President Obama’s proposed changes to inheritance and capital gains taxes could raise the estate tax rate in the U.S. to the highest in the industrialized world.

The plan, announced during the State of the Union address, would eliminate what is called “step-up basis at death” on capital gains taxation. And the top capital gains rate would jump to 28% from 20%.

Under current law, when a parent or grandparent dies, the increase in the valuation of his or her asset from when it was originally purchased is not taxed.

This is to offset the effects of the estate tax.

Obama’s plan would tax estates and impose the regular capital gains tax on inherited assets – a business, property or stocks.

This could bring the effective death tax rate to 57%, according to Dick Patten, chairman of the American Business Defense Council.

Including state inheritance taxes, the rate would average 65% but could go as high as 68%.

Of 38 industrialized countries tracked by Ernst & Young, only Belgium would have a higher death tax, at 80%. But Belgium provides a lower 60% rate to immediate family members.

Add in state estate taxes, and the U.S. would have the highest rate in the world. At least a dozen nations, including Sweden, Russia and China, impose no death tax at all.

The Obama proposal would raise about $200 billion over the next decade, according to White House projections. Spouses would not have to pay the tax, but other family members, including children, would.

‘Dagger’ For Family Firms

“The Obama plan is effectively a dagger in the heart of family-owned businesses,” said Patten, who is leading an effort in Congress to eliminate the death tax altogether. “If the tax were to ever get this high, most family businesses would have to be sold at the time of death in order to pay the taxes owed. This seems almost un-American.”

In many plans to eliminate the estate tax entirely, the step-up basis at death on capital gains would go away. So heirs would have to pay only the capital gains tax rate (now 23.8%) on the increase in the valuation of an asset once it is sold.

What makes the Obama plan shocking to estate-tax planners is that he would tax the estates as capital gains and as an inheritance – a double-tax whammy.

Making matters worse, the new plan to soak the rich would continue to raise the capital gains tax. When he entered office, it was 15%. He imposed an income-tax surcharge of 3.8% to help pay for ObamaCare. Then he raised the rate an additional five percentage points as part of his tax increase on the rich in 2012.

Obama has proposed raising that 23.8% rate to 28% – the highest since the late 1980s and nearly double the rate when he entered office.

Not Just The 1%

Obama has been trying to sell the plan on rich-vs.-poor rhetoric. The White House fact sheet on the plan begins by saying: “Our tax system has changed over time in ways that make it easier for the wealthy to avoid paying their fair share.”

The administration calls the step-up basis at death policy on capital gains “perhaps the single largest loophole in the entire individual income-tax code.”

What the White House has not acknowledged is that under its proposal to end the “trust fund loophole,” hundreds of thousands of families with small or midsize estates would get hammered with the Obama death tax, according to estate tax planners.

Under current law, estates of less than $5 million are exempt from estate taxation. Under Obama’s plan, the new capital gains tax on inherited assets would exempt only the first $200,000 of inherited assets for a married couple and only $100,000 for singles.

Take a daughter who inherits from her deceased father a family home worth $1 million. If she sells the home, and it has risen in value by, say, $500,000 from its original purchase price, the first $250,000 of gain is tax-free.

But the woman would have to pay a 28% tax on the rest of the $250,000 net gain. She would have to write a check to the IRS for about $70,000, whether she is rich or not. This means that many estates with an asset appreciation valuation of $250,000 to $5 million that are not currently subject to tax now could be.

“So much for only taxing millionaires and billionaires,” said Grover Norquist, president of Americans for Tax Reform. “This looks like yet another Obama tax lie.”

For those who are rich, the combined estate and capital gains tax for major estates could reach more than 60%. “This isn’t fair,” Patten said, “because remember, the income was already taxed when it was originally earned.”

Steve Forbes of Forbes magazine calls the estate tax “an indefensible double tax on family businesses. It runs contrary to the American ideal.” Meanwhile, Republicans in Congress are moving ahead aggressively with a plan to eliminate the estate tax altogether.

“This is Obama’s way to try to head off our estate-tax repeal legislation,” said one GOP staffer on Capitol Hill. “But we are very close to having the votes in the House and Senate now to get rid of this hated tax.”

Republicans point to a 2012 study by the Joint Economic Committee that found “the estate tax has reduced the amount of capital stock in the U.S. economy by roughly $1.1 trillion since its introduction as a permanent tax in 1916.”

It also concluded the tax “is an overwhelming cause of the dissolution of family businesses. The estate tax is a significant hindrance to entrepreneurial activity because many family businesses lack sufficient liquid assets to pay estate tax liabilities.”

The issue and coming battle over the estate tax highlights the deep ideological divide between the Republican Congress and the Obama White House: The GOP wants to get rid of the death tax; the president wants to nearly double it.

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Republished from The Heritage Foundation.