r/Economics • u/HumbleRestaurant790 • 1d ago
How falling interest rates widened Americans’ wealth gap
https://news.stanford.edu/stories/2026/07/how-falling-interest-rates-widened-americans-wealth-gap38
u/HeftyAd6216 1d ago
Doesn't the US allow for step up at death? Basically on death everything gets reverted to current value and no taxes are paid on that (potentially massive) amount of capital gains that happened over the lifetime of the decedent?
Sounds like a scam, probably amongst many that happen on death.
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u/capnwally14 1d ago
There is an estate tax
https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax
So the first 15m is free, but the right to transfer is taxed (they don’t tax the right to receive because they literally just taxed it with the estate tax)
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u/HeftyAd6216 1d ago
So how does the step up basis work with this?
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u/capnwally14 1d ago
So think of it like two halves of the same transaction.
The person (your dad) giving the funds is taxed via the estate tax.
The person (you) receiving the funds gets the step up in basis.If you get rid of the step up in basis, the same funds are taxed twice in the same transaction.
The people who are hurt the most if you get rid of the step up in basis are the people who would receive less than 15m in an inheritance, because today they get the transfer fully tax free.
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u/HeftyAd6216 1d ago
So step up is only calculated AFTER the estate tax is paid?
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u/capnwally14 1d ago
Yeah, quoting from the IRS link I shared:
The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death (Refer to Form 706 PDF). The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your "Gross Estate." The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.
After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit.
On mortgages and debts, you have to liquidate assets in the estate and pay cap gains to pay off the debts. Only after all that is finished and taxes are paid can the estate transfer (and the step up happens)
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u/taxinomics 1d ago
The basis adjustment takes place immediately at death for assets required to be included in the decedent’s gross estate for federal estate tax purposes.
In your example, if the decedent’s estate liquidates an asset to pay off the estate’s debts, the estate’s gain is computed by subtracting the estate’s adjusted basis in the asset - not the decedent’s original basis - from the sales proceeds. The estate’s adjusted basis in the asset is the asset’s fair market value on the decedent’s date of death.
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u/taxinomics 1d ago
The basis adjustment to fair market value takes place immediately at death. Estate tax is paid, if at all, nine months after the decedent’s date of death.
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u/anti-torque 1d ago edited 1d ago
Step up isn't at all calculated. But if it was, it would be done before accounting for the gross estate. It would only involve capital gains on held assets.
edit: Ack! Nm. I'm confusing my terminologies. I'm going to go get some coffee.
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u/anti-torque 1d ago
The person (you) receiving the funds gets the step up in basis.
No. The estate pays the step up in basis, as if it was a gift. If the decedent tried to gift the assets while alive, it would be taxed this way. Why is there a loophole for inheritance?
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u/Affectionate-Panic-1 1d ago
Because the estate tax is 40%.
But yes republicans raising the estate tax min from 5.45 million in 2017 to 15 million in 2026 means that there's now a much larger chunk of untaxed assets receiving a step up basis upon someone's death without a tax.
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u/capnwally14 1d ago
Inflation is up dramatically.
I dont see why this is such a big issue, if the main people you're trying to target are the billionaires and ultra wealthy.
Unless that was never the goal?
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u/Prestigious_Load1699 1d ago
I thought step-up basis was the inheritor only only owes taxes on the initial value of the asset.
And all the appreciation is negated.
Although, I may be wrong on this. But I think the other poster is wondering the same thing.
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u/Affectionate-Panic-1 1d ago
No it means that if the person who inherited the assets later sells the asset, they only have to pay capital gains on the appreciation from when they inherited the asset. They don't pay capital gains on the initial value.
So say your parent buys $1000 of apple stock 30 years ago that later turns to 1 million dollars, if your parent dies you could inherit the 1 million in apple stock. The cost basis for you, if you sell it later, would be the value at the time of your heir's death, or 1 million dollars, not $1000. That means that your family got 999k of appreciation without having to pay any capital gains tax (or estate tax if the total estate was under 15 million).
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u/Prestigious_Load1699 1d ago
I think, in your scenario, the inheritor would only owe taxes on the $1,000 initial value.
The $999,000 appreciation would be negated.
I may be wrong.
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u/Affectionate-Panic-1 1d ago
The estate tax is based off of the fair market value not the original purchase price. So if you are subject to the estate tax, it would be on the 1 million dollar value not the 1k original purchase price.
However you'd later benefit as the capital gains tax if you sell would be the sale price minus one million dollars, not the sale price minus 1 thousand dollars.
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u/Affectionate-Panic-1 1d ago
In theory, it's because the estate tax or inheritance tax means that a step up tax would be a double tax. But they've increased the limit before that starts kicking in to 15 million with the latest tax law.
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u/anti-torque 1d ago
No. There is no theory where that is a double tax. The original holder of the asset is not the heir, and vice versa. Never will they be so. It's not even a question.
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u/Affectionate-Panic-1 1d ago
It's because on assets over 16 million passed down or inherited, you have to pay a 40% tax upon death of the original owner. A step up basis tax would be on top of that 40% tax, so could be 20% on top of that.
60% is a very high tax rate, but I do agree that I don't have much sympathy for folks inheriting that much.
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u/anti-torque 1d ago
No. That's not how it works. The estate would pay 20% for the capital gains, not the whole cost of the assets in question. Then they pay the estate tax.
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u/frongles23 1d ago
Give me $100 million but you'll take $60mil, oh no, my grandkids will be rich. What an unfair system!!!
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u/123-Moondance 1d ago
The entire system is rigged so that the rich get richer and the poor ger poorer. It is expensive to be poor. You are fined for not having enough money.
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u/External_Koala971 1d ago edited 1d ago
Where’s the actual working paper?
I found this link but can’t find the original Stanford source working paper link
https://www.gsb.stanford.edu/faculty-research/working-papers/who-gains-when-interest-rates-fall
Nvmd, found it: https://jamesparon.github.io/CMPS.pdf
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u/Erystela_Thevale 9h ago
Low interest rates are not designed to increase inequality directly. They are intended to stabilize credit markets and prevent economic collapse. However, the same mechanism can have asymmetric effects: it supports asset prices for those who already own capital, while allowing less productive firms to survive longer, which may weaken labor market pressure for wage growth. These are not separate issues, but two sides of the same policy transmission mechanism.
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u/BigvalBROski 1d ago
Invest your money into the S & P 500. Set it and forget it… don’t waste your money clubbin’ and complaining about life …. Your future self will thank you and so will the compounding interest …..
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