The tax on unrealized capital gains

by Tyler Cowen October 25, 2021 at 9:17 am in

Maybe I don’t understand how the supposed plan is supposed to work. There is no tax credit for unrealized capital losses, right? So you won’t want to hold volatile asset classes any more, right? Imagine the value going up, you pay some tax, and then the value falls and you move into loss territory. You still paid the tax! You get nothing back. By exactly how much do the prices of these assets have to fall, ex ante, so that holding them is a good idea in the first place? Or maybe the wealthy investors subject to this tax are not significant enough to on their own move market prices, in which cases they are just pushed out of these very risk asset classes?

If you can deduct unrealized losses, just how much revenue will the bill raise? Might the wealthy be incentized to hold ever yet riskier assets in that case? And how will debt assets be treated? What exactly is equity anyway? Do all options and derivatives positions have to be considered as well? (If not there is a massive arbitrage opportunity, hold some assets with a big chance to take losses but hedge your position with derivatives.)

Has anyone estimated all this and figured it out? Should we pass such a tax bill without such estimates and public debate? Isn’t that kind of democracy "good"? What would The Party of Science say?

What am I missing here?

Comments

Zaua

2021-10-25 09:26:54
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According to the NYT write-up, you would be able to deduct unrealized losses: https://www.nytimes.com/2021/10/25/business/dealbook/democrats-capital-gains-tax.html. Also this tax would apply only to billionaires or people with $100m+ reported income for three years in a row. It is probably a reaction to the revelation that Peter Thiel stuffed $5 billion of capital gains from equity offerings that weren’t available to the general public into a tax-free Roth IRA.

This also seems extremely unlikely to pass. Democrats haven’t even been able to repeal the step-up basis, even though repealing that would just result in inherited assets being treated the same as non-inherited assets, require no new administrative burdens, and obviously increase the fairness of the tax system. If they can’t even grab that low-hanging fruit, they aren’t going to pass a new tax on capital income that would require a new bureaucracy to value people’s wealth every year.

Zaua

2021-10-25 09:35:20
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The other issue, addressed in the NYT write-up, is that many rich people follow a "buy, borrow, die" strategy, where they never realize their gains by selling their assets but instead borrow against them. When they die, their gains go to their heirs and become tax-free through the step-up basis. Thus, they end up never paying any taxes on capital gains.

The idea of only taxing capital gains at realization is good but is premised on the idea that people will inevitably realize their gains at some point. If people now commonly use a strategy that prevents them from ever realizing any gains, then it’s understandable that people would be thinking of reforms (especially when that strategy isn’t really available to the middle class). Taxing unrealized gains would be an administrative disaster so I’m against it, but they really should figure out how to prevent people from never paying taxes on their gains (such as repealing the step-up basis, like-kind exchanges, etc. and automatically taxing capital gains at death).

Vangel Vesovski

2021-10-25 09:46:57
46 -8
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Why is it good for government to tax gains?

davie

2021-10-25 12:34:58
10 -6
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Would you prefer for them to tax labor?

Neurotic

2021-10-25 17:12:31
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Neither. Tax income. Tax luxuries (their sale/purchase). I don't see how even talking about taxing paper gains is rational. Why not tax charisma? popularity? intelligence? strength? beauty? (or any other abstract characteristic - BMI, age, educational attainment, ... ).

Hateful Hornytoad

2021-10-25 14:27:18
0 -5
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To be able to pay for government-provided goods and services

BoatSchool

2021-10-25 17:07:43
5 0
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As opposed to, say,

1) killing off the zombie government programs that have been in existence for years, often decades, without definitive proof that they actually accomplish stated goals.

2) pare back the severe administrative bloat to administer these programs.

3) stop authorizing new discretionary (as opposed to real emergency) programs until those currently authorized are running reasonably efficiently.

For politicians and government employees (and the whole rent-seeking ecosystem that they live within) the need for more money is insatiable. Looking out for the dwindling number of actual taxpayers ? Not so much.

waltonb

2021-10-25 10:20:54
11 -17
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/// "Has anyone estimated all this and figured it out?" TC ///

... we need to develop an expert professional class of analysts to do this.

We could call them "economists"

Nobody in the world has ever seriously analyzed taxes, tax policy, tax efficiency, tax options, etc, etc.
A Google search turns up nothing on such tax issues.

Maybe we could get some PhD Anthropologists to start looking into these tax issues, as a sideline?

Jayson

2021-10-25 12:44:34
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I'll trust your Google, but reams have been written by Policy people trying to accomplish this or that end. Historically taxes have mostly fallen on those with the least power to protect their interests. But the REASON to tax is always the same - to get money for the government to operate, from Kings to Democracies the reason remains the same. I'm a fan of flat across the board taxes, say 15% of ALL income above $26,000 (right now) with absolutely NO deductions, exclusions or hideyholes. Set all Business tax at 5% on all income without any deductions, offsets or loopholes. Since a lot of real economic activity is on Wall Street, a 0.01% tax on all trades would catch the "loose change" so to speak. Much of the trading is done by algorithms these days, written by individuals with different "go" buttons, formula, and objectives. This trading is so fast that your computer's location relative to a node makes a difference. A transaction tax may slow this down to a more reasonable speed, and possibly smooth out some of the distortion. Get someone to brief you on what is included, and at what weight, in those algorithms. It will curl your hair.

y81

2021-10-25 16:29:30
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When you refer to business "income" I presume you mean net income. A lot of businesses don't have 5% profit margins, so a 5% tax on receipts would put, say, the typical supermarket out of business. Now we just need to figure out what net income is. How do we value inventory? What items count as expenses versus capital expenditures?
Is there an allowance for depreciation? (If not, look for capital to flee businesses with high fixed investment.) Etc.

Perplexex

2021-10-25 21:44:13
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Not sure if this comment is ironic or real. In case it is real: I am not sure what search terms you put on Google, but the theory of taxation is on the largest fields of economics.

Lectures on Public Economics: Updated Edition by Anthony B. Atkinson and Joseph E. Stiglitz (yes, that Stiglitz) is a standard textbook with nearly 600 pages covering the classical results on the field (including whether and when is a good idea to tax unrealized capital gains). One could, however, probably fill another 600 pages with the results developed after Anthony B. Atkinson and Joseph E. Stiglitz's textbook came out.

Jayson

2021-10-25 13:00:19
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Think of all the infrastructure, military might, Trade Agreements etc that allows you to make that profit. You're not doing it in a vacuum.

Julien Lafleur

2021-10-25 14:08:46
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I think this is a bit of a red herring.

All the things you list above come in at $1.6T in 2020, as compared to revenues of $3.4T.

In other words, the things you mention, the things we all use, are more than paid for by taxes.

We get into fiscal trouble because of Social Security, Medicare, Medicaid, and debt service which is about $2.5T. (Note that 2020 is a weird year because of COVID.)

While you can argue that we should pay for SocSec, Medicare/caid first then for all the rest, it is a bit disingenuous to use the "you didn't build this" line. The infrastructure was there from the beginning and the fact that no one made a plan to pay for it only demonstrates the fecklessness of our government.

joan

2021-10-25 10:30:20
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Corporations turn income and dividends into capital gains by using profits to buy back shares and with a little effort most individuals can also avoid incomes taxes if capital gains are not taxed.

Vivian Darkbloom

2021-10-25 11:09:43
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Current tax law taxes qualified dividends and long-term capital gains at the same rate.

Bill

2021-10-25 13:04:59
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If you are an executive with stock options there is a difference between having stock price go up from corporate stock purchases or receiving a dividend. And, if I do not sell the stock, there is no capital gains tax until I do.

Continue this thread →

joan

2021-10-25 18:49:52
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When dividend were taxed like ordinary income firms paid a smaller faction of their profits as dividends which worried economists so the changed the law . If the tax on capital gains were zero , do you think they would still pay dividends?

Bill

2021-10-25 14:13:15
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Vivian, In my reply below I linked to Investopedia to explain paying tax on dividend income in Year 1 and capital gains upon sale in Year 20.

Jonatan Pallesen

2021-10-25 09:50:39
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Seems pretty simple to tax capital gainst at death. Especially in comparison.

God of Thunder

2021-10-25 10:19:27
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That settles it, I’m not going to die.

Boris_Badenoff

2021-10-25 10:25:19
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Devastating for family-owned small businesses, farms.

