NCPA - National Center for Policy Analysis

Bill To Replace Death Tax With Carryover Basis For Capital Gains

June 7, 2000

The U.S. House of Representatives is scheduled to take up H.R. 8, "The Death Tax Elimination Act of 2000." H.R. 8 would eventually repeal the estate and gift tax -- but would replace it by taxation of capital gains at death.

H.R. 8 originally reduced the top estate tax rate of 55 percent by 5 percentage points per year, beginning this year. In 2010, the estate and gift tax would simply disappear.

However, the House Ways and Means Committee rewrote H.R. 8, taking back a great deal of the tax savings. The substitute provides a reduction of 2 percent the first year, 3 percent the second year and 1 percent per year for each of the next 4 years.

  • Thus by the year 2007, the top estate tax rate would fall to 46 percent.
  • Under the original bill, the rate would have fallen to 20 percent.
  • The substitute would also repeal the estate tax in the year 2010; but it imposes a new tax on capital gains at death.

Under current law, the increase in value of an asset is taxed as a capital gain when sold. When someone dies, the heirs have the basis stepped up to its value at the death of the original owner.

Under H.R. 8, heirs would inherit the basis as well as the asset. This means that when an heir sells an asset he will pay capital gains taxes from the date the asset was originally purchased.

Obviously, carryover basis will be enormously complicated to administer. It was repealed in 1980 after having been implemented by the Tax Reform Act of 1976.

The goal of eliminating the estate tax is a good one, but replacing it with carryover basis is a bad one.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 7, 2000.

 

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