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  • Washington Post Misses on Romney Tax Plan and Step-Up Basis

    The debate about former Governor Mitt Romney’s (R-MA) tax plan has reached a fevered pitch. In fact, The Washington Post published two articles (here and here) about it. The second repeated the confusion surrounding a poorly understood policy known as “step-up.”

    Recently, I weighed in to correct the false statement that Governor Romney’s plan “mathematically necessitates” a tax increase on the middle class. That falsehood has been perpetuated by a misleading report from the Tax Policy Center (TPC). The report is misleading in part because the authors of the study made a material error in their analysis in regard to step-up.

    Step-up arises because of the interaction of two taxes—the tax on capital gains and the death tax—and the need to avoid yet another instance of double taxation. When someone dies, an estate is created. Typically, the estate contains appreciated assets on which capital gains tax would have been owed had they been sold prior to the decedent’s passing.

    The death tax levies tax on the total value of the estate less an exemption amount. In contrast, the capital gains tax is levied on the increase in value of the asset, which is the difference between the current value and the purchase price, or “basis.”

    Taxing the capital gain when an inheritor sells an asset using the basis of the original owner would be taxing the same wealth twice. Thus, after death tax is paid, the basis of the asset is “stepped up” to the current value so the recipient of the asset will owe capital gains tax only on appreciation occurring after receipt.

    On the other hand, if the death tax were repealed, then step-up basis would be inappropriate as long as the capital gains tax remains. The appropriate policy is for the new owner to retain the basis of the original owner and thus receive the asset along with its accrued capital gain. This is called “carry-over,” as the tax basis carries over from one owner to the next.

    With this as background, consider now the second Washington Post article:

    Dubay’s estimates for exactly how much revenue it raises are flawed. His numbers compare the current “step basis” [sic] policy not to carryover basis, but to a policy in which all assets are taxed at capital gains rate when someone dies. That’s a much more dramatic change than carryover basis, and likely to raise much more revenue. So Dubay’s revenue estimates are considerably too high. [Emphasis added.]

    This is factually incorrect. My estimate explicitly involves replacing the step-up in basis with carry-over basis. The Post does not make the important point that step-up is valid with the death tax in place and that carry-over is the proper system for the capital gains tax after the death tax is repealed. (The Romney plan repeals the death tax.)

    The Washington Post says I overestimate how much repealing step-up basis could raise. According to the Office of Management and Budget (OMB), in 2013 alone, step-up reduces capital gains tax revenue by $24 billion.

    That $24 billion is what OMB determined the IRS would collect if the step-up basis is repealed with the death tax still in place. This estimate accounts for the revenue that would be raised under the capital gains tax if the step-up basis is repealed and inheritors of assets pay the capital gains tax with a carry-over basis. The OMB estimate of the step-up remains the same whether the death tax is in place or not.

    In my paper, I calculated that repealing step-up would raise $19 billion in one year, because some inherited assets would go to taxpayers with incomes less than $200,000. As such, I determined that the distribution of step-up would roughly follow that of long-term capital gains. (About 78 percent would therefore go to taxpayers with incomes over $200,000, according to the IRS.)

    The capital gains rate under current law will be 20 percent in 2013, and Romney’s plan would keep the rate at 15 percent. That differential in rate could account for some overestimate on my part, except that the TPC report estimates how the Romney plan would apply in 2015. The growth over two years would likely make up for the difference.

    Posted in Economics [slideshow_deploy]

    15 Responses to Washington Post Misses on Romney Tax Plan and Step-Up Basis

    1. Bobbie says:

      It's concerning that the major sources of publication supports the President's take over of America's free people and freedom for government socialism by lying to and manipulating their base as if they're base is less deserving of truth. How low life and disrespectful to America!

      There are stark differences between Mr. Romney and Mr. Obama. Mr. Romney doesn't hide his life's history. Mr. Romney helped America while he lived in the private sector and when he took a seat in government he saved areas Obama is destroying.

      Romney respects what America stands for. THE PEOPLE! Obama is crippling America and what she stands for! Refusing advice that would eliminate Obama's intentional imposition of sacrifice! or he wouldn't refuse! Assumptions are shameful from a man that hides his truth. Telling his truth for which it stands shows unfavorable to America.

      Romney is an American that took the opportunities available to anyone that wanted them. He believes in people. Obama believes in free cell phones for poor people as if he respects their minds ability to operate a cell phone but respects even more their inability to see themselves better without government handouts! Narrowing to a close, peoples' minds!

