President Joe Biden and Senate Finance Committee Chairman Ron Wyden (D-OR) have proposed various ways to tax unrealistic capital gains each year. Their shared goal is understandable, with a trillion-dollar income tax exemption under current law. But each plan raises serious administrative and legal issues.
We suggest a simpler, more effective approach: tax the unrealistic gains of the rich at the time of death if the property is sold or given as a gift during life.
An unrealistic gain is an increase in the value of an asset, such as a stock that has not yet been sold. Taxing these profits is important because unrealistic profits now account for more than half of the astonishing amount of wealth of extremely wealthy Americans, with a net worth of at least $ 100 million.
The current law encourages rich people to retain their assets until death, when those profits are permanently exempt from income tax. This happens for two reasons. First, current law does not treat a will as a sale, so no income tax is required at the time of death. And, secondly, heirs are allowed on a “step-up basis” where they do not pay tax on the increase in property value over the lifetime of the deceased.
Outcome: Governments lose large amounts of revenue, wealth inequality persists for generations, and investors are encouraged to hold (or “lock-in”) portfolios that are unbalanced, and less productive.
More than 50 years ago, two leading tax experts described the failure to transfer property tax benefits at the time of death as “the most serious flaw in our federal tax system.”
To address this long-term error, our plan would impose a tax on unrealistic profits at the time of death of the very rich (couples with over $ 100 million and unmarried with over $ 50 million) at the tax rate for general income — currently 37%. But there is still a 23.8% tax on profits from the sale or gift of assets over a lifetime. Spouse transfer will be tax-free. And the very rich will be allowed to deduct their income tax from their estate tax at the time of death.
Our proposal turns the existing incentive for the acclaimed asset in his head. Instead of encouraging them to retain their valuable assets until death to avoid income tax, our proposal encourages them to sell these assets before they die.
For example, imagine an entrepreneur who owns $ 100 billion in his company’s stock, for which he paid nothing when he founded the firm. Under our proposal, if he retains his stock until his death, he will have to pay $ 37 billion in income tax. But if he sold it in his lifetime, he would owe .8 23.8 billion. And if he wants to transfer his stock to his children without paying 37 37 billion, he can give them the stock in his lifetime and pay $ 23.8 billion.
To determine the reach of our proposal, Robb reviewed data from the 2019 Survey of Consumer Finance, which he combined with Forbes 400 data (excluded from the survey). He estimates that subject to our proposal, taxpayers will receive about $ 7.5 trillion unrealistically in 2022.
If these families realized লাভ 6 trillion of their $ 7.5 trillion profit in their lifetime and the remaining $ 1.5 trillion at the time of death, our proposal would increase by about $ 2 trillion over time. In just the next 10 years, our plan could raise hundreds of billions of dollars, just like Biden and Wyden’s plan. (Our plan may eventually raise more than that, because at the time of death our tax rates are higher than Biden and Wieden.)
For simplicity, we assume that unrealistic gains do not increase over time, which probably makes our assumptions conservative.
Taxing wealthy families on their unrealistic gain in death is much easier to manage than Biden or Wyden’s annual tax plan. Our plan will rely on existing estate tax returns, and assessments that the rich already file, while Biden and Wyden’s plans will impose new annual filings for taxpayers in their lifetime. While few taxpayers will pay Biden or Wyden taxes, many more will have to pay the value of all their assets annually, as taxpayers closer to the line can move in and out of the regime over time. How will the IRS determine if all these taxpayers have filed correctly?
Finally, our proposal to collect taxes on transfers by gift or will is well-established under the U.S. Constitution, but raising taxes outside of their lifetime transfers raises unresolved legal issues.
Today, older, richer taxpayers often hang on to the admired assets of their lifetimes, awaiting their transfer at the time of death. Our plan encourages them to realize real-time profits, which can lead to a better balanced portfolio, expand ownership of these assets and generate much-needed tax revenue.
A joint venture between Steven M. Rosenthal and Robert McClelland, senior fellow at the Tax Policy Center, the Urban Institute, and the Brookings Institution. It was first published on the TaxVox blog – “Taxing Capital Gains on Death at a Rather Than Life”.