Bill

2021-10-25 11:01:39
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Also, Boris, you probably don't know about 1031 exchanges either. They also escape "realization" as a taxable event. Another great way to avoid taxes. https://www.cpec1031.com/?gclid=EAIaIQobChMI3IPa6-nl8wIVanxvBB2xAwAPEAAYASAAEgLRPPD_BwE "CPEC1031, LLC is dedicated to helping owners of businesses and investment property defer their capital gains taxes on sale of property under Section 1031 of the Internal Revenue Code. Our team of tax professionals and third party administrators is equipped to facilitate your 1031 exchange of real estate".

ben

2021-10-25 11:22:20
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What a vexing problem.

So hard to solve.

Impossible to just say "50% of wealth over (((some figure that heirs could easily live off of perpetually))) gets taxed at death"

Must do Chavezism since this problem so hard.

Victoria Gray

2021-10-25 13:35:01
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Please keep in mind that your statement " when people die their gains go to their heirs and become tax-free through the step up basis" only applies to the amount of the estate tax exemption so if your estate is worth over the current $11 million exemption you will pay a combined state and federal estate taxes close to 50% in many states. This sweet spot is destined to shrink under Biden. I believe like kind exchanges are very good for the economy because it keeps $$$ moving throughout the economy because transaction costs or so high and additional spending is triggered that wouldn’t occur if the asset was not exchanged up

Bill

2021-10-25 10:33:13
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Oh, really.
I had an uncle, a bachelor farmer, who never paid taxes because he always invested in farm equipment, much of which he never used. At his death, I got a good deal of money, and wondered why the gains were not taxed. Never took the trust and estates tax class.

As for the family owned business, what would happen is that you would buy life insurance during the term of the owners life to cover the taxes if you wanted to maintain it as the farm.

It's not fair to tax people who get a W-2 income differently than those who own assets and have discretions to decide how much they themselves are paid, and how much they can borrow against the assets to life a life in Florida. This is simple tax fairness. If you want to borrow against the assets, that could be treated as a realization event.

Also, as for farms, and other small enterprises, there is an exclusion before the estate is taxed.

sort_of_knowledgeable

2021-10-25 11:24:19
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Presumably the inherited money came from something other than farming or else you would have just inherited a lot of unused farming equipment.

You can buy term insurance cheap when you are 30 since you can be expected to not die and let the term insurance lapse. Insurance might be an alternate way to have invested money grow tax free for heirs, but you can't buy cheap term insurance when you are 65 to pay estate taxes otherwise the insurance company would lose money.

Continue this thread →

Bill

2021-10-25 11:52:33
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Sort of, The farm and the equipment was sold. He had just kept putting money into buy farm equipment, tractors, snow mobiles, trucks, etc.

dan1111

2021-10-25 10:03:07
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It seems like fixing stepped-up basis should be a relatively straightforward solution.

I get why a total stepped-up basis repeal would be unpopular, since it would hit millions of people. But I don't understand why a proposal like Biden floated, with a large exemption so that it doesn't hit most people, would not pass. It seems far preferable to the nonsense idea of taxing unrealized gains.

George Oh-well

2021-10-25 15:51:33
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I'm pretty sure that breaking stepped-up basis will almost certainly lead to capital hording and renting out that capital for regular income rather than taking a massive tax penalty in selling the capital.

dan1111

2021-10-25 16:30:15
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Not sure I follow. Could you give a real world example of how this would be used to avoid taxes?

George Oh-well

2021-10-25 19:39:17
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Say someone's parent passes, they inherit a house in a location that was purchases 60 years ago at $150,000, but the market value is now close to a million dollars. With stepped-up basis, they sell the place and realize almost all of the revenue from the million dollar sale or they could list it for rent and readily clear $2000 a month if they're exceedingly generous. However, without the stepped-up basis, they're getting the capital gains tax of someone who makes $700,000 for the year of sale (it gets significantly worse if they decide that it's going to be a short-term capital gains) and suddenly they're looking at walking away with $140,000 less (bare minimum) and the option to rent it for steady income looks better, especially in the face of the psychological factor of having to write the check to the government. Selling will be even less likely in cases where a grandparent passes right before a child goes to college, especially in families with relatively low income because that will ruin their ability to file for Pell grants, etc as well as any other assistance or favorable tax treatments the family already receives. The effect would also be strongest in areas where home prices have risen the most, further constraining available land in places where it is clearly needed.

BC

2021-10-25 10:02:55
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"that strategy isn’t really available to the middle class...Taxing unrealized gains would be an administrative disaster"

The obvious solution is that we should just stop taxing capital gains for everyone especially since, when comparing two people of identical lifetime wage earnings, the capital gains tax penalizes the one that saves more. That would be the most "fair" solution. The only thing preventing us from doing so is that we would give up the ability to penalize middle class people for saving (since the claim is that the "wealthy" have all sorts of ways to avoid capital gains taxes). Is punishing middle class savers really worth all the "administrative disasters" of the capital gain tax?

Sam

2021-10-25 11:01:20
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I think that capital gains and dividends should simply be taxed as ordinary income. Then expand the Roth IRA contribution limit to $100k a year or something and remove the income cap. That way, most people will be able to invest for retirement tax-free, but the ultrawealthy will pay reasonable tax rates.

OldCurmudgeon

2021-10-25 12:16:45
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I tend to agree that magical number we call "adjusted taxable income" is essentially arbitrary the wealthy (i.e., high net worth).

But the *obvious* solution to that problem probably is to replace the income-based tax with a VAT, national sales tax, or other form of consumption tax. And/or a land value tax.

Mike

2021-10-25 18:26:17
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Doesn’t a land value tax have the same issues as an unrealized capital gains tax, but with the added issue of appraisal accuracy? I’m constantly amused by seeing property appraisals that are off by an order of magnitude.

OldCurmudgeon

2021-10-25 22:11:31
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I'll concede that point. But, in practice, I think most of the disagreements are over the improvements, not the value of the land itself.

Ricardo

2021-10-25 10:43:53
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The low long-term capital gains rate provides hedge fund and private equity managers with one of the most notorious tax loopholes out there. I can't figure out whether hedge fund and private equity people are heroes or villains to which side of the political spectrum these days but repealing the capital gains tax without making reforms to the way fund managers book performance fees means you will give them a way to earn income that is 100% tax free. People in lower income brackets benefit greatly from the Roth IRA, which allows them to invest $6k after tax per year and never pay any taxes at all on capital gains or dividends.

John Hawkins

2021-10-25 14:59:10
1 0
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Most fund managers I know would be fine with trading carried interest for capital gains (I'm not sure if they've "done the math" but they understand the philosophical arguments on the carried interest side and hate the capital gains tax philosophically almost as much as they hate corporate income taxes due to the distortions it causes)

joan

2021-10-25 11:10:56
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People who consume instead of save are "penalized" by paying sales taxes which people who save do not pay.

George Oh-well

2021-10-25 15:12:44
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The biggest problem is that savings make you less likely to rely on the government, so we need to make sure to punish savers as much as possible.

BoatSchool

2021-10-25 12:38:46
2 -1
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As you well know sales (w/the exception of Federal gasoline taxes) fund local/state governments, not the Feds.

As you also know, wealthy people and those alleged tax cheats, small businesses, also pay sales tax - likely far more in absolute dollars than "consumers".

Finally, as you know, Federal income tax is the way Federal tax payers (and not all tax return filers actually pay tax) fund the Federal government which provides the overall governmental structure under which all in the United States live. I trust you’ve done the easily-googled tax distribution that shows the top deciles of tax payers pay a disproportionately higher share of Federal income tax and a higher share of Federal income tax than their share of income.

Zach

2021-10-25 17:02:21
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A reform focused on "buy, borrow, die" could be much more narrowly tailored, though.

For example:
1) Borrowing against an asset is realizing the value of the asset. Tax the value at which the loan is made.
2) Transferring an asset at death is realizing the capital gain. Capital gains taxes are assessed first, then the estate is taxed at normal rates.
3) Donating the asset to a trust or charity is realizing the capital gain ...

Simply fixing the definition of "realizing" the capital gain would get you most of the way there. The point where the asset should be taxed is when the owner stops holding it passively and starts using it for its economic benefits by selling it, borrowing against it, or giving it to someone else.

Dave

2021-10-25 19:17:44
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My best guess is that the political prospects of #3 for charitable donations are close to zero, despite policy merit to the idea.

Charities love this provision as a way to incentivize big gifts from donors. It also seems that use of this tax benefit is increasingly being adopted by the upper middle class through use of donor-advised funds ( https://www.nptrust.org/reports/daf-report/ ).

Dave

2021-10-25 19:34:16
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If anyone wants to start down the path of item 1 as a principle in the tax code, there needs to be a lot of thought about the details and where it ends.

