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Marine One departs from the Ellipse after dropping off President Biden on Sunday. Photo: Tasos Katopodis/Getty Images

President Biden is committed to increasing capital gains taxes for the richest Americans when they die, before they pass wealth to their heirs, according to people familiar with the matter.

Why it matters: Eliminating the so-called stepped-up basis is central to Biden’s plan to find additional revenue to pay for the roughly $1.5 trillion in new spending he'll unveil during a major speech Wednesday night.

  • “It is important to tax gains at death when you raise the maximum capital gains tax rate,” said Leonard Burman, of the Urban Institute's Tax Policy Center. “Otherwise, rich people would go through contortions to hold assets until death and avoid the 43.4% (plus state tax) rate.”
  • “If you are also ending step-up basis at death (as Biden proposes), the revenue-maximizing rate is much higher — plausibly above 43.4%,” wrote Jason Furman, a Council of Economic Advisers chairman for President Obama, wrote on Twitter.
  • The proposal is estimated to raise some $370 billion, but only if the stepped-up basis is eliminated.

The intrigue: During the campaign, Biden proposed increasing estate taxes from 40% to 45%, while also dramatically decreasing the exemption from tax-free inheritances from $11 million to $3.5 million.

  • During the president's first 100 days in office, White House 0fficials have been silent if Biden will actually propose changes to the estate tax in his next package.
  • Using the stepped-up basis means that when assets are passed to an heir, they are reassessed — for future tax purposes — at their current value.
  • In practice, that means an asset's increase in value is never taxed as capital gains in the original owner's lifetime, though estate taxes could still apply upon the owner's death.

Driving the news: Ahead of Biden’s joint address to Congress, officials are stressing his plans are designed to target the ultra-wealthy.

  • It’s “not the top 1%, it’s not even the top one-half of 1%,” Brian Deese, the director of the National Economic Council, said of the president's capital gains proposals.
  • Deese also sought to rebut arguments that nearly doubling the capital gains rate would slow economic growth.
  • “There is no evidence of a significant impact of capital gains rates on the level of long-term investment in the economy,” he said.

By the numbers: Biden’s plan to tax capital gains at the same rate as income could actually increase the deficit, according to research by analysts at the University of Pennsylvania Wharton Budget Model.

  • Increasing the top capital gains rate from 20% to 39.6% could cost the government $33 billion over 10 years if the stepped-up basis remains law.
  • But if the stepped-up basis is eliminated — and assets are taxed at death before they are passed on — the IRS would collect $113 billion.

Go deeper: There’s a debate among economists about what the revenue-maximizing rate for capital gains should be, even if the stepped-up basis isn’t eliminated.

  • The consensus had been in the 28% to 32% range, according to David Herzig, a tax principal with Ernst & Young's private client service tax practice.
  • But those calculations would need to be reconfigured if the stepped-up basis is taken off the books.
  • “In the absence of stepped-up basis at death, we estimate that it would be in the low 40s,” said John Ricco, associate director at the Penn Wharton Budget Model.

Go deeper

Trump urges federal judge to block release of tax returns to Congress

Photo: Brandon Bell/Getty Images

Former President Trump's attorneys on Wednesday asked a federal judge to prevent the Treasury Department from releasing his tax returns to Congress, NBC News reports.

Driving the news: The Justice Department last week said the Treasury Department "must" release Trump's tax returns to the House Ways and Means Committee, finding that the committee had "invoked sufficient reasons" for requesting the documents.

Democrats propose raising debt ceiling through midterms

Speaker of the House Nancy Pelosi and Senate Majority Leader Chuck Schumer. Photo: Stefani Reynolds/Bloomberg via Getty Images

House and Senate leadership announced on Monday that they plan to attach a proposal to raise the debt ceiling through Dec. 2022 to a short-term, government funding bill. The bill must pass before the end of the month or Congress risks a shutdown.

Why it matters: Democrats are taking a huge risk by trying to force through an increase of the debt limit in its must-pass funding bill. The move is wishful thinking on behalf of Democrats who are hoping they can get at least 10 centrist Republicans to balk, as well as an effort to put Republicans on record opposing it.

Biden to stress U.S. does not seek new Cold War in UN speech

Photo: Al Drago/Getty Images

President Biden will use his first address before the UN General Assembly to lay out his vision for an era of "intensive diplomacy" with allies and "vigorous competition" with great powers — without a Cold War with China.

Why it matters: Biden will take the podium in New York on Tuesday with his own international credibility in question after the chaotic withdrawal from Afghanistan. His administration also is struggling to build international momentum to fight climate change, the pandemic and rising global authoritarianism.