With Democrats preparing to pass a reconciliation bill that will spend up to $3.5 trillion on investments and aid for American families, the next few months are going to be full of debate about how to pay for this new spending.
One of the changes proposed by the Biden administration is eliminating the stepped-up basis, an egregious loophole that allows the rich to pass down billions of dollars in assets through generations without ever having to pay a single penny on their growing value. It’s a $42 billion per year tax break that overwhelmingly goes to millionaires and billionaire heirs, and it has no place in a fair tax code.
Despite the fact that it’s obviously absurd to let millionaire and billionaire heirs avoid paying taxes on their inherited wealth, we’re already seeing conservatives (and some moderate Dems) pushing back on fixing this ridiculous loophole. Here’s why they’re wrong, and why we need to get rid of it.
The stepped-up basis relies on the fact that investors don’t pay any taxes on their capital gains, or the increased value of the assets they own, until they sell those assets. If they don’t sell those assets when they die their heirs get the tax bill for those assets wiped clean. Say you buy a bundle of stocks for $1 million, and sell it for $10 million. You pay taxes on that $9 million in profit. But if you hold onto it until you die, your heirs can sell those stocks for $10 million and pay zero taxes.
This puts wealthy families at an automatic advantage over working ones. Working people who want to grant money to their children have to pay taxes on every cent they earn in their lifetime before that money is passed on. It is only right that we expect wealthy investors to do the same, instead of allowing them to permanently wipe away millions of dollars in tax obligations.
Let’s be clear, normal people simply do not have to worry about the stepped-up basis. This loophole is laser-focused on those inheriting millions of dollars in assets.
No person inheriting less than $1 million ($2 million for married couples) in unrealized capital gains will be affected at all by the Biden administration’s proposed changes, and those inheriting more will only have to pay capital gains taxes on the gains above $1 or $2 million. If we want to build a stronger and more equal economy, we need to eliminate the stepped-up basis and other loopholes that allow the ultra-rich to grow richer and richer, all while evading taxes.
Critics claim that eliminating the stepped-up basis will hurt the ability of family farmers to pass their land on to their children. But these claims deliberately ignore the Biden administration’s stated plan to protect family farms. The White House plan explicitly excludes family farms and family-owned businesses from the change to the stepped-up basis. The bottom line is, if a family wants to keep their farm, the proposed change isn’t going to stop them.
With a much-needed budget reconciliation package finally in the works, we don’t have time for more excuses. It’s time to take a vital step towards tax fairness and eliminate the stepped-up basis.
If we want to close the widening wealth inequality gap and revitalize our economy, we must require the same things from the rich as we require from working people. Owning astronomical amounts of money shouldn’t exempt citizens from paying their fair share. These inequities have gone on for far too long. It’s time to ditch the stepped-up basis.