Why Obama wants to kill the “angel of death” tax loophole

Nothing may be certain but death and taxes, but that doesn’t seem to cover loopholes.

In his State of the Union speech on Tuesday, President Obama proposed closing the so-called “angel of death” loophole, a tax break critics say unfairly benefits the wealthiest Americans.

“Everyone who sells assets pays a capital gains tax,” Frank Clemente, executive director of Americans for Tax Fairness, said in a statement to CBS MoneyWatch. “Why should the heirs of the wealthiest Americans be exempt from this tax? That flies in the face of the purpose of inheritance taxes — to limit the accumulation of huge amounts of wealth by millionaires and billionaires and to help fund the critical services we all depend on.”

In other words, why should someone who sells an asset just before he dies owe capital gains, while another person who holds off on a sale until after death is able to sidestep the same tax?

Obama unveiled his plan to reform capital gains taxes as one element in his agenda to boost the middle class. Taking higher taxes from top income-earners would enable the government to provide tax breaks for the middle class and provide benefits such as tax credits for education.

Also called the trust-fund loophole, the “angel of death” loophole provides tax relief to heirs who inherit stock and other assets that would otherwise be subject to capital gains tax. The loophole allows those assets to pass tax-free to heirs, who receive the stock on a “stepped-up basis.” Once those shares become an heir’s property, all past capital gains or losses are wiped clean.

This loophole has drawn fire because it allows people who have been able to accumulate capital to pass it on tax-free to their heirs. The accumulation of wealth by the richest Americans has been helped by a U.S. tax code that taxes capital at a lower rate than income. Such tax breaks have been cited as one reason why America’s wealth inequality has reached what economist Thomas Piketty called “spectacular” heights.

The world’s richest 1 percent will control most of the world’s wealth by next year, Oxfam reported this week.

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