President Obama's proposed changes to inheritance and capital gains taxes could raise the estate tax rate in the U.S. to the highest in the industrialized world.
The plan, announced during the State of the Union address, would eliminate what is called "step-up basis at death" on capital gains taxation. And the top capital gains rate would jump to 28% from 20%.
Under current law, when a parent or grandparent dies, the increase in the valuation of his or her asset from when it was originally purchased is not taxed.
This is to offset the effects of the estate tax.
Obama's plan would tax estates and impose the regular capital gains tax on inherited assets — a business, property or stocks.
This could bring the effective death tax rate to 57%, according to Dick Patten, chairman of the American Business Defense Council.
Including state inheritance taxes, the rate would average 65% but could go as high as 68%.
Of 38 industrialized countries tracked by Ernst & Young, only Belgium would have a higher death tax, at 80%. But Belgium provides a lower 60% rate to immediate family members.
Add in state estate taxes, and the U.S. would have the highest rate in the world. At least a dozen nations, including Sweden, Russia and China, impose no death tax at all.
The Obama proposal would raise about $200 billion over the next decade, according to White House projections. Spouses would not have to pay the tax, but other family members, including children, would.
'Dagger' For Family Firms
"The Obama plan is effectively a dagger in the heart of family-owned businesses," said Patten, who is leading an effort in Congress to eliminate the death tax altogether. "If the tax were to ever get this high, most family businesses would have to be sold at the time of death in order to pay the taxes owed. This seems almost un-American."
In many plans to eliminate the estate tax entirely, the step-up basis at death on capital gains would go away. So heirs would have to pay only the capital gains tax rate (now 23.8%) on the increase in the valuation of an asset once it is sold.
What makes the Obama plan shocking to estate-tax planners is that he would tax the estates as capital gains and as an inheritance — a double-tax whammy.
Making matters worse, the new plan to soak the rich would continue to raise the capital gains tax. When he entered office, it was 15%. He imposed an income-tax surcharge of 3.8% to help pay for ObamaCare. Then he raised the rate an additional five percentage points as part of his tax increase on the rich in 2012.
Originally appeared in Investor's Business Daily.