Death of Death Tax Brings Rise to A Tax That Could Be Deadlier

Dallas (August 3, 1999) - Just when there looked to be a break in the link between death and taxes, National Center for Policy Analysis Senior Fellow Bruce Bartlett states that tax foes who are cheering the House's proposed repeal of the death tax better read the fine print.

"Although the estate tax is indeed being repealed," says Bartlett "it would be replaced by something that they may find worse: carryover basis."

An important feature of the recently passed House tax bill is the repeal of the death tax - the tax placed on the value of any asset (i.e. stock or family business) above a standard exemption, which is willed to anyone other than a spouse at time of death.

However, one often-overlooked feature of the tax law as it relates to estates has to do with capital gains. Ordinarily, when an individual sells an asset for a higher value than was originally paid, they are taxed on the profit. This is called a capital gains tax. Under current law however, gains on assets that pass through estates are not taxed at all, mainly to avoid double taxation, which would occur due to the existence of the death tax. Therefore, when an heir decides to sell an inherited asset, they pay capital gains taxes only on any rise in value since they received it.

Under the House bill, however, the tax would apply to the entire gain since the deceased individual originally purchased the asset. Thus, the bill would increase capital gains taxes. In fact, the increase in capital gains would approximately equal the loss of revenue from abolishing the death tax.

Why would the House make this change? It's a way of applying the flat tax concept to estates. What the House has done is eliminate all the exemptions, exclusions and credits that currently apply to the estate tax, and lowered the rate from 55% (the top estate tax rate) to 15% (the proposed top rate on long-term capital gains), all without reducing federal revenue.

"This change may be good for the economy but bad for individual tax payers," said Bartlett. "Those who favor estate tax repeal need to look carefully at carryover basis. They may like it even less."