Is the plan to apply this to all secured loans? If so, does that mean proceeds of non-purchase loans against residential real estate (home equity lines, reverse mortgages, etc.) are now taxable? And how do we deal with revolving lines (whether margin loans or HELOC's) that people periodically draw down and repay?

Does this treatment apply to loans within a business (either C Corp or pass-through)? If so, I don't see how that's workable without massively increasing the cost of business borrowing. If not, the differences in tax treatment between businesses and individuals seem like a good target for figuring out structures to avoid this tax?

Does this tax treatment apply to unsecured personal loans? If not, I assume that really high net worth individuals are still a good credit risk - up to some % of net worth - on an unsecured business. (E.g., lending Jeff Bezos or Warren Buffett $1 billion even on an unsecured basis still doesn't seem very risky.) So there's one big workaround. If not, are we going to apply this same tax treatment to unsecured personal loans ranging from credit cards to student loans.

Mike

2021-10-25 11:36:23
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Isn’t "buy, borrow, die" already a wealth tax that goes to lenders instead of the government?

OldCurmudgeon

2021-10-25 12:18:30
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I'm pretty sure the government charges higher rates.

ES

2021-10-25 17:16:29
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> but they really should figure out how to prevent people from never paying taxes on their gains

Why tax capital gains in the first place? Maybe there's a fundamental flaw with that idea, which is causing this game of whack-a-mole attempting to stop people from dodging out on paying those taxes.

Taxes do two things - raise revenue, and change behavior.

Taxing capital gains changes behavior in that it discourages some savings (investment in capital) on the margins, which in turn depresses overall economic growth. Why would we want to do that?

If we want to change the distribution of wealth, maybe consider ways to do that directly, on purpose, and not as a side effect of a policy depressing growth rates.

There are other ways to raise revenue that don't as badly or directly depress economic growth. Consumption taxes seem to shine here. Perhaps they're too regressive. Why not consider a Land Value Tax instead? If we're ok with imagining a better world for a second, why not take a consumption tax, but make it progressive by using bank records (or blockchain) to track inflow and outflow of dollars?

This hyper fixation on the few ultra-wealthy isn't good for politics and it isn't good to sculpt tax policy essentially with jealousy as the driving motive.

Steve-O

2021-10-25 12:25:52
2 -1
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The buy, borrow, die strategy doesn't avoid taxes unless you're below the threshold for taxable estates.

Ska

2021-10-25 12:42:52
1 0
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It works - liabilities reduce the asset value to the estate and taxes are only due on the net equity. A $25M property with $25M in debt would net to zero for estate tax purposes, though you'd theoretically have a taxable estate.

Tester

2021-10-25 12:54:30
0 0
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Uh, that is a zero value position. It may be put on to avoid selling another asset, which unlike the zero position you cite, should be subject to estate taxes.

dan1111

2021-10-25 14:07:04
1 0
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The point of the scheme is to access and spend your money without paying capital gains taxes. If you borrow $X against an asset and spend it all, you have successfully converted that $X to usable income without paying any capital gains taxes on it.

Further, the $X you have borrowed counts against your estate tax liability, so you also haven't added anything to your estate tax bill by making this move.

Yes, you might still have an estate tax liability on other assets. But that is not the point here.

Continue this thread →

Mike W

2021-10-25 16:01:42
1 0
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"When they die, their gains go to their heirs and become tax-free through the step-up basis. Thus, they end up never paying any taxes on capital gains."

Actually, they pay Estate Tax (at about 40%) on the value of the assets less the relatively small (for them) exemption, that go to their heirs (which would include the capital gains) .

The underlying reason for the step-up in basis is because the Estate Tax has been applied.

Dennis Duffy

2021-10-25 10:16:22
0 0
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I'd like to hear what "many" really means in this context.

Gray Victoria

2021-10-25 13:32:35
0 0
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Please keep in mind that your statement " when people die their gains go to their heirs and become tax-free through the step up basis" only applies to the amount of the estate tax exemption so if your estate is worth over the current $11 million exemption you will pay a combined state and federal estate taxes close to 50% in many states. This sweet spot is destined to shrink under Biden. I believe like kind exchanges are very good for the economy because it keeps $$$ moving throughout the economy because transaction costs or so high and additional spending is triggered that wouldn’t occur if the asset was not exchanged up

Vicky

Julien Lafleur

2021-10-25 13:49:25
0 0
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It seems to me (neither an attorney nor accountant) that the buy-borrow-die strategy still works out.

After Uncle Moneybags passes on, but before his estate gets settled, all his outstanding debts would need to be resolved. The estate would pay back all loans. If there is sufficient cash on hand, great, otherwise an asset sale will be required, at which point the gains are realized.

Even if this were not the case, the unrealized profits are still being realized because Uncle Moneybags is paying some portion of his principle + interest, meaning that he's actually realizing more than he would if he were only spending his straight-up (interest deductions do not reduce the overall payment).

Floccina

2021-10-25 16:16:46
0 0
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especially when that strategy isn’t really available to the middle class

Anyone with stocks and a mortgage is doing the same thing.

Calwatch

2021-10-25 18:14:36
0 0
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The concept of taking money out and not selling is most definitely available to upper middle class people, not just the very rich. Look up box spreads for sub 1% interest on your diversified holdings.

Gimlet0153

2021-10-25 18:46:06
0 0
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Solution: graduated consumption tax.

Dave

2021-10-25 19:00:26
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For people at the noted asset / income levels, the estate tax (~40% of the estate amount over $11.7 million) should - at least in theory - apply to the vast majority of their assets upon death.

There's a reasonable argument that the administrative complexities of the estate tax provide lots of opportunity for people to structure around having to pay estate tax. Some of the underlying reasons for these complexities - difficulty of valuing illiquid assets, how to treat trusts under the tax code, whether to have provisions allowing for payment over time or have tax amounts force the sale of assets, etc. - also seem to apply to the mechanics of taxing unrealized capital gains, however.

I'm sympathetic to the argument of simply eliminating capital gains basis step-up at death for everyone (regardless of estate size), though without requiring automatic payment of capital gains tax at that time.

Bob from Ohio

2021-10-25 10:54:52
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"this tax would apply only to billionaires or people with $100m+ reported income for three years in a row"

This year.

The original income tax barely affected anyone either.

Millian

2021-10-25 09:49:57
31 -11
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It seems prima facie fair that Peter Thiel should be treated better than other humans, for some convoluted Girardian Straussian Schmittian reason we won't go into.

Ben

2021-10-25 11:13:09
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The government does not bar you from starting a business.

Your laziness might, your lack of willingness to take risks might, your intelligence might, but the government does not. They allow you all the same opportunities they allowed Thiel.

On the other hand, can you shit on a canvas and sell it for more than Picassos, as Hunter Biden can?

Phinton

2021-10-25 10:43:16
10 -14
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Thiel used the exact same mechanism available to you. Why punish him alone? When the gov offered a place to put money that grows tax free forever, why are you surprised that someone took advantage of that?

jc

2021-10-25 12:07:32
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Theil committed fraud by stuffing his 401k with shares he underpriced

PHinton

2021-10-25 12:26:35
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> Theil committed fraud by stuffing his 401k with shares he underpriced

Underpricing shares will result in some of the most brutal punishment from the IRS that can be mustered. See 409A. You don't even need to make a dime. Underpricing a share will result in multiples of punishment--it is absolute brutal. If I started a company with $100K, and a $1 share price, and I offered you 10K shares at $0.01 each, even if the company went broke and the shares were worth nothing, your liability to the IRS could exceed $3M. All for signing a piece of paper and not earning a dime. That's because the FMV of the shares was $1, yet I underpriced them to you by 100X.

If there was fraud, the IRS would be all over it. The IRS claims a return of $4500/hour of audit time on very high wealth individuals. And yet, they are slowly but surely shutting that unit down. Probably because it's costing them more to find a dollar than they make.

or

2021-10-25 22:07:21
0 0
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...because the legal costs cut into the return significantly...and because the government isn't allowed to pay enough to get lawyers good enough to compete with the lawyers of those with endless resources.
Even when the evidence leans in the government's favor, better resources can overcome this.

Stan Sitwell

2021-10-25 10:47:49
10 -16
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He's not, he's just resentful of success.

Formerly K

2021-10-25 09:49:29
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Agree with most of what you said...but not "obviously increase the fairness of the tax system."

