An interesting comment from the Baseline Scenario (by commentator John Thacker, replying to James Kwak):
More interesting is to discuss the combination of eliminating the estate tax plus eliminating basis step-up. It would get rid of some of the biggest sob stories that people dislike about the estate tax (some closely held sole proprietorship or family farm is forced to sell out in order to pay the taxes; they’d owe nothing right now if there weren’t intending to sell, only owe capital gains when selling.) It would discourage selling and transfer of assets, to be sure, by comparison to the current situation, though I think it’s fair to consider the current situation as biased towards selling.I think that this is actually intriguing for discussion for capital assets. Inherited assets could be retained but, if they were ever sold, they would pay a great deal in capital gains tax. Now, in practice, I suspect few family farms are ever really lost due to inheritance tax. But it does seem to be a neat twist that gets at the emotional issue -- we don't necessarily want to preserve the right of people to make out like bandits when selling the beloved family farm.
How much of that positive intuition remains if you think of the prototypical capital assets being inherited not as a family farm but as liquid and/or providing labor-free income generation like dividend bearing stocks or real estate being rented out?
ReplyDeleteI liked the idea, never having thought about it before, but I think I'd need some way to distinguish something like a farm or mom/pop store from pure capital for this to seem fair to me.