President Joe Biden is proposing to create a second Death Tax by repealing step-up in basis. This will impose the capital gains tax (which Biden has proposed raising to 43.4 percent) on the unrealized gains of every asset owned by a taxpayer when they die and will be imposed in addition to the existing 40 percent Death Tax.
Repeal of step-up in basis, which has been proposed as part of Biden’s “American Families Plan,” will create new complexity for many taxpayers including family-owned businesses. It will force businesses to downsize and liquidate assets, leading to fewer jobs, lower wages, and reduced GDP.
Repealing step-up in basis will disproportionately fall on family-owned businesses, many of which are asset rich, but cash poor. These businesses are already forced to liquidate structures, equipment, land, and other assets because of the Death Tax. Repealing step-up in basis will compound this problem and force family-owned businesses to sell a significant portion of their business or go into significant debt to pay their tax liability.
Repealing step-up in basis will create new complexity for taxpayers. Because of this tax increase, taxpayers would have to determine the cost basis of all assets owned, many of which may have been owned for decades. As noted by an Ernst and Young study, if the taxpayer is unable to provide sufficient evidence to prove the cost basis, then it may set to $0. In other words, the 43.4 percent tax would be applied to the entire value of taxpayer assets:
“Family-owned businesses may also find it difficult to comply because of problems in determining the decedent’s basis and in valuing the bequeathed assets. It seems likely that these administrative problems could lead to costly disputes between taxpayers and the IRS. Additionally, if sufficient evidence is not available to prove basis, then $0 may be used for tax purposes. This may result in an inappropriately large tax at death.”
In addition, repealing step-up in basis will harm the economy, costing jobs and wages. As noted by the Ernst and Young study, repeal of step-up basis will increase the cost of capital and discourage new investment. This negative economic impact will cost 80,000 jobs each year for the first ten years, increasing to 100,000 jobs each year thereafter.
One third of the tax will also fall on American workers in the form of lower wages. In other words, every $100 in federal revenues raised will result in $32 in lower wages by workers. Because of these negative economic effects, repeal of step-up in basis will reduce GDP by $10 billion per year.
Repealing step-up in basis has already been tried and failed. In 1976 congress eliminated stepped-up basis but it was so complicated and unworkable it was repealed in 1980 before it took effect.
As noted in a July 3, 1979 New York Times article, it was “impossibly unworkable”:
“Almost immediately, however, the new law touched off a flood of complaints as unfair and impossibly unworkable. So many, in fact, that last year Congress retroactively delayed the law’s effective date until 1980 while it struggled again with the issue.”
As noted by the NYT, intense voter blowback ensued:
“Not only were there protests from people who expected the tax to fall on them — family businesses and farms, in particular — bankers and estate lawyers also complained that the rule was a nightmare of paperwork.”
Biden’s plan to repeal step-up in basis will hit families and small businesses hard. It will harm the economy and job creation, and create new complexity in the tax code. It also has a history of failure as it was quickly repealed the last time it was tried.