Reagan was a wage earner. The “ultrarich” get their incomes from capital. I’m in favor of higher taxes for the ultrarich, but I don’t expect any behavior changes caused by higher taxes which would increase before tax income for the rest of us.
I think we could do fine with a progressive income tax, unless your goal is to just eliminate billionaires as a class.
One key component for the income tax solution is taxing unrealized gains.
That is not my goal, nor should it be the goal of a wealth tax IMO.
Correct. We are now talking about two different problems. 1- is the nature of the highest marginal tax bracket and 2- is taxing capital gains differently than wage income.
So to address your point, we can add a new tax bracket at $10M that raises the marginal tax rate to 90% if we wanted to. This wouldn’t affect the before tax income for the rest of us and would affect the high income earners.
My personal stance is that the highest marginal tax rate is too low for a top tax bracket and I think we should tax capital gains as normal income.
I also don’t think this is necessary. As long as we stop teasing the idea of eliminating the estate tax. That money will get taxed at some point, I don’t care when it is really.
However, there is the issue that people take out loans on these unrealized capital gains as a way to play games with income taxes. This shouldn’t be allowed. I’m not smart enough on this topic to know how we’d do it though.
I have no problem with NOT taxing unrealized gains, but the step up in tax basis on death should be eliminated.
I think timing matters a lot when we are talking about money payments.
I don’t recall stories about how Sam Walton’s family wealth shrunk dramatically after they paid estate taxes or capital gains taxes on his death.
I think that, given time for planning, wealth retention firms can devise strategies to avoid most taxes on transfers. The quote below is about estate taxes, I expect there are also strategies for cap gains taxes. (Note that the quote is from Goldman Sachs’ former COO. I expect he has a very good idea what their private wealth management unit accomplishes.)
Taxing unrealized gains produces money now.
There is a step up in basis when many assets are passed to my heirs. So if I take out loans against existing assets to use for whatever without paying taxes. When I die the estate pays off the loan with no income tax paid on the money. Whatever is left is passed to my heirs without the requirement to pay taxes on the funds because their taxable basis is the value when it is received. So it is as simple as eliminating the step up in non-taxable basis in the estate tax (this is extremely simplified from what actually happens but illustrates the point of basically what happens).
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This shouldn’t happen. We should eliminate this.
On the one hand, it’s a huge boon to the heirs and there’s no fundamental reason why they deserve a step-up in basis.
On the other hand, asking them to figure out the basis is nigh impossible in a lot of cases. I mean, maybe it should be $0, but that’s perhaps unduly harsh. But if my grandpa bought GE stock in the 1960s and passes it to me now, I have no freaking clue what he paid for it or how I’m going to begin to figure that out.
The step-up in basis makes compliance & enforcement a lot easier.
Brokerage firms are now required to make a bigger effort to track the basis and fewer & fewer people are holding physical stock certificates these days. I think it was around 2010 or so they tightened the rules on tracking basis. So down the road when there’s less and less stock out there with an unknown basis in the first place it might make more sense to revisit ditching the step-up in basis.
It’s not just stocks either. It’s real estate too, including family farms & homes. And once again, figuring out at least the purchase price on sales in the last 15 years or so is a lot easier than on much older transactions.
I’m sure some of you will cry foul at the notion that just because it’s hard on the beneficiary doesn’t mean we shouldn’t do it. But it’s hard on the IRS too… how are they going to disprove the stated basis?
Yes, it is hard. But does that mean the gains should be ignored? Suppose your grandfather sold some of his GE stock now. He would have to do something to determine a basis, and the IRS would need to accept it or disprove it (or challenge it).
Or Congress could codify rules that apply in the absence of a known basis. Perhaps that property acquired before 2000 has a basis of 50% of its eventual sale price, or (more complicated) 50% of its value on January 1, 2023.
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True, but if he’s alive it’s usually a lot easier. (Not true if he’s lost use of his faculties though.)
