Accuracy in Media

Slate is gaslighting its readers on how the tax system works in order to bolster support for the new “billionaires’ tax”. The claim is being made that since those vast stock-based fortunes are never taxed, they can be passed on to children and heirs without Uncle Sam ever getting a cut. Accordingly, they should be taxed with a new and heavy tax on an annual basis.

That original contention simply is not true, however convenient it is for the political argument at hand. An example of what is being said at Slate: “Thanks to the notorious stepped-up basis rule, today’s plutocrats can pass wealth on to their heirs without anyone ever having to pay taxes on the capital gains they’ve accrued.” That’s simply not how the tax system works currently.

This is part of the misinformation backing the Wyden plan to tax unrealized capital gains. The idea is that if stocks go up in value then the capital gains tax must be paid whether they’re actually sold – and the income taken – or not. The argument being used to advance the idea is that those capital gains can end up never being taxed.

This is untrue. The tax system operates at many levels. Avoiding, even dodging, one tax doesn’t mean not paying them all. There are backstops.

To give an example, we’ll invent someone called Jeff Bezos who starts a company. On day one, he invests $10,000 for his stock in a company called, say, Amazon. 25 years later, whose stock is worth $190 billion. Say that Mr. Bezos met a truck on the highway and didn’t survive the experience. What is the value of his Amazon stock in his estate? The $10,000 purchase value? The “step up” is that his estate values it at the market value, not the purchase price. So estate tax is paid on the $190 billion, the tax take being 40%. 

The “stepped-up basis” is that his heirs get what’s left – $114 billion – and their new tax bill only starts with any rise in value after that. Sure, that’s a lot left. But it isn’t true that the heirs get the value without tax being paid on the capital gains. Forty percent has just been paid on those capital gains. And without the step up the estate would be valued at $10,000 and no estate tax would be paid at all. 

The step-up is what makes the estate tax work. Not, at all, what allows fortunes to be passed on without tax.

There is no clever way around this, either. The stock can be left to a foundation or a trust but that means the heirs don’t get it, the foundation or trust does. The heirs will pay normal income tax on anything they gain from those sources. It’s just not possible to spirit money across the generations untaxed. The initial problem just does not exist for anyone with an estate large enough – those plutocrats – to be subject to the estate tax.

This is a point widely unrecognized, Slate is just an example of it. The Tax Foundation and also get the point wrong.

This is a general gaslighting of the American public over a highly partisan political proposal.

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