Tax Capital Gains At Death At A Higher Rate Than During Life

President Joe Biden and Senate Finance Committee Chair Ron Wyden (D-OR) have unrealized capital gains each year. Their shared goal is understandable, with trillions of dollars escaping tax revenue under current law. But each plan raises serious administrative and legal problems. My colleague, Rob McClelland, and I suggest a simpler, more effective approach: Tax unrealized gains of the wealthy at death at higher rate than assets are sold or given as gifts throughout life.

The unrealized gain is the increase in the value of an asset, like stock, which has not yet been sold. Taxing these gains is important because of unrealized gains.

When those gains escape income tax permanently. This happens for two reasons. First, current law does not treat a death and no income tax is due at death. And, second, heirs are allowed a “stepped-up basis” where they never pay tax on any increase in the value of property during a decedent’s lifetime.

The results: Government loses a huge amount of revenue, wealth inequality is perpetuated through generations, and investors are encouraged to retain (or “lock-in”) poorly balanced, and less productive, portfolios. More than fifty years ago, “the most serious defect in our federal tax system.”

To fix this long-standing flaw, our plan would be unrealized (couples with more than $ 100 million and singles with more than $ 50 million) But profits from assets or assets would be taxed at 23.8 percent. Transfers to spouses would be tax exempt. And the very rich would be allowed to deduct their income taxes at death from their estate taxes.

Our proposal turns the existing incentive for appreciated assets on its head. Instead of encouraging people to hold their assets until death, we recommend that they sell these assets before they die.

For example, imagine the entrepreneur who owns $ 100 billion of his company stock, for which he does nothing when he founded the firm. Under our proposal, if he holds his stock until death, he’d owe $ 37 billion in income tax. But if he sells during life, he would owe $ 23.8 billion. And, if he wants to transfer his stock to his children without paying the $ 37 billion, he could give his stock to them during his life and pay $ 23.8 billion.

To determine the reach of our proposal, which is reviewed in the 2019 Consumer Finances survey, which is combined with Forbes 400 information (which is excluded from the survey). It is estimated that taxpayers will be totaling about $ 7.5 trillion in 2022.

If these households realize $ 6 trillion of their $ 7.5 trillion at their lifetimes, and the remaining $ 1.5 trillion at death, our proposal would raise almost $ 2 trillion over time. Over the next 10 years alone, our plan could raise several hundred billion dollars, just like Biden’s and Wyden’s plan. (Our plan could raise more than the last, as our death rate is higher than Biden’s and Wyden’s.)

For simplicity, we assume our estimates are conservative over time, which likely makes our estimates conservative.

Taxing the wealthiest households on their unrealized gains at death is much easier to administer than Biden’s or Wyden’s plans to tax them annually. Our Boundary and Wyden’s plans would require new annual filings for taxpayers during their lifetimes. While few taxpayers would pay Biden’s or Wyden’s tax, many more would be needed every year, as taxpayers close to the line might move in and out of the regimes over time. How would the IRS determine if all these taxpayers filed properly?

Finally, it is not possible to receive taxes under the US Constitution, but to collect taxes outside their lifetime.

Today, older, wealthier taxpayers often hang on to assets during their lifetimes, waiting to transfer them at death. Our plan encourages them to realize gains during life, which could lead to better balanced portfolios, broaden ownership of these assets, and generate much-needed tax revenue.

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