He might have some notion of which year he bought it, for example. And before DRIPs became common this was a lot simpler.
The most obnoxious stock transactions to deal with, by far, are ones where there was a DRIP but the broker is not tracking the basis, at least for the older shares. There was a period of about 15 years where that was normal and for stock acquired via DRIP during that period… 
Also, keep in mind, I’m looking at this purely from a cost of compliance perspective.
I already acknowledged that the beneficiary of the inherited stock has no reason to be entitled to a step-up in basis.
Another approach would be to limit the step up based on the amount of assets. Perhaps if aggregate estate is over $5 million, including step up, Fully allowed. Otherwise allowed, with a maximum step up of $5 million - value before step up.
The limit to be determined by Congress, but should (IMO) be less than the amount at which estates become taxable. I personally am not a big fan of estate taxes (am OK with them, but they are a tax only because of death. Totally different than the step-up, which is escaping taxes due to death. So I’m fine with some people eventually having to pay income taxes on gains even if they didn’t need to pay estate taxes.)
If grandpa sold his stock before he died, how would he establish the basis? If he kept records good enough for his purposes, they should be good enough for yours.
“But, I don’t know where to find them”. He planned ahead enough to make a will. If he’s so rich that he has stock he bought 60 years ago that he has never needed to sell, he should have his financial affairs in order enough to keep the records somewhere his heirs will find them. The heirs apparently found the stock certificates.
If it’s really that old, the basis is probably close to zero anyway. GE was selling around $2.50 in the 1960s, it is $63.00 today. So we’re talking about 4% of the current price.
In my state, real estate sales have to be reported to the state (tax stamps). Assessors keep records going way back. When my wife’s mother died, she got a record that went back to when the railroad sold the land in the 19th century.
Basis is just like any other deduction, like business expenses or charitable contributions. It’s the taxpayer’s responsibility to keep the records. If you don’t, you pay more taxes than you would have otherwise.
Inheritances are windfalls, very few people “deserve” them. If some lucky heirs pay a few percent more on the inheritance than they would have if the deceased had kept perfect records, they should be thankful they were lucky enough to inherit. They shouldn’t expect tax laws to wipe away the capital gains tax entirely because of the very low chance they will over pay a little.
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I’d pick a number far below $5 million (although, I’ll agree that $5 million is far, far better than unlimited).
What assets might ordinary people have when they die? Bank checking, saving, and maybe CDs – no issues with basis. Qualified retirement plans – no issues with basis. A house that’s not expensive enough to generate capital gains taxes. Or, it does, the assessor knows what the deceased paid for it. That covers 85% (?) of estates.
I could see allowing step up on $100,000 of assets, just to cut down on administrative work. That’s handy for the hobby collector.
Often times it’s a matter of the tax preparer saying “when did you acquire this stock” and grandpa scratching his head and deciding it was a gift from Great Aunt Myrtle when their third child was born in 1963, no wait, their second child in 1961.
Which month was the kid born? September? Ok. Tax preparer Googles the price of GE stock on September 1, 1961, checks for stock splits since then and backs into a price.
If Grandpa dies without telling me the story then I have no idea. There are no records… just what he can remember.
I would generally agree for most people not tied to agriculture.
However, most of the wealth of a farmer is tied to the land they own. And a small (viable) farm can easily hit this $5M mark; but the family usually will not have the liquid assets to cover the taxes based on the current threshold.
Yeah, this doesn’t happen. Half the time he probably forgot he had it and the kids discovered the stock certificates a year after he died when they’re cleaning out his attic.
You’d allow it for estates over $5 million? Am I reading your post right?
I can see capping it, certainly. Don’t ding the small folks but get the rich ones.
Yeah, that’s a pretty extreme example. Most inheritances go from parent to kid, so stuff is rarely more than about 50 years old.
But stocks bought in, say, the 1990s or 2000s had some real basis that’s still worth something today and a lot of those records are pretty shaky.