To point out that this is a very, very, silly idea
Of course, given that it’s Robert Reich talking about economics and taxation is proof enough of that headline. But we’ve heard little whispers that some would like to think of doing this in Britain too. It’s an extremely silly idea:
If a wealth tax is not politically feasible, an alternative would be to end the “stepped-up basis” inherent tax rule that allows heirs to great fortunes to avoid paying a dime of capital gains taxes.
The step up rule is not about absolving people of capital gains taxes. It’s to make them subject to inheritance taxes.
To take a slightly stylised real world example. Jeff Bezos is, dependent upon the day and the hour, worth some $200 billion. Assume that’s all Amazon shares - it isn’t but just assume for a moment. We forget the actual number but upon incorporation of Amazon Bezos paid some $5,000 or $10,000 for his shares as his part of capitalising the company.
We can say whatever we like about the glory of capitalism in the returns available to those who enrich the rest of us or, obviously, as some do the rapine of the body economic by such concentrations of wealth.
But the step up basis. At the point of the death of Mr Bezos - long may he prosper, long in the future may that unhappy day be etc - what is the value of those Amazon shares? $5,000, the original purchase price? Or $200 billion, the current market value?
The step up basis is that death of the owner crystalises valuations to current market value. Values are stepped up from purchase to market value as the basis of evaluating the estate for inheritance tax.
Whether there should be inheritance tax or not is another matter. What the rate of such a tax should be equally so. But if there’s going to be an inheritance tax we’ve got to agree upon how we value what for the purpose of said tax. The step up basis is exactly that, market value at time of death.
Eliminating the step up means that the Bezos estate gets charged the estate tax on the $5,000. This is not a logically sound basis for such a tax.
That the inheritors don’t get charged capital gains tax upon what they inherit is a logical consequence of this. They’ve just paid 40% so the value at death is the starting point for any future tax liability.
It is, of course, possible to change this system. Perhaps no inheritance tax but CGT on assets inherited. Or the current IHT and no CGT.
Reich - and others who purport to support the abolition of the step up basis - never do seem to grasp that the point is to enable the taxation of the estate. And doing both - CGT and IHT - would have nominal rates at up around 80, 85% (they call for capital gains and income taxation to be equalised as well, so 40 to 45% plus the estate taxation of 40%) which isn’t a system that’s going to work.
”Those b’astards never pay CGT because muh step up basis” is good political rabble rousing but lousy, ignorant commentary upon either tax or economics. But, you know, Professor Reich……..
Tim Worstall