NO. If the rich person dies the value steps up on inheritance, And nobody pays capital gains tax. (Although they do pay inheritance tax, which basically makes the most sense when thought of as a stopgap measure to plug this loophole.)
As the article points out, the step up basis avoids double taxation. The estate tax is 40% of the whole value, regardless of gains.
The step up in basis also avoids a logistical nightmare, as it can be extremely difficult to determine the cost basis of an asset owned by someone who is now deceased.
If we're not taking in enough from inheritances, we should change how the estate tax works, but eliminating the step up in basis generally would just result in a substantial increase in administrative overheads.
Finally, to the extent that there is a problem with gains totally escaping taxation (e.g. via trusts)-- the article doesn't use any of its massive felony private violation to make a case for that.
Presumably you could “realize” gains upon transfers due to death, as you do with other transfers. Does it make estate handling a little more complex? Maybe a bit. But it mirrors other transfers, avoids punishing inherited earned income disproportionately, and avoids complex record-keeping requirements.
(In general, brokers and similar institutions track basis, so I don’t think the death of the owner makes determining the basis especially difficult.)
The “double taxation” argument makes no sense to me. If someone has a lot of wage income and leaves it to their kids, they will pay income tax and then the estate will pay estate tax. But if someone has a lot of capital gains and leaves the asset to their kids, nobody pays the capital gains tax because that would be “double taxation” (but only if they didn’t sell before dying). Why is capital gains protected from “double taxation” in this specific scenario but other kinds of income aren’t?
Because they already had the benefit of the income, while the gains are a fiction until the assets are sold. (and the overall tax burden for cap gains is already much higher than income, once you factor in corporate taxes).
I regret repeating the double taxation point, I agree it's the weakest point-- plus, if we want to double tax as a matter of policy, we can do that. Step up really just avoids a logistic mess.
I think regardless of where you think taxes on inheritance should be, we're much better off with the step-up. If we're not collecting enough decrease the thresholds or up the rates (and if we're overtaxing earned wages as a result-- provide a method to exempt some of those from estate taxes, it's an easier accounting issue that not having the step up in basis).
If you lowered the estate tax exemption to $50,000—-just enough to avoid having to value personal property—-then the step up basis rule would be fine. But at $11MM it’s a major loophole.
"sorry, I know you've spent the last 10 years living with your aging mother in her home, but now that she's passed away you'll have to sell it to pay the 40% in its value in estate taxes" -- not so attractive. :)
No one likes paying taxes. But the status quo you are advocating for is a major loophole. It allows for significant amounts of capital gains to never be taxed at all. That inappropriately favors capital over labor.
