Could Suspending the Estate Tax Soak the Rich?

If the federal estate tax vanishes next year as scheduled, revenue from taxing capital gain could help take up the slack. Reason: the return of carry-over basis. But as a corrected WSJ article explains, only the heirs of high-net-worth decedents would suffer:

[T]he 2010 law as written gives each taxpayer $1.3 million worth of "free" step-up at death, but this is a far cry from the unlimited basis step-up under current law. Married couples get an additional $3 million at the death of the first spouse, heavily favoring them over individuals.

Congress is expected to extend the current estate tax for another year. What if Congress is too distracted to act until next year? That could get tricky:

Under Congressional bookkeeping, any extension of the current system into next year counts as raising revenue because the tax is currently slated to lapse in 2010.

In 2011, however, the exemption is supposed return to $1 million. So extending the $3.5 million exemption beyond 2010 will count a revenue loser at a time when deficit-cutting pressures will be intense.

Maybe it was a mistake to let the inmates run the asylum.

Photo from Wikimedia Commons