NCPA - National Center for Policy Analysis

Death and Taxes

July 24, 2003

Despite the protests of Senate Democrats who claim permanent repeal of the federal death tax will eliminate valuable tax revenues at a time with the deficit is too huge, a new report demonstrates just the opposite. Economists Wilbur Steger and Frederick Reuter, writing for Consad economic research firm, found that if changes were made this year, Uncle Sam would collect about $38 billion more over the next10 years than it does now.

The death tax brings in only $24 billion a year in tax revenues, or 1.1% of total receipts. But the Senate's born-again deficit hawks aren't correct in claiming they'll lose even that small sum. That's because the legislation killing the death tax also makes several small, but underreported, adjustments to capital-gains taxes.

The reason is something called the "step up" in basis on capital gains:

  • Today when someone dies, the heirs must pay a tax of up to 60% on the estate.
  • However, once the estate taxes are paid the heirs are allowed to adjust what's left of the assets to present-day values, thereby eliminating any liability for capital gains built up during the dearly departed's lifetime.
  • Families pay the estate tax but not capital-gains taxes.
  • Estates would escape death taxes but continue to be valued from their original levels.
  • Only when, and if, heirs voluntarily decide to sell the assets would they owe the entire capital gains tax amount.
  • There's also a $1.3 million exemption from the capital-gains tax, so smaller estates are protected altogether.

Death would no longer be a taxable event, though heirs would have to pay something on a lifetime of asset appreciation.

Source: Editorial, "Deficits and Death Taxes," Wall Street Journal, July 24, 2003.

For text (WSJ subscription required),,SB105900726978967000,00.html


Browse more articles on Tax and Spending Issues