      • Tmon23 says:

        Obama is a Progressive!! There will be Many after this Election, and they will continue tomove "Forward" . To Stop Them will take time!! Good Post!!

      • Brian says:

        "Mr. Romney doesn't hide his life's history. " <– Where are the past 10 years tax returns Mr. Romney??? Since you required them of Mr. Ryan during the VP vetting process, maybe it's time you release yours to the American public!

        • Diane says:

          I am much more concerned with a presidents or presidential candidates background than his or her tax returns. Is there really that much interest in the tax return verses the persons life history??

        • Frenchra says:

          Brian, you're kidding us, right? Mr. Romney has provided the same records other candidates have given in the past. On the other hand the President has hidden his birth certificate, travel documents, and school records since day one. He's created controversy and questions about his qualifications to be President to the point of law suits being filed against him. But rather than focus on what's wrong with the country and what they're going to do about it the Democrats want you to focus on Mr. Romney's success instead of their failures. I call that misdirection. Mr. Romney has hidden anything. They just can't find anything wrong with what he's provided so they want more in hopes something might not look right.

          You want to criticize Mr. Romney for being successful but have you looked at John Kerry, Charles Rankle, Harry Reid, and Nancy Pelosi, just to name a few. I'm tired of the lies. Let's fix the country.

          • Brian says:

            You've made the assumption I'm an Obama supporter. Which I am not. Truth be told, in my mind neither of the two primary candidates deserve to be elected (or re-elected).

            • Nybbler says:

              hmmm, so what's left, anarchist, communist, socialist, fascist, stylist, ventriloquist?

            • Nybbler says:

              I'm guessing ventriloquist. I just haven't figured out whose hand is up your shirt yet?

            • Brian says:

              Certainly not any of what you mention. But how about Libertarian. Look at Gary Johnson's website and tell me what's so bad about that!

          • CforUS says:

            Two words, "Lock Box". Bring it back. Put 10 years of tax returns in the box. The key opening it is a lifetime of travel records, transcripts, Selective Service records, and thesis. It may just be me, but it sounds like a fair trade.

        • Bobbie says:

          You are just a sad sap who doesn't know his place, Brian! What does 10 years of tax returns have to do with Mr. Romney's work history and truth? Is it a question you would've asked without political influence? Probably not! Why don't you research the government budget department and have government officials itemize where every penny of Mr. Romney's millions was spent by government? Half of it goes into the pockets of Harry Reid and Nancy Pelosi and the like!! And then, why aren't you demanding the same of any other political people that ARE IN OFFICE effecting our economy daily by government rules usurping the peoples' own? America isn't here for government dependents and dependencies. AMERICA IS HERE FOR FREEDOM AND INDEPENDENCE FROM THE CONTROLS OF GOVERNMENT SEEN IN 3RD WORLD LEADERSHIP!

          • Brian says:

            Wow Bobbie…calm down. You're gonna have a coronary!

            Because Heritage checks all messages before posting, you may have missed my post above. Gary Johnson will be my guy this election.

            For some reason unknown to me, whenever anyone bashes Romney, you automatically think that person is in bed with the Democrats. For some reason, in the little box that Republicans live, there seems to be no room for any ideas other than "love Republicans" and "hate Democrats".

            Take a look at Johnson's website and tell me what's not to like.

            BTW – something totally off subject. Whenever I post to Heritage, I always click the "All new comments" in the "subscribe to" box. And I have yet to receive an e-mail from Heritage telling me new comments were posted. What gives?

    2. Lloyd Scallan says:

      The Washington Post didn't miss anything. What they did was what they always do, Lie, distort, and deceive about anyone that dares to challenge Obama.

      • CforUS says:

        What are they going to do if Romney wins? If it were up to me all of the media that has a problem with challenges to BO would be given scraps when it comes to access to the new president. No more "favored" status in the press room, AF1, trips, etc.

    3. Hal V says:

      There is some benefit to 'step-up basis' in that determining tax basis in assets acquired years prior to death may be difficult if not impossible. Especially true in small businesses with multiple owners.
      Basis must be proven when an asset is sold, otherwise tax basis is zero and all gains are taxed at current rates, capital gains or ordinary income.
      Step-up in basis is based on value at date of death (or an alternative date), which is much more available, being current values by appraisal or published market value.

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