issue repeatedly. Sure, deep-pocketed lobbyists working for the nation’s plutocrats have done a lot to destroy the estate tax, but Democrats did their part, too -- first by underestimating their opponents and later by simply being inept.

But in fairness to Democrats, the estate tax has never been a slam-dunk for liberals. Sure, it’s been on the books forever, but a lot of that longevity can be explained by inertia (or path dependency, as the social scientists like to call it).

In fact, the estate tax is simply not that popular with voters. For a long time, it wasn’t important to them either, since it was a rich man’s problem. But when inflation eroded the exemption in the late 20th century, it gained new salience for the upper middle class. Add to that heightened interest some well-funded lobbying by the 1 percenters, and you end up with repeal – or at least a defanged tax like the one we have today.

Obama will make sure that repeal is dead in the water for the time being. But this battle isn’t over, and if Democrats don’t want to keep losing it, they'd better take a new look at their arguments. Because the old ones aren’t working anymore.

Read Comments (8)

edmund dantesApr 15, 2015

You omitted the zaniest part of all of the bill. They kept the gift tax! As
if the basis step-up weren't enough inducement to lock up assets, the gift tax
plus carryover basis would apply to any assets transferred during life!

Because that's good tax policy.

I can't imagine any rationale for that approach. It can't be for the revenue.
Gifts are voluntary, so the gift tax would be also.

However, credit for the new push for estate tax repeal largely goes to Rep.
Kristi Noem of South Dakota, not Republicans generally. Her family was burned
badly by the federal estate tax, back when the exemption was under $1 million.
The tragedy of the premature death of her father was compounded by a massive
federal estate tax on the illiquid assets of the family farm. She's been on a
mission from God to repeal the estate tax ever since:
http://trustmarketing.blogspot.com/2015/04/death-tax-repeal-act-of-2015-...
tml

Noem has a powerful story that draws sympathy across the political spectrum.
If the Democrats would really like to preserve a death tax, they would do well
to trade away the costly, inefficient transfer tax system for President Obama's
proposal to make death a realization moment for capital gains. Even people who
hate the estate tax might be amenable to that approach, and it would raise much
more actual revenue.

Bubba ShawnApr 15, 2015

One of my economics professors asked,"So should America adopt a 100% estate tax
rate?". Estate and gift tax schemes are redistribution abominations.

By the way, real estate and personal property assets are already taxed as local
property tax.

Stating those assets are accumulated as pre-tax dollars is blatantly
disingenuous especially when those opinions come from "tax experts".

Americans who want to pass down their accumulated wealth to their children
should enjoy an unrestricted right to do so in the "land of the free".

Redistribution tax schemes are indefensible. Especially when couched in
"fairness". What is fair? To whom?

PrudentiusApr 16, 2015

Preserving the gift tax while repealing the estate tax was a feature of the
2001 Tax Act ("EGTRRA"). It is not "zany," though it is ill-advised. Its
stated purpose in 2001 was to deter asset transfers back and forth among family
members to reduce income taxes by "parking" assets temporarily with a
lower-income family member. That problem would better be addressed through the
income tax itself; the gift tax was designed to back up the estate tax not the
income tax is ill-suited to the latter task.

Matthew BryanApr 16, 2015

The tax is immoral. On what moral principle does dying make one liable to a
civil government which can never again render him any service or protection?
Or is this supposed to be like the exit tax for the Americans who decide they
might like to live elsewhere, only this case "elsewhere" is across the river.

emsig beobachterApr 16, 2015

The estate tax should be repealed. It should be replaced by inheritance taxes,
which would also tax bequests to charitable organizations and family
foundations.

The inheritance is a windfall to the heirs -- marital bequests should be taxed
much more lightly than other bequests.

All bequests would be assessed at current market values.

edmund dantesApr 17, 2015

An inheritance tax would have been just as devastating to Noem's family. The
death of their father, and the devolution of responsibility to manage the farm,
is hardly a "windfall."

On the other hand, I certainly agree that we should eliminate the deduction for
gift and estate transfers to charities and family foundations.

I thought the retention of the gift tax was zany in EGTRRA, and I still do for
this proposal, which has now passed the House.

emsig beobachterApr 17, 2015

Edmund: There's an old saying: "Farmers live poor but die rich." The small
business/ farm problem is that these forms of assets are iiiiquid --hard assets
little cash.

While I can sympathize with Noem's family on the death of their father, their
situation is not unique. Not all deaths are "timely," whatever that means.
There are carve outs and safe havens for small businesses and farms that can
lessen the financial burden of the tax -- not the burden of the
responsibility.

However, an inheritance tax has the feature of taxing immediate family members
more lightly than non-family members, charities, etc. No tax is fair, the best
we can work for is equity in taxation.

Michael KarlinApr 21, 2015

There are tax policy arguments and there are social policy arguments and we
should try to distinguish the two. I don't intend to discuss the
redistributive effects of taxation in general or transfer taxes in particular.
But I can make a rational policy argument for eliminating the estate tax. Here
it is:

Assume we start our lives with nothing. We engage in economic activity that
increases our wealth by the difference between what we earn and what we
consume. The estate tax is imposed on that wealth whether or not the economic
activity in question has been taxed. In the case of earnings from employment
or gains from acquiring and selling property, the economic activity is taxed.
In the case of assets acquired but not sold before we die or give them away,
that gain is not taxed. The estate tax does not care. It is imposed on our
wealth whether we have paid tax on it or not. That's what makes the tax
unfair. By contrast, capital gains tax imposed on gain before we die has not
been taxed. We have in effect been given the option to defer our increase in
wealth as long as we live and if we do decide to trigger a tax, it's payable at
lower rates - a pretty generous deal, I would suggest. A fair tax would
recognize that our wealth has either been taxed or not during our lifetime and
would impose the tax no later than we die. In other words, capital gains tax
on death.

Once we go into the details, the first and most obvious issue with any tax
payable at death is liquidity of the assets. This is not the same as making
the social policy argument that we should not impose a tax that effectively
forces the break-up of family farms or the sale of small businesses. It is
simply recognizing the fact that a share in a privately held asset is less
marketable and less liquid than public traded securities. So we should do
something that addresses the liquidity issues.

A second issue is that eliminating the step-up causes enormous problems of
tracking basis. So any reform that moves us to imposing a capital gains tax on
death and/or requiring carryover basis has to address the genuine difficulties
of taxpayers in tracking basis, especially when the original acquirer of the
property is deceased. No easy solutions here, but let's at least recognize the
problem. We have to do better than using the Cohan rule as a backstop.

Finally, does anyone think a bit of dynamic scoring might be an appropriate way
of looking at Rep. Noem's proposal? How much capital gains tax will be
eliminated not only because of the step-up at death but because people will
lock up assets as some of the commentators have noted? Was that part of the
estimating process? Let's see if the Republicans will insist on dynamic
scoring for this particular proposal.

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