Thinking about the "fairness" of the tax system is complicated, and it depends on perspective. From an ex ante veil of ignorance, more progressive policies can be seen as "fair" in some loose sense (because genes aren't fair either...and work ethic is a weird middle ground that is probably partly innate, but it still seems both "fair" and "good" to reward people for working). But having all these different layers of taxation is still a bizarre thing--we tax your money when you earn it, then we tax it when it grows, then we tax it when you give it to or spend it on anyone. So in some sense, even after you've taxed what I earn, it's still not quite "my money". (On its surface, maybe a pure consumption tax would be more "fair".)

I'm not taking a hard stance on what a "fair" tax system is. But the only obvious thing to me is that it isn't obvious.

Ben

2021-10-25 10:49:32
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Yes those evil billionaires.

And that dreadful soon-to-be trillionaire who is ending global warming, making our species interplanetary, and posting funny memes

We really should give more to bureaucrats, pharmaceuticals, incompetent financers, and especially to our sacred health care workers treating predictable consequences of McDonalds, promiscuity, and booze.

>It is probably a reaction to the revelation that Peter Thiel stuffed $5 billion of capital gains from equity offerings that weren’t available to the general public into a tax-free Roth IRA.

I'm sorry, Peter Thiel profited by making successful businesses. This vehicle is very much available to the general public.

Hunter Biden type appointments to Chinx boards, selling dog shit art for more than Picassos is a type of wealth that is unavailable to the public.

BC

2021-10-25 10:11:27
8 0
#

"a reaction to the revelation that Peter Thiel stuffed $5 billion of capital gains from equity offerings that weren’t available to the general public into a tax-free Roth IRA"

What does taxing gains in taxable accounts have to do with gains in tax-sheltered accounts? Are they proposing to tax the after-tax assets in Roth IRAs too? That would open up a whole other can of worms.

Pepe Silvia

2021-10-25 10:44:03
1 0
#

Good point. Am I going to have to start taking money out of my Roth IRA and incurring the penalty, just to cover the tax on unrealized gains in that same account?

Ted Craig

2021-10-25 09:47:15
7 0
#

"obviously increase the fairness of the tax system. "
I hate using any version of the word "fair" in a discussion about taxes. It's vague and tends to add an emotional element to what should be a utilitarian discussion.
But since it's been introduced, I'd counter by asking, how is it more fair that someone who builds a business should be treated the same as someone who merely buys a stock?

RobertL

2021-10-25 11:25:59
7 0
#

My wife, an attorney, says the word "fair" is what people who have no real argument use. She likes it when opposing counsel uses it as she believes they are grasping at straws and she is closer to winning her case.

OldCurmudgeon

2021-10-25 12:20:32
1 0
#

>what should be a utilitarian discussion.

I'm not sure I agree. Shouldn't the system also be just?

Vivian Darkbloom

2021-10-25 11:23:05
6 0
#

The rationale for the step-up in basis of appreciated assets in the hands of beneficiaries is to account for the fact that those appreciated assets are subject to federal estate tax. HIstorically, there was also the argument that the tax bases of assets held for extremely long periods is hard to track, but this argument is less valid today. It's rough justice, but estates that fall under the estate tax taxable threshold still benefit from the step-up even though no estate tax was paid. You could eliminate the double taxation by first taxing the appreciated assets in the hands of the decedent *and then* subjecting the remainder (net of CG tax) to estate tax. None of the proposals to eliminate the step-up account for this as far as I know. Note that when Bush II briefly emiminated the estate tax, he also eliminated the step-up so that heirs were obliged to use the historical basis (this is called "carry over basis").

The Dems writing this bill are probably trying to figure out how to tax Buffet, Gates, Musk and the like. Their estates will be subject to little estate tax because their fortunes will be gifted (with charitable deductions, to boot!) and bequeathed to foundations. This proposal, if enacted, will simply encourage them to make those donations earlier.

If you really want to fix the problem, the most effective way would be to eliminate the charitable deductions to non-profits for income, gift and estate tax purposes. That ain't gonna happen, unfortunately, because politicians and policy wonks are too closely tied to the "not-for-profit" industry.

tg56

2021-10-25 14:06:52
1 0
#

Why not eliminate the step-up in basis and the estate tax and the gift tax and instead step-down the basis to 0 on death and recipients pay cap gains on realization (possibly at a higher rate?) and income tax on cash equivalents? This seems strictly easier for accounting and tracking purposes (no more need to value potentially illiquid assets at death to mark to market) and also prevents breaking up small business / farms to pay estate taxes (which is a major justification for the large exemption in estate taxes).

Vivian Darkbloom

2021-10-25 15:12:16
1 0
#

I suggest you do some examples. Your proposal would have many beneficiaries paying well in excess of 100 percent of the actual capital gain. Also, it would result in huge disparities between a person inheriting a very high basis asset and one a very low one. I don't see this as an improvement.

tg56

2021-10-25 15:18:28
0 0
#

I am presuming we still want an estate tax of some form, which currently runs at 40%. Even at 0 basis the max capital gains rate is less then that (which is why I allow for the possiblity of a higher cap gains rate on inherited assets). The benefit is that this is much less gameable then an estate tax. A lifetime exemption of xxx can still be allowed for (either for the recipient or the giver) if desired to more closely match the existing estate tax structure.

OldCurmudgeon

2021-10-25 15:00:34
0 0
#

One benefit would be more fairness/certainty i.e., nobody really knows the true "value" for many/most assets w/o an arms length sale. Right now, we de facto reward those who are willing to lie the most on the assessment.

Anti-Gnostic

2021-10-25 18:16:00
4 0
#

Per the link, this reaches a few billionaires and is projected to raise $20B a year in a budget with outlays of $6.8T a year. I'd be fairly certain there's a work-around for the imaginative tax specialist. This is theater.

EdR

2021-10-25 23:01:45
0 0
#

Kabuki theater.

John Thacker

2021-10-25 10:52:14
3 0
#

"It is probably a reaction to the revelation that Peter Thiel stuffed $5 billion of capital gains from equity offerings that weren’t available to the general public into a tax-free Roth IRA."

I thought that the reaction to that news was various proposals (that may not be adopted) to impose a maximum balance on IRAs.

After all, this proposal would literally do nothing to a Roth IRA, where capital gains are never taxed.

I believe this is just something that Sen. Wyden has been pushing for a while, and for some reason they're trying this now instead of the easier tax at death idea.

peri

2021-10-25 12:10:22
2 0
#

Is this why the NYT et al have *suddenly* developed a prudery with respect to Thiel's entourage of "barely clad young men"? -- https://www.nytimes.com/2021/09/21/books/review/the-contrarian-peter-thiel-max-chafkin.html

As I recall, the wokerati had already decided Thiel was not really gay, as his activism didn't tend in their preferred direction, and was simply an aesthete Uranian type.

Relatedly, did we ever really think gays were going to drop their cattiness and all get along?

Donald Clarke

2021-10-25 20:41:51
0 0
#

Wise words. It’s the step-up in basis at death that is the root of all evil. A gigantic, brazen, and utterly unjustifiable gift to the rich that Congress refuses to repeal.

Paul Hamrick

2021-10-25 20:46:04
0 0
#

I do not understand this narrative although I've been hearing it a lot lately. If someone borrows money to fund their lavish uber rich lifestyle, don't they have to pay that loan back? And I'd assume they'd likely pay it back by selling stock and getting taxed on those stock sales. What am I missing here?

EdR

2021-10-25 22:58:25
0 0
#

"...a new tax on capital income that would require a new bureaucracy to value people’s wealth every year."

That's an important driver - a jobs program for demoncats.

SeanNY2

2021-10-25 10:41:47
1 -2
#

The NYT article is paywalled. Do you know if the deduction for losses extends across years? Or is it that within a single year you are taxed on gains minus losses in that year? If that's the case then the author's point is still well taken. If you invest in stocks, you're likely to have net gain years and net loss years, though over time you (hope) to have gains.

I'm also curious about your observation that Peter Theil invested in "equity offerings that weren’t available to the general public". You're referring to his shares of PayPal, the company he created right? It's right that they weren't available to the general public, correct? Because the alternative would be that you can't even start a company unless and until it can register with the SEC and conduct a public offering with the SEC. Which would mean that the cost to start every company (even a local plumbing business) would be a minimum of a couple million dollars. For example, even if you are a brand new company you need to file three years of GAAP audited financials and accounting firms charge brand new SPACs around $300,000 for that service. On top of that most new companies (like PayPal) are highly speculative and more likely to go bankrupt than to get to the stage where they would even be able to find a regulated broker-dealer to take on their public offering.

PHinton

2021-10-25 10:34:51
13 -16
#

> Peter Thiel stuffed $5 billion of capital gains from equity offerings that weren’t available to the general public into a tax-free Roth IRA.

