Most people want to be fair. They believe in fairness. This reality creates challenges for our politicos and policy wonks who’ve chosen to defend the existing blatant unfairness that benefits the most privileged among us. Their strategic response to this challenge? They position themselves as fearless champions of fairness!
We’re now witnessing this phenomenon once again in the struggle over the Biden administration’s move to eliminate one of the most gaping loopholes in our tax system, the so-called “basis step-up” that lets wealthy people avoid paying any income tax whatsoever on lifetimes of investment gains.
Consider Jeff Bezos, the richest American. As ProPublica has reported, Bezos has paid little more than trifling amounts in income tax over the years even as his Amazon shares have appreciated over $100 billion. In several years, Bezos paid no tax at all.
If Bezos dies holding his Amazon shares, how much income tax would his estate owe? Thanks to “step-up,” not a cent, even if those shares come to be worth a trillion dollars, as USA Today reported they will — by 2026. Yep, you read that right: Under current law, one family might escape income tax on $1 trillion in gains.
How can that be? Under “step-up,” death resets the “cost basis” of assets to their current value. A deep pocket’s heirs can sell the shares they inherit at their current value and owe no income tax on the huge profit the original investment in those shares has created.
Now this “step-up” provision may have had, years ago, some justification. Generations ago, figuring out what a recently deceased person had paid for an asset a half-century earlier could be hard to determine. But we’ve now had decades of electronic record-keeping. The retention of “step up” serves no legitimate purpose. Step-up just confers a massive tax break on wealthy families.
Wealthy families, of course, like things that way. But now they face the most concerted effort yet to do away with “step-up.” Biden’s American Families Plan would make sure that all the windfalls the rich register buying and selling assets finally face income tax.
How much income tax? The Treasury Department estimates that eliminating step-up, together with related changes to taxes on capital income, would raise $322 billion in the decade starting in October of this year.
Defenders of the ultra-rich have a simple game plan for saving step-up: turn super-rich heirs into victims. Ending step-up, the claim goes, would unfairly subject our wealthy to “double taxation.” They would pay both income tax and estate tax on the same dollars. An outrage!
Hardly. Let’s review the tax basics here. All Americans who receive more than nominal income in any year must pay income tax. Income tax for the year a person dies must be paid by her estate. The Biden plan would include any previously untaxed investment gains in excess of $1 million in that final year’s income.
This reform merely equalizes the tax treatment of those who sell appreciated assets before death and those who hold appreciated assets until they die. If the Biden plan becomes law, Americans in both these situations will pay a tax on their income gains. We have an income tax to do just that, to make sure that all Americans contribute to the common good.
Our federal estate tax on the intergenerational transfer of great fortunes has a different purpose. The estate tax safeguards America from the dangers that extreme accumulations of wealth pose to a healthy, functioning democracy. We must not let, as Republican former President Theodore Roosevelt put it over a century ago, “a small class of enormously wealthy and economically powerful men” forever “hold and increase their power.” That original goal of the estate tax still makes eminent sense.
The income tax and the estate tax don’t duplicate each other. They apply to two different things, the income tax to income, the estate tax to the passage of wealth. Nothing unusual here. We have many different types of taxes. On top of income tax, we have Social Security tax, Medicare tax, sales tax, and property tax. When we pay sales tax or property tax, we don’t object because we’ve already paid income tax.
What are apologists for America’s ultra-rich really saying when they cry “double taxation”? They’re saying that forcing wealthy Americans to pay all the tax due on their income should justify the inheritance by their descendants of colossal fortunes free of estate tax. This claim rates as no more logical than saying if you stop at red lights, you don’t have to obey the speed limit.
The ultra-rich should pay income tax on their gains because we all pay income tax. The estates of the ultra-rich should be subject to estate tax because we need to safeguard our democracy.