USA President Joe Biden proposes 40% inheritance tax
President Joe Biden had moved significantly forward on the three key elements of his Build Back Better program, all of which are funded by notable changes in tax law. An issue that stokes passions on both sides of the U.S. political divide is taxing wealth as it passes from generation to generation. In order to target a tax break that benefits recipients of inherited property President Joe Biden is reinvigorating the debate with a plan. Applied immediately when assets are transferred to wealthy heirs
1. What is the proposal made by Mr. Joe Biden?
The President proposes to repeal current allowed tax adjustment known as step up in basis. Currently, when people die with stocks, real estate and other assets that grew in value during their lifetimes, heirs who inherit those assets don’t have to pay capital gains tax on the appreciation of the asset that occurred under the previous owner.
2. What does it mean to repeal the current step up in basis?
Repealing the current step up in basis would mean that heirs would have to pay tax on unrealised gains passed on by the prior owner at death on all sorts of assets, which would amount to a massive increase in their Tax liability.
3. Why does Mr. Joe Biden want to repeal it current step up in basis?
The administration Biden states that current step up in basis primarily benefits wealthy households. According to a paper published in 2019 by Lily Batch elder, Biden’s nominee for the top tax job at the Treasury Department, and David Kamin, deputy director of the White House’s National Economic Council, nearly 40% of the wealth of the top 1 % comes from accrued and unrealized capital gains, citing data from the Federal Reserve Board.
4. Who are in support of the change?
In March, 2021 Democratic senators introduced a proposal to eliminate the step up in basis with a $1 million exemption, which is similar to the plan proposed by Mr. Joe Biden. The senators stated that the exemption is needed to protect small family farms and businesses a nod to arguments often raised by opponents of taxes on estates and inheritances. Biden’s plan adds to this by proposing family-owned businesses and farms wouldn’t have to pay taxes when given to heirs who continue to run the business.
5. Where does the proposed plan fit into Biden’s larger tax plan?
As per an estimate made by the Penn Wharton Budget Model, other aspects of the Biden plan won’t work as intended if step up in basis isn’t eliminated. Here’s the logic behind that thinking:
On its own, Biden’s plan to almost double the capital gains tax rate on top earners would actually decrease, rather than increase, federal revenue by $33 billion over 10 years, because investors would exploit every possible loophole to avoid paying the tax. But if the boost in the capital gains rate is paired with the elimination of step up in basis, it would raise $113 billion over the same time period.
6. Will Biden’s changes get enacted?
Not without a fight. Groups that generally oppose the estate tax are expected to come out in full force against the plan. One such group, the Family Business Estate Tax Coalition, has already commissioned a report by EY that concluded eliminating the step up in basis adjustment would reduce jobs and U.S. gross domestic product.
