Thursday, January 21, 2021
Harry L. Gutman (Ivins, Phillips & Barker, Washington, D.C.), Taxing Gains at Death, 170 Tax Notes Fed. 215 (Jan. 11, 2021):
Joe Biden has proposed addressing income inequality in part by eliminating the tax-free step-up in basis for property passing at death. Although details are lacking, the proposal would address a glaring omission from a comprehensive income tax base — an omission that exacerbates vertical inequity and produces horizontal inequity, inefficient resource allocation, and significant revenue loss.
In this article, I argue that tax-free step-up should be repealed and replaced by a regime in which death and lifetime transfers are income tax realization events. That would mean that when an individual dies owning property that has appreciated in value, tax would be payable on that gain rather than forgiven as it is under current law. Conforming rules would treat lifetime transfers similarly.
Section II of this article details the structural design elements of the solution — a task that has not been undertaken in the recent past. It also addresses the effective date and transition. There, the issue is the scope of the proposal — that is, whether it applies to all assets held on the effective date, appreciation occurring after the effective date, or assets acquired after the effective date. It is my view that specification of an acceptable transition regime is the key to the political acceptability of this proposal.
The time to repeal section 1014 is long overdue. Replacement with the suggested regime would enhance horizontal equity, economic efficiency, and tax revenue. Most importantly, at a time when income inequality is growing to what many consider unacceptable levels, the proposal would directly address what is perhaps the most glaring loophole in the income tax: the complete exemption of the bulk of the superrich’s wealth accumulation from income tax. Hopefully, this article provides a roadmap to help accomplish those important objectives.