Thiel didn't stuff $5B into a Roth IRA. The max contribution in any year is $6K. Instead, Thiel bought 1.7M shares of Paypal for $0.001 per share--$1700 total--using money in his Roth IRA. Like all Roth IRAs, the money in the Roth grows tax free AND you pay no taxes on the gains when you take it out at the age of 60.

The mechanism used by Thiel is available to everyone. You could have taken $1000 in Roth monies in 2010 and put it in Tesla. And you be looking at $250K tax free today.

Equestrian

2021-10-25 13:35:22
0 0
#

These are matters of a fact, not necessarily for a court. You can't believe the evidentiary type of proceeding you have to have, in order to understand before tax income and after tax interest.

It is true, "If you invest in stocks, you're likely to have net gain years and net loss years, though over time you (hope) to have gains." I suppose today there is reaction against reactionary comment, but the truth underlines, shadows and leaves, like that, you see a bat has teeth. What irony there is in investment, that leaves you fables for whores and countenence for patience. All this time and no where to spend it. Thiel is anonymous, and while he speaks for the public he doesn't publically speak so what public then does the Authorian represent? At best, it's the financially cleansed, those who have wretched the wheel from the orange juice and that flair that surives on the cosmic trip to Church on a Sunday morning when the white flight is near.

AlanK

2021-10-25 10:20:55
33 -1
#

This is just another attempt by the progressive party to confiscate "wealth" and transfer the proceeds to their targeted beneficiaries. They couldn't care less regarding the economic damage or even the constitutionality of their proposals. And they will find a way to exempt themselves. The Citizenry should ask themselves how is that progressives like Pelosi have a net worth of up to $300 million, the Clintons well over $150 million, the Biden family somewhere north of $100 million and the same for the Obamas while the the middle and lower class have experienced stagnated incomes for the last two decades? How is it that Nancy Pelosi who recently said she "Feeds the People" has accrued wealth of extraordinary amounts. Is her husbnad such a genius in investing? These progressives are likely in the 0.1 percentile but they fight for equity. When will these fake facade be torn asunder?

Ricardo

2021-10-25 11:05:57
5 0
#

Pelosi's case is interesting and not familiar to me but a quick check of her bio shows that she was married to her financier husband for over 20 years before being elected to the House. If her husband only became rich after she had served in Congress for several terms, that is suspicious. But if he became rich first, then that's not a very interesting story.

The number for Biden is not substantiated and most sources say his net worth is about $8-9 million. I would expect anyone who continues working into his 70s and who spent a lifetime earning an upper middle class salary while saving and investing prudently to wind up with a few million in net worth in his golden years. Book deals would account for the rest.

BoatSchool

2021-10-25 11:35:31
8 0
#

Also pays to be "the big guy".

Seriously, this is a guy who openly bragged (you had his word on it "as a Biden) fir decades that he was one of the poorest members of Congress because he relied solely on "green" (I.e. Federal government) checks.

Not a joke.

C’mon man.

PHinton

2021-10-25 11:56:10
0 -3
#

"And now let's all go out for ice cream! I'm buying!"

https://www.youtube.com/watch?v=K3HD8Ikp_vc&t=40s

Reason

2021-10-25 10:33:30
0 0
#

What’s more interesting is that the Bidens and the Obamas (not sure about Pelosi) were, essentially class before gaining power. Fascinating.

peri

2021-10-25 14:17:35
1 0
#

I don't know much detail about Biden's backstory but the little I know reminds me of Rick Perry a bit. Maybe it's that they were both conventionally quite good-looking guys, I suppose? - Biden a strutting-around lifeguard, Perry a yell leader (more work, assuredly!) - guys who presumably knew how to make themselves liked beyond their looks. Also, they both have "humble" backgrounds - Perry's more genuinely humble, I believe, but I don't care to investigate Biden and take away anything away from him there, especially when *everybody* in a sense grew up "humbly-er" even just those few decades ago.

Anyway, Perry caught somebody's eye, somebody with money - and though it's water under the bridge now, whoever those guys were, they arranged for Perry to become more comfortable financially (with what was just play money to them) - loaning him a sum to buy a lakehouse, then the same folks buying it back from him many times over appraisal a couple years later.

I assume Biden had some similar kingmakers back in the day. He just seems too facile a person - watch me do bicep curls while you interview me! - to have quite done much of it on his own, though he certainly deserves credit for making the most of whatever opportunities came his way.

If I had ever once had a candidate - where did you go, Bruce Babbitt? - I wouldn't care how they got their foot in the door, of course.

M

2021-10-25 09:46:10
20 -1
#

Odd news. Presumably the goal here is to make people pay to hold an asset, whether they realize a gain or not, and thus force people to liquidate assets at a loss if they don't hold high labour income? Which is an obvious advantage to people with high labour income who could still afford to hold, or to buy assets from people who are asset rich but cash flow poor.

It seems part of some ongoing Democrat quest to do anything possible to raise revenue without raising income tax for their new "base" (the urban upper-middle class) and generally to entrench advantage towards people with high labour income. Some worldview where high labour income derived from education and connections is legitimate and based on "merit", while investment and saving income (i.e. small scale capitalism) aren't?

From overseas I get the sense that the Democratic Party, much like our Labour Party, really is becoming this thing where the ideal is for everyone to be employed by the government, on an income strictly determined by their educational outcomes, with no ability to make any additional income for themselves by any form of saving or investment (i.e. a world where status is solely determined by intelligence and intellectual openness, with no room for conscientiousness to play a role except through increasing education). There is a place for you, and its entirely determined by your willingness to join "The Academy" (or "The Cathedral", if you like) and submit entirely to it.

Ricardo

2021-10-25 10:28:54
3 -11
#

If your last paragraph was grounded in reality, we ought to see serious steps being made to abolish IRAs and 401(k)s, which incentivize retirement saving. We don't. The other way Americans commonly acquire wealth is through home ownership and the mortgage interest deduction remains popular, although Trump (not Democrats) lowered the maximum amount a taxpayer could deduct.

All this is to say, there is very little evidence that Democrats are pursuing the socialist fantasy you attribute to them.

M

2021-10-25 10:44:31
12 0
#

Think back, and would you have said, in November 2020, we would be likely to see serious attempts at a tax on unrealized capital gains? Or would this have been "a dangerous fantasy"?

Ricardo

2021-10-25 11:40:53
3 -1
#

As I asked, where is the evidence that Democrats are pushing to repeal or severely limit programs that give middle class people incentives to save and invest?

M

2021-10-25 12:37:43
2 0
#

To be fair, it is a reasonable comment that they're smart enough to know what's electorally feasible here and there is a limit. And "M, you're posting hot takes without reading the proposal; this is aimed at a particular wealth class that's way above the middle class", would've been a reasonable response (in this case, I did and it is; sorry upvoters, Ricardo's response is not completely without merit).

But I really do think the psychology is as I said it is, and the Progressives will push policy that way if they get the chance to, and aren't checked by other, more sane, elements in their party.

peri

2021-10-25 12:30:55
0 0
#

Well, the media at least seems to have decided "redlining" is back, instead of just, ah, forgotten ;-). I assumed they were laying the cornerstone of ... something.

"Forgotten" being another of those words that has somehow come to denote its opposite. Seems to me this blog was talking about such instances one time. I never have anything to offer to lists, so I'm putting it forward now.

PHinton

2021-10-25 10:50:21
12 -15
#

> If your last paragraph was grounded in reality, we ought to see serious steps being made to abolish IRAs and 401(k)s, which incentivize retirement saving.

but we are seeing that. The gov has decided that if you have two identical workers at Ford, one which saved their entire life, and one which saved nothing...then the worker that saved their entire life has a responsibility to take care of the worker that saved nothing.

That is the basis of means tested benefits: The guy that dumped $20K/year on vacations deserves some of the savings of the guy that never took a vacation.

Everything the democrats talk about is means-tested: health care, education, social security. So, load up your 401K all you want. the chances are good that the suckers that saved will be asked to take care of the worker that partied.

Ricardo

2021-10-25 11:51:08
1 0
#

Social Security, Medicare, and access to public education are not means-tested. Means testing is often opposed by serious leftists.

Phinton

2021-10-25 12:36:26
1 -1
#

> Social Security, Medicare, and access to public education are not means-tested. Means testing is often opposed by serious leftists.

Social security delivers an effective rate of return that is dependent on your expected payout. That is, those with higher payouts (and payins) will get a much lower effective rate of return than the person with lower payouts. That's means testing.

