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Thursday, February 7, 2013

McCaffery: The Case for Repealing Stepped-Up Basis

Edward J. McCaffery (USC), A Progressive's Silver Lining Playbook: The Case for Repealing Stepped-Up Basis:

In this brief commentary, to appear in a later version in Tax Notes, I argue that, now that we have no meaningful estate tax for the vast masses of even wealthy individuals and families, it is time to call for an end to stepped-up basis on death and to start doing something, somehow, to shut down the typical tax planning of the wealthy.

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If it’s a legitimate basis step-up, the body of progressives has ways to try to shut that whole thing down.

Posted by: Anon | Feb 7, 2013 10:46:12 AM

This proposal would much more palatable if it contained a safe harbor of basis = 50% of FMV for people who could not prove basis, or if it cut the normal long term capital gains tax rate in half for the portion of the gain represented by the Fair Market Value.

I do expect that we'll see some form of this before a VAT. We'll see a VAT when the government loses its ability to borrow. That m ay be one reason that progressives appear less concerned than I believe they should be about the bond market bubble.

Posted by: AMTbuff | Feb 7, 2013 6:39:06 PM

Ah, the blissful platitudes of youth. Prof. McCaffery is too young to remember the fiasco of the Tax Reform Act of 1976 which did eliminate stepped-up basis. It was so unworkable it was repealed in a few years. Progressives complain that conservatives ignore science but it can easily be shown that progressives ignore history.

Posted by: TexEcon | Feb 8, 2013 7:52:04 AM

TexEcon, you missed footnote 8 and the paragraph where it appears. I think my safe harbor or rate reduction could overcome the objections which appeared in 1976. Furthermore the need to cut spending and increase revenue is more urgent today.

Posted by: AMTbuff | Feb 8, 2013 11:00:56 AM

Here's a "What if?": What if there had never been a step-up* but a carryover of basis; what might have been the impact on the fisc? Might behavior of taxpayers regarding holding of assets have differed significantly? What might have been the impact on securities markets?

*Of course, there is not always a step-up but sometimes a step-down in carryover basis. (Gift tax rules address this adversely to a donee's carryover basis.)

Posted by: Shag from Brookline | Feb 9, 2013 4:44:33 AM