Friday, September 24, 2021
Daniel Hemel (Chicago; Google Scholar), Carry On with Carryover? Not All Carryover Basis Regimes Are Created Equal:
Congress ought to adopt the Biden administration’s proposal to tax unrealized gains over $1 million per person at death—full stop. But with the Biden administration’s sensible proposal now facing resistance from congressional Democrats, eyes are turning toward carryover basis as a compromise. One political advantage of carryover basis is that it’s very hard to brand carryover basis as a “death tax” (though well-funded opponents will no doubt try). In a carryover basis regime, death is a non-event for income tax purposes. You can say it’s a “death tax” just as you can say that an apple is a banana, but the statement would have little relationship to reality.
If Democrats decide to go down the carryover basis path, though, it matters which carryover basis regime they would be adopting. Not all carryover basis regimes are created equal. All conceivable carryover basis regimes would be better than the status quo, but some would be considerably better than others. ...
In short: Carryover basis could achieve some of the same objectives as deemed realization at death (albeit with less of the revenue coming within the 10-year budget window). Some carryover basis regimes would come closer to achieving the objectives of deemed realization than others. True carryover basis (potentially with a deemed realization option) would be quite a bit better, from a revenue-raising and progressivity perspective, than modified carryover basis with an estate tax step-up.