Our health programs overcharge the top earners by about 2X so they undercharge the lower earners, who pay about 0.5X. That is, a bronze policy costs the person making $400K/year about $1200/month, while it costs the person making $80K/year about $300/month. That's means testing

And yes, even public universities are means tested. There's the list price paid by upper middle class, while those in the lower 50% will always get substantial discounts off list price.

> Means testing is often opposed by serious leftists.

And yet, even more is being pushed by Pelosi. She's not a serious leftist?

BoatSchool

2021-10-25 15:30:03
0 0
#

Additionally 85% of (the lower return) payout of SS benefits is subject to (higher bracket rates) taxation - further lowering the actual return.

If memory serves the Medicare premiums that are 2x the cost for higher income participants than lower income participants end up being no deductible.

BenK

2021-10-25 09:41:14
19 -4
#

You aren't missing anything . It's a blatant attempt to do exactly what the politicians say they want to do - take the money from people who have it. Everything else is just a patina of 'process' so that they can say they have a consistent process to do so.

davie

2021-10-25 13:15:33
2 0
#

It's almost like, maybe money is power, and the state is trying to regulate that civic power....

ehm

2021-10-25 09:47:32
15 -1
#

You will raise exactly $0 in tax revenue. This tax is so easy to evade its unbelievable. All they are going to do is enter into a swap with a bank with a fee that is less than the proposed tax. Now you have a illiquid asset that is no longer subject to said tax.

Ben

2021-10-25 10:22:06
13 0
#

Once again, the thing that drives me kind of nuts about any of the discourse around taxation is that it's all working backwards. The goal or objective isn't a new program, it's just about taking money from wealthy people. Now I am not totally opposed to that since I am not all that wealthy myself, as long as it wasn't done in a way where there aren't a lot of unintended consequences (unlikely in my opinion). But it seems like the goal whenever anything like this is brought up - wealth tax, taxing unrealized gains, etc. - is completely about taking money from wealthy people. It might as well be fine lighting that money on fire because the important part is that it was taken.

If that last few years have proven anything, it's that our government is almost certainly not struggling due to a lack of resources - in fact I would argue all of our biggest problems are quite literally problems that money can't solve. Would more money make the FDA move quicker and less irrationally risk averse? Would more money reduce healthcare expenditures as a % of GDP? Would more money eliminate all the red tape that NIMBY's wield that is causing the housing crisis? Give me a break. Why can't we try actually solving some of the biggest problems we face?

Andrew Leinung

2021-10-25 18:23:46
0 0
#

Lighting rich people's money on fire via taxation is exactly what the government aims to do! And it's a good way to not only combat wealth inequality, which has its own nefarious consequences, but also fight inflation. Collecting taxes reduces the money supply. We should all be for taxing the wealthy in this new era of inflation fears.

Stendell

2021-10-25 09:35:03
16 -6
#

> What am I missing here?

the names "Janet Yellin" and "the Democratic Party".

You write as if the idea just proposed itself.

lee2253

2021-10-25 09:59:09
10 0
#

Liberal politicians know nothing about the real world.

Ben

2021-10-25 09:24:09
22 -14
#

Another winner from Team Self-Immolation.

Almost makes you wish they’d stay focused on letting trannies into your 11 year old daughter’s bathroom.

Jean Passepartout

2021-10-25 10:00:41
8 0
#

For billionaires holding a lot of stock in the companies that made them billionaires this is a problem since they have very concentrated holdings, so unlikely to have same sized capital loss offsets. If you own mostly one stock and it is going up you will need to continually divest to pay the tax and reduce your ownership stake over time.

Reason

2021-10-25 10:30:09
5 0
#

For proponents of this scheme this is a feature not a bug. Why should you control the company when "you didn’t build that."

Bob from Ohio

2021-10-25 10:59:10
4 0
#

Yes, its aimed at the Bezos and Gates of the world.

Its not a revenue scheme, its a punishment scheme.

Bill

2021-10-25 14:15:24
0 0
#

Jean, You can diversify by borrowing against these assets and using that to purchase into another asset class. No realization because no sale.

Anti-Gnostic

2021-10-25 10:59:44
6 0
#

Should we pass such a tax bill without such estimates and public debate? Isn’t that kind of democracy "good"?

This is where democracy ends up; it's the future you chose.

You think this is troubling, wait until the inflation tax ramps up (it's already started) and Uncle Joe refuses to open up the economy.

Vangel Vesovski

2021-10-25 09:44:53
6 -1
#

You are missing human nature. People in the parasite class that rule over you see the gravy train running out of steam. They want their pound of flesh and don't care about policy making sense.

Greg S

2021-10-25 09:58:07
6 -1
#

"What am I missing?"

It makes the most sense as an attempt to get budget recognition (even if later held unconstitutional) for a one-time intake of a large amount of taxes for previous gains. Then you can say the bill costs less overall. And it doesn’t need to have any particular long-term effect one way or another.

jayson

2021-10-25 09:26:16
5 -1
#

South Dakota is gonna get way more popular.

OldCurmudgeon

2021-10-25 17:09:05
0 0
#

In practice, Buffett and the rest of the insurance industry will make billions selling ways around it.

nf

2021-10-25 09:34:20
9 -5
#

The issue is a lot of people are taking out loans on unrealized gains and effectively living at $0 tax rates.

As long as asset values go up faster than interest rates, it always makes sense. What we should be doing is counting loans backed by assets as taxable income and deduct first 1 mil or so in assets.

What you do is get an apartment complex at 40% loan to value and each time property values go up, you cash out for expenses or to get more property. Rent pays operating costs and you end up paying little tax.

static

2021-10-25 09:42:03
1 0
#

Do you then get to deduct the payments on the loan as expenses?

Ska

2021-10-25 10:09:56
2 0
#

Interest expense, yes (subject to 163(j) but real estate firms can always elect out with a small tradeoff being longer depreciable lives); principal payments, no.

Poster nf is correct, that is a tried and true strategy of RE investors. If death was considered a deemed sale and used the FMV at date of death the basis step up would better align with other types of assets. But you'd still end up in a position where heirs would need to liquidate assets in order to pay what ended up being capital gains taxes at 20+% (not knowing where the rate itself lands, and also the numerous exceptions and categories of capital gains) as well as the estate tax at 40+%. It would immediately undo decades of tax planning and people would adjust going forward, but that adjustment would be a big one.

Bob

2021-10-25 10:06:33
2 -3
#

And you are describing just the second layer of how the money is so advantaged. It's not just that it's random capital gains taxed at zero for a long time: It's the fact that we are calling those capital gains at all.

A lot of those unrealized gains are fun things that were assigned an incredibly small value on assignment, and have annualized returns that go past the 4 figures. Take any unicorn founder, venture capitalist, or any member of the early staff that wasn't wiped out by preferred shares shenanigans: They worked somewhere for 5-15 years, invested 3 to 4 figures in capital, at the most, to buy their shares, and now have billions in unrealized capital gains, which were taxed at a far, far lower rate than their income. That kind of tax advantage will not seem all that healthy to the random person on the street.

Your random google engineer that joined in 2000 received stock options for their work that are worth billions, and if they did early exercise, they might have paid less than a thousand in taxes. And evne if they sold everything today, they'd be paying just the capital gains rate for the whole thing. The difference in tax rate vs the money they got paid in salary is just obscene.

BoatSchool

2021-10-25 11:53:21
2 0
#

There were/are plenty of stock option holders who never realized a gain because those options were underwater.

NYT and it’s political collaborators always choose to cite the relatively few outliers that (the NYT thinks) makes their point w/o ever bothering to search for the opposite cases.

I’d rather deal with market risk any day of the week than deal with the ratcheted political risk that says out-of-control government spending and continued failure to accurately assess results of said spending.

To quote my too candid Irish pastor one Sunday "You’ve got the money and it’s my job to get it out of you."

PHinton

2021-10-25 11:53:50
5 -7
#

Stock options are highly speculative for a reason. They are trying to incentivize you to leave a big, comfy company like MSFT and work for a scrappy startup that might do amazing things (Tesla) or will likely not. For every Tesla, there's a thousand dead companies where the founders lost everything.

The country is better for our moonshot programs that deliver massive wins. And that is the purpose of the tax policy. Would it be better if all the engineers that left cushy jobs to go work for SpaceX INSTEAD stayed at the cushy jobs and paid income tax on their cushy wages BUT we have no SpaceX? Or, is it better than a group of people decided to take a risk, worked ass-crushing hours for a decade, and made a rocket that does great things?

