Late to the Game

In yesterday's Wall Street Journal, Tom Herman's "Tax Report" feature had the headline "Estate-Tax Repeal May Hurt Some." (Paid subscribers only.) In the article, he reported what I had noted last month, namely that people who would not benefit from the abolition of the estate tax would be exposed to tax liability they currently escape due to the operation of the basis step-up rules. The estate tax repeal would likely abolish these rules, thus subjecting capital gains to income tax, in cases where, under current law, the gains would escape tax entirely.

The WSJ is reputed to have a somewhat split personality--outrageously ideological on its editorial page, scrupulously honest in its actual news reporting. Herman's article, which I believe falls into the news reporting category, erodes one's confidence in the reputation of the reporting side.

Start with the headline itself, indicating that the repeal may hurt "some." Wrong: As I pointed out, not some. The simultaneous repeal of the estate tax and of the basis step-up rules would impose a tax on many, offering relief to only a few. Consistent with Republican philosophy, of course, the few are very rich, the many merely the well-to-do and the simply wealthy.

The body of the article gives the impression that the abolition of the basis step-up rules is the product of some arcane statutory fine print. (In fact, the article actually refers to those who are aware of the problem as "tax advisers who have studied the fine print.")

Look, this is not, as one tax expert quoted by the WSJ says, "enough to make your head spin." Rather, it's what the late Charlie Eckman used to say, "It's a very simple game!" A lot of people, including people in the middle class, benefit from the basis step-up rules. As the estate tax law changes currently enacted take effect, only the few very rich will benefit from a repeal of the estate tax. The losers outnumber the winners by at least a factor of 20. The repeal of the estate tax will have the effect of imposing tax on the less well-to-do to satisfy the really, really wealthy. This is not subtle or tricky. Any decent reporter whose beat is taxes should have known about the issue from the beginning.