Eeeeeenteresting, especially given the necessities of reconciliation in the Senate. Joe Biden campaigned on finding ways to hike taxes on the wealthy in order to fund his big spending agenda, and Democrats have long demanded an expansion of the estate tax for that purpose. Right now, the White House and Chuck Schumer desperately need pay-fors to get those bills through the Senate on reconciliation as a means of getting around Republican filibusters.

However, Bloomberg reported last night that the expansion of the so-called “death tax” is itself pushing up daisies, at least for now:

President Joe Biden and his economic team are planning to forgo an expansion of the estate tax in the administration’s coming individual tax-hike proposals, according to people briefed on the plan.

Biden during the 2020 campaign pledged to increase the estate tax, along with raising rates on capital gains and corporate income, as part of an effort to force companies and the wealthy to pay a greater share of federal revenue. But the estate-tax boost won’t be part of the funding measures in the “American Families Plan” the president will unveil Wednesday, the people said, asking not to be named as the plan isn’t yet public. …

The exclusion of a hike in the estate tax is noteworthy to both progressive groups and liberal economists, because Biden had made taxing the rich such a central part of his campaign and presidency — and advocates view an estate-tax hike as one way to dismantle wealth passed along within families that’s often not subject to taxation.

The capital-gains tax hike will remain in the package, but it’s not going to be popular either. Democrats have become the party of Wall Street themselves, and the professional investor class lives off of capital gains rather than income. Their donors will demand all sorts of loopholes to avoid increasing their tax burden, while Republicans will correctly oppose it as an attack on risk-taking and economic growth. We tax capital gains at lower rates to incentivize investments, especially in riskier ventures that can pay off in jobs, economic growth, and innovation for future expansion.

This is a curious choice for that reason specifically. Biden needs rapid economic growth, politically speaking even more than he needs the short-term revenue these changes would bring. He can’t afford three years of weak economic recovery in the way that Barack Obama managed to barely survive it in 2012. By hammering capital gains, Biden risks sending that investment power into savings or shelters rather than making it work for him, and the result will be a sharp contrast to the first three years of Donald Trump’s economy when the midterms and the 2024 presidential cycle rolls around.

It’s odd for another reason. Progressives wanted higher taxes in both directions, but probably would prefer an estate-tax expansion over the capital-gains hike, as they see the estate tax exemption as too much protection for established wealth. Republicans spend a lot of time talking about the “death tax” on the principle of double taxation — again, correctly — but the estate tax touches very few voters personally in the US. These days, I’d guess that the majority of voters it does touch are Democrats, or at least not Republicans. That could change significantly depending on how much those exemptions are rolled back, but even at the 2010 level of $1 million (as opposed to $11.7 million today), not too many Americans will run afoul of federal estate taxes. The impact on voters is much more broad in the capital-gains tax hikes, even if it’s not entirely direct.

However, Bloomberg points out that Biden wants to make a change to capital-gains tax calculations for estates that will impact a lot of voters, and not in a good way:

Ending “step up in basis,” which allows heirs to use the market value of assets at the time of inheritance rather than the actual purchase price as the cost basis for capital gains when the holdings are sold, would mean much higher tax bills for wealthy estates. Congressional Democratic proposals have exempted a share of assets from tax — one Senate plan provides for $1 million — but the specifics of Biden’s measure aren’t yet clear.

Kelly Johnston explains how that could impact smaller investors and homeowners (via Matt Vespa):

Say you’re a 60-year-old almost-retiree whose 90-year-old parent just passed away. You are bequeathed their Florida home acquired in 1980 for $100,000. Its value is now $500,000. Hopefully, it won’t be complicated by a reverse mortgage or isn’t burdened by other forms of leveraged debt. You sell it for $500,000. Thanks to “stepped-up basis,” you should owe no federal capital gains tax on the sale.

But what happens if all this happens after Democrats eliminate this so-called “loophole?” You’ll owe capital gains taxes on the gain in value since the property was purchased 41 years ago, most of which is probably inflation. That’s a likely 20 percent tax hit on the “gain” of $400,000 – some $80,000 to Uncle Sam. For people with incomes over $1 million, Biden may raise Capital Gains taxes to match the highest personal income tax rate of 39.5 percent.

The Biden plan may exempt the first $1 million of “unrealized” gains, but that’s a shallow threshold for many family businesses and farms. And it is not just homes or beach property. It includes stocks and family businesses.

Being allowed to keep your or your family’s own money is now a “tax loophole.”

Biden proposed a level of $3.5 million for a new exemption during his campaign, which would cushion this impact but hardly eliminate it entirely. If Democrats combine that threshold with an elimination of inflation indexing on capital gains in relation to estate taxes, it would be a back-door method of getting to the same money. And it would take place with such stealth that those who get caught by it will almost certainly experience it as an ugly surprise in the middle of their grief.

That’s not exactly a winning formula for elections. Biden’s got no one to blame but himself for having a range of bad options to fund his hobby-horse spending agenda.