Remember, the risk takers are likely paying far more in taxes at their risky job rather than their cushy job. They created wealth out of thin air.

You are just upset they aren't paying more. But you don't get SpaceX if there's not a massive reward. Are you upset when people win the Powerball? They did nothing but buy a ticket, and they win $500M. They pay $250M in taxes. They created nothing.

On the other hand, 250 engineers might help create a SpaceX, and each earn $20M while doing it, and only pay 20% of that in taxes.

Be happy we got a Space X. It was cheap all things considered. Don't let envy eat you up.

Phinton

2021-10-25 10:40:30
6 -7
#

> As long as asset values go up faster than interest rates,

And so, the gov decides to keep interest rates near 0 through bad times and good, and causes weird distortions in the market, leading to outsized gains by some as they figure out how to exploit cheap money. And to compensate for stupid policy, the gov decides to go after unrealized gains by a few? IOW, the very people that understood how to play the system set up by idiot gov officials are going to either play by the new rules OR figure out how to legally game the system again.

My money's on the smart people, not the gov employees.

Ricky

2021-10-25 09:34:28
8 -4
#

Sounds like you understand it - as much as anyone understands it. Too bad tax policy is aimed at handicapping the most productive parts of our society to satisfy the envy of some rather than actually raising revenue.

Michael Rulle

2021-10-25 10:24:33
5 -1
#

You know it is all fake. It is about pretend hating the rich. And it is not about raising revenue because it won’t. They know that. It’s just another one of those capture the "useful idiot" vote ideas. But there probably are not enough of them.

No One

2021-10-25 09:45:57
5 -2
#

Blame central banking which is central planning which has decided to implement the ultimate in "trickle down" policy by pumping up asset prices (which mostly benefit "the rich") and via financial repression pushing down real rates of interest (which mostly hurts the "non-rich" who keep a lot of their assets who keep more of their assets in banks). And thus as a result they are nudging the non-rich into speculative gambles like pseudocurrencies and penny stocks given the lack of returns from safe assets.

So limousine leftists have no complaints about this kind of central planning and its consequences, and blame the outcomes on "the rich" and try to claw back the results of the central planner's asset inflation policies.

So much economic distortion, so much hubris. Manipulations on top of more manipulations for the "expert" class.
But they all hate the gold standard and free banking- no room for their magnificent expertise in saving the world.

louis

2021-10-25 10:29:11
3 0
#

Using mark-to-market accounting to levy taxes isn't crazy or unprecedented, there are investment vehicles which elect to be. Also, investors can already count their recognized losses against recognized gains, and carry forward against future income - no reason those rules wouldn't apply here.
Derivatives usually don't extend past a year or so, and I blv traded derivative are already subject to mk-to-mkt taxation.
The current tax code incentivizes high net-worth individuals to harvest losses while retaining (and borrowing against) appreciated assets - a bit of a distortion to capital markets. For someone with a $1 bn+ portfolio, I can't see them choosing to bear less risk (and reduce their long-term expected return) just because they wont be able to defer cap gains tax on the winners.

Some Guy

2021-10-25 10:37:59
5 -2
#

It's a bad solution to a legitimate issue.

Most of the economic gains over the past 40 years have been in the form of capital, not labor, and yet it's often never taxed at all through a combination of low-interest asset-backed loans and the stepped up basis at inheritance.

My preference would be to set a fixed inheritance tax -- say, a clean, 20% on everything above $1M, no loopholes -- and reduce income taxes by a comparable amount.

glenn

2021-10-25 11:03:41
3 0
#

We need to stop this nonsense that the step up in basis results in no tax on the gains. Upon death the assets are marked to market and taxed at 40% under the estate tax provisions . The loans need to be paid off at death since the only collateral to the lender is the stock itself . The proceeds for the liquidation of the loan comes from the sale for the stock.

The mechanics of taxing unrealized gains don't work. As an example at year end 2021 Jeff Bezos may have $75 billion unrealized gain in his stock in Amazon during the year. He pays federal and state tax (usually follows Federal rules) under Biden's proposal of $30 billion. The next year Amazons stock goes down $75 billion. Does the government write him a check for $30 billion that year? If the loss can only be carried forward it is very possible that the stock never recovers and he winds up paying a tax that is an infinite percentage of his gains.

Finally since he has close to a zero basis in his amazon stock he has to sell another $50 billion of his amazon stock to get enough after tax money to pay the $30 billion in tax due on the unrealize appreciation.

O f course the sale of that much stock will drive down the price of the amazon stock that every index fund and pension and 401k and state pensions funds own. Great result for everyone.

Moral Panic

2021-10-25 21:30:18
0 0
#

I don't understand whether Bezos would pay capital gains on the stock he has to sell to pay this proposed new special tax. Suppose the feds send him a bill for $30B. Can he cash $30B of stock tax-free because he owes them $30B, or must he sell $50B and pay CG and THEN send them $30B?

Pete Melnick

2021-10-25 13:36:00
3 0
#

I have a steak in the freezer that went up 20%. What do I do?

M

2021-10-25 10:19:32
2 0
#

Does seem like it would inevitably add an extra kind of uncertainty to owning an asset. Say your asset's going up, by a degree which is manageable to your degree of cash flow financing, well, fine.

But if it unpredictably goes beyond what you expect, you'll have to sell and drop the asset?

Which may lead to a glut of the asset on the market, at a time at which people would not necessarily have an incentive to buy, if their cash flow isn't sufficient to match asset price increases.

Adds a sort of self "Hit the brakes" mechanism on any stock or asset that does too much better than expected. Would do wierd things to any company with a breakthrough innovation that experience intense asset appreciation as a result? You're sort of forcing people to sell and discourage people from buying things that appreciating faster than their cash flow can match?

OldCurmudgeon

2021-10-25 15:09:26
0 0
#

>But if [the asset's appreciation] goes beyond what you expect, you'll have to sell and drop the asset?

If only I had that problem....

Brett Powers

2021-10-25 10:48:46
2 0
#

What you have missed is that this is all about signaling that Biden and Co. are "going after the rich."

That's all this is.

B.B.

2021-10-25 11:26:23
2 0
#

What are you missing? Larry Summers once said that economists live in a world of substitution effects, while the public lives in a world of income effects.

Democrats are looking for way to raise money and punish rich people. Most do not care about the efficiency impact.

Capital gains and wealth are devilish topics. My simple proposal is to replace the entire jumble mess of the US tax code with a comprehensive value added tax. We cannot measure "income." We can measure spending.

Mikeja

2021-10-25 09:43:00
1 0
#

Losses are deductible, but only to the extent you’ve paid gains tax on the assets? Limits the distortions while keeping potential costs within reason

OldCurmudgeon

2021-10-25 15:13:40
0 0
#

An interesting aspect is that it would take the 'voluntary timing' advantage away from the taxpayer (i.e., tax farm the losers each year, but hold the big winners)

Scott

2021-10-25 10:13:40
1 0
#

Regarding the "borrow against assets" and pay no tax thing... Wouldn't payments on the loan be made with taxed $ ?

Faze

2021-10-25 12:27:45
0 0
#

Yeah, I'd like to know this, too. How does one manage this? (Asking for a friend.)

Ska

2021-10-25 15:49:05
0 0
#

Without getting into complicated examples, two major tax deductions help here: depreciation and interest expense. It's not uncommon to see a property that is cash flow positive and a breakeven or loss for tax.

Depreciation is a noncash expense. If you bought a $3M residential building for $1M of cash and $2M of debt, you'd have $100K in tax deductible depreciation every year for 30 years. So even with $100K in annual positive cash flow from operations you'd be breakeven for tax.

Mortgage amortization is interest heavy in the beginning. Or you could use interest only debt and refinance before the balloon payment is due. Your debt service would again help reducing taxable income to the extent your payments are toward interest.

Kyle Schutter

2021-10-25 11:53:57
1 0
#

I'm kinda in favor of this. It would encourage people to exit the US sooner than later. US is an empire in decline. Let's put it out of its misery.

Pericles

2021-10-25 13:09:52
1 0
#

Another nail on coffin for public stocks. ao easy just to keep your company private so they can’t make you to market so you never have to pay this tax.

Christian Thwaites

2021-10-25 14:00:40
1 0
#

Same as a property tax. Value goes up. Property taxes go up. Value falls. You write a dozen letters to the town tax collector and, with luck, tax falls. It's not complicated.

Bill

2021-10-25 14:10:54
1 0
#

Vivian, Evidently you do not know when income is received, or what is a taxable event. Assuming you do not know this, let me explain. If you tax dividends in Year 1 when they are received, or you claim capital gains in Year 20 when you sell the stock, even though you pay the same rate, the gains are realized years later, or perhaps never at all, if you borrow against the stock and your kids inherit.

