What You Need to Know
- Attempting to please both progressives and moderates has led to messy compromises that create more problems than they solve.
- Raising the rate on capital gains without eliminating a key loophole won’t work.
- Nor will a provision aimed at fund managers.
The tax committee in the House of Representatives released some long-awaited details Monday of how Democrats plan to raise taxes on top earners to help pay for social programs. It’s an effort to split some of the wide differences between the soak-the-rich tendencies of the party’s activist progressives and the be-careful-what-you-wish-for centrists.
That’s a tough balance to strike, and the strain shows, especially in two messy compromises that would create more problems than they solve.
The first is a failure to close a long-standing loophole in the tax code, which will sabotage a key tax increase Democrats were relying on to deliver enough revenue to finance their programs. The loophole involves the special treatment of investment gains when taxpayers die, a boon to wealthy families when they pass these gains along from generation to generation. As the proposal now stands, the special treatment would be maintained in a way that undermines the revenue benefits of raising the capital gains tax.
Under the current system, most investors aren’t taxed on any appreciation in their portfolios when they die. In other words, in the eyes of the Internal Revenue Service, dying isn’t a taxable event (unless your estate is worth more than $11.7 million). As an added bonus, heirs get to ignore any appreciation of assets that happened prior to when they inherited them.
Here’s a hypothetical example: Let’s say an investor had bought $200,000 worth of Apple shares that appreciated to $2 million. She wouldn’t owe capital gains tax on the $1.8 million of appreciation when she died. In turn, her heir would inherit the $2 million of Apple shares and only owe capital gains tax on the difference between the $2 million and any subsequent appreciation of the Apple stock if and when she sells.
Earlier this year, President Joe Biden proposed a way to get at that $1.8 million of untaxed gains. Under his plan, the deceased would owe capital gains tax on any unrealized gains. He called for an exclusion of $1 million per person, or $2 million per couple, so amounts under that wouldn’t be subject to the tax. And he made accommodations for family-owned businesses.