Here is a link to Investopedia : https://www.investopedia.com/ask/answers/033015/there-difference-between-capital-gains-and-dividend-income.asp

Wondering

2021-10-25 16:50:56
1 0
#

This is stupid idea by people afraid/unable to go after trusts, step ups in basis, and other shelters that reduce or delay taxes from long-recognized tax events. Let's get rid of all the protections afforded the wealthy and tax them upon realization, which should include death.

SamB

2021-10-25 17:29:07
1 0
#

The simplest way to implement such a tax is to redefine the meaning of "realised".

Presently, "realised" means upon sale for cash.

If "realised" meant upon obtaining value in any form (pledging as collateral for a loan, transferring to a trust, donating, gifting, etc), this would capture a if chunk of the what actually concerns people.

If you have $10bn in shares and are living on your 100K taxed salary - good luck to you.

BUT

If you want to pledge $500m as collateral for a loan to buy a yacht or a mansion, or donate $50M to ensure your kids get into Stanford - that is "realised" as far as any fair observer is concerned.

Jayson

2021-10-25 09:47:49
1 -1
#

I'm not sure one can apply Science to the Stock Markets since so much trading is based on emotions, rumors and gut feeling. Neither income nor loss can be (should be) taxed until it is realized, though aggregate value can be taxed by setting a specific day and time for assessment. A much simpler and fairer tax would be a small tax on all trading, much the same way Casinos tax Poker by taking a small bite out of each pot. That might also curb some of the wild swings and nanosecond advantages that plague the Market. Simple, straight forward and universal.

Formerly K

2021-10-25 09:57:14
0 0
#

Depending on how it's done, that could also hurt liquidity. Maybe if it's a tax only on price-taking? That would probably have other distortions. I'm not sure the ease of trading is really the fundamental issue with price swings. They might even get worse if trading were more expensive.

David Roberts

2021-10-25 10:47:19
0 0
#

There's a saying that no one rings a bell at a market top.

But, just maybe, the idea of taxing all these unrealized gains is the bell!

We shall see.

Carolyn Mikell

2021-10-25 11:24:26
0 0
#

Exactly what happened to us when we did a Roth conversion in the 1990’s

Anonymous Coward

2021-10-25 11:42:57
0 0
#

Economics isn’t science. Start there!

Duane Stiller

2021-10-25 11:48:55
0 0
#

How could you possibly calculate unrealized gains in real estate?

OldCurmudgeon

2021-10-25 16:57:24
0 0
#

In most places, real estate as simple as (this year's property tax base) - (last year's property tax base). Small businesses OTOH, will be hard.

cornpopsrustyrazor

2021-10-25 12:03:51
5 -5
#

what are you missing here?
to be fair
- its lefty eliteX elizabeth warrens marxist grift so
incoherence = strategy
its not supposed to "work"

HLS J.D.

2021-10-25 13:06:39
0 0
#

This clearly violates the takings clause of the fifth amendment. The sixteenth amendment grants broad power to tax income, but the apparent appreciation of an asset's value, as calculated by some curious journalist, is not income.

diz

2021-10-25 17:04:41
0 0
#

I don't think it violates the takings clause so much as it is flatly violates the Constitution and will be (should be) voided. The counter argument would be something like "the government can define anything it wants to as income". This seems like a silly and frivolous argument to me, but I wouldn't say it couldn't get past the USSC. It's even hard to imagine the Democrat wing voting against it.

AnthonyB

2021-10-25 14:09:49
0 0
#

If you are holding a futures position (long or short) at the end of the year, that position is marked-to-market for tax purposes, as if you had realized the gain or loss.

tg56

2021-10-25 14:22:32
0 0
#

Here's my pet idea which is buried in a response below:

Why not eliminate the step-up in basis, the estate tax and the gift tax and instead step-down the basis to 0 on death and recipients pay cap gains on realization (possibly at a higher rate?) and income tax on cash equivalents for gifts and inheritance? I would still allow the same gift tax exemptions (e.g. direct payment for housing/education/medical doesn't count and an annual exemption applies [though in this case to the recipient]). This seems strictly easier for accounting and tracking purposes (no more need to value potentially illiquid assets at death to mark to market) and also prevents breaking up small business / farms to pay estate taxes (which is a major justification for the large exemption in estate taxes).

As separate thing I would also cap deductions for charitable gifts of appreciated assets at the gifter's basis in the asset (the lack of this seems like one of the more egregious bits of the existing tax code).

Floccina

2021-10-25 16:22:20
0 0
#

I'm convinced that a progressive consumption tax is the way to go. It is better targeted at what we want.

So Much For Subtlety

2021-10-25 19:26:22
0 0
#

I am all in favor of a tax on unrealized capital gains for billionaires. And a lot of other taxes too.

On the small condition that they can excuse themselves from paying these taxes if they sign a full page advert in the Wall Street Journal explaining why these taxes should not apply to them

Bjorn B

2021-10-25 20:31:41
0 0
#

This step-up basis thing is so odd to this Canadian. As it stands, when I croak, there'll be a deemed disposition on all of my capital assets and my estate will pay tax on these capital gains. If I had access to this step-up thing my estate planning would change dramatically.

JMKD

2021-10-25 21:48:00
0 0
#

"…And fight to break up Big Tech so you’re not powerful enough to heckle senators with snotty tweets."
Maybe the purpose is to whittle away at the power of people who can speak their minds to the government.

Sergey Aleksashenko

2021-10-25 09:27:46
3 -4
#

That is what is called "progressive policy". Meanwhile it is a little better that MMT

Bill

2021-10-25 10:25:32
5 -7
#

Re: "What am I missing here?"

There must not be
Any economists
Who pay
Property taxes
In the audience.

A property tax is a wealth tax
And it goes up and down
With the value of the property.

There will be valuation issues, however,
But, just remember,
When a person borrows against
His/her assets
That person makes an declaration
Of value
To a bank
To get the loan.
Follow the paper trail.

Skeptical American

2021-10-25 11:54:44
7 -1
#

Bill hallucinates that:

" A property tax is a wealth tax
And it goes up and down
With the value of the property"

Dude,

Those of us who actually own property in the "real world" have NEVER seen our ‘property taxes’ go down.

Unless you are a democrat politician like Senator Tammy Duckworth.

Bill

2021-10-25 13:07:50
0 -2
#

Dude,

Residential Property values change from year to year, and not always up.
Ever heard of 2008.

OldCurmudgeon

2021-10-25 17:02:09
1 0
#

My 'lived experience' was that the government pretended 2008 never happened. I had to appeal my taxes multiple years in a row.

Skeptical American

2021-10-25 17:28:22
0 0
#

Bill replies …

"Residential Property values change from year to year, and not always up.
Ever heard of 2008."

Yup.

And … funny thing … even though the VALUE of my property went down … my property taxes went UP.

Have your property taxes ever gone down?
If so, was the percentage decrease in those taxes the same as the drop in your property’s value?

R

2021-10-25 10:52:42
4 -1
#

Why
Do you talk like
A Rupi Kaur
Poem

M

2021-10-25 11:07:46
3 -1
#

Bill: Youarenotthetargetaudience...

rayward

2021-10-25 09:57:21
2 -5
#

I'm old enough to remember when "realization" was accepted as a constitutional requirement for taxing capital gains (realization, recognition, and reporting to identify the trio of events). Really. Now I understand that the "realization" requirement isn't constitutional at all but simply a convenience. I'm not buying it. And owners of assets aren't selling (assets). Of course, this isn't about taxing unrealized capital gains, this is about taxing the hundreds of billions of dollars a year of taxes evaded every year because the IRS doesn't have the resources to find it, and getting the owners of capital who are law abiding and paying their fair share of taxes to join the effort of ferreting out and taxing the evaders.

rayward

2021-10-25 12:13:05
1 -2
#

It's not described as an "income tax" but what else could it be if it's imposed on unrealized (capital) gains. There is a long line of old Supreme court cases that imposed a "realization" requirement, back in the days before there were (for example) detailed corporate reorganization provisions in the tax code. Many of the non-recognition provisions in the code were actually codifications of the realization requirement. It's because of all the non-recognition provisions that have been added that the courts have not considered the realization requirement in many, many years. I have no doubt that this Supreme 'Court would resurrect the realization requirement.

StillGeorge

2021-10-25 11:26:09
1 -6
#

Perhaps you should stick to your expertise: amateur epidemiology.

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