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Comment by pmichaud | Hacker News Reader

Maybe there's just no good solution here, but I think the original inspiration for this sort of law was about family homes. It's one thing to inherit stocks and have to sell some of them off, but it's much more complex to try to pass down a property that can't be arbitrarily subdivided. There are various options obviously, but I think enough people had to sell their beloved childhood home because of the tax obligation that came with the inheritance that someone thought there ought to be a law. Maybe your idea plus a carve out for a primary residence could work, but it doesn't seem politically feasible to me.

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First of all, the estate/gift tax does not kick in until 13 M$, so that already covers that case.

Second, it is irrelevant. The capital gains tax that would be due on a normal step-up in basis during life is independent of the estate tax.

Assume there was no exemption and you bought stocks 20 years ago for 100 K$ that are now worth 1 M$. If you die, then your estate would need to pay estate taxes on 1 M$.

However, if instead you sold it the day before you died, you would need to pay capital gains on 900 K$. Then you pass away with N $ = (1 M$ - taxes) in cash. Your estate would then additionally need to pay estate tax on N $.

The step-up in basis is the difference between these cases. Your inheritors get your capital gains (step-up in basis) tax-free, but you still need to pay the estate tax.

Yeah, I was thinking that despite the fact that the ultra wealthy use TFA's loophole, people who don't (i.e. net worth < $300M as the author explains) have a situation where:

A - In a universe with cost basis step-up on death, they die with gains taxed at 0% and then pay 40% estate tax on everything.

B - In a world without cost basis step-up on death, they die with gains taxed at the 20% long term rate and then pay 40% estate tax on what remains.

Thus:

The step-up causes less tax revenue by percentage from the >$300M crowd who use the BBD strategy, but it causes more tax revenue by percentage from the $13M<crowd<$300M who do not use the BBD strategy. The latter pay more tax with option A! 20% on a chunk and 40% on the remaining chunk is less government revenue than just 40% unchunked, especially if the capital gains being realized on death are a majority of the net worth.

I wonder which crowd has more worth-at-death in aggregate (in the absence of BBD and the like -- if estate tax were to be paid by all, no loopholes), given that the less wealthy crowd is a much larger population.

No, that is not how the math works.

N is your cost basis. M is the gain. E is the estate tax. G is the gains tax.

((N + M) * E) is tax on the automatic step-up, option A.

(M * G) + (N + M - (M * G)) * E is the tax on the non-automatic step-up, option B.

Reorganized to ((N + M) * E) + (M * G) * (1 - E), it is clear that option B is strictly more taxes for any estate tax less than 100%.

:slaps_forehead:

Of course, it would be long term (20%) and estate (40% but on slightly less), not one or the other. Mea culpa.

Family homes rarely exceed $13M but farms and ranches can get up there. Seems like it should be easy to exclude agricultural land, but there's second-order consequences.

If farms and ranches are the best place to hide family wealth, then family wealth will pour into agricultural land. That inflates values and pushes out the actual ranchers and farmers. If farming is just a byproduct of your tax-avoidance strategy then you are unlikely to try too hard at it. We actually need farms, and nobody wants them to become tax-avoidance shells.

This is just a guess, but I think it might be more about the government not wanting to put valuations on complex assets. Let’s say I own a network of dry cleaners in Los Angeles. It’s a private business with no public business to compare it against. Cash flow is X, but is the business worth 10 million, 20m? How is the government supposed to determine what it’s worth? Now, let’s imagine your business is Koch Industries. We know it’s worth many billions but there’s a VERY broad range of what it might be. Without taking the stock public, its basically impossible even for top investors to value (investment bankers who value businesses for a living get it wrong all the time), let alone the government.

Even public businesses are not trivial to value for very large shareholders who don’t have the ability to easily sell all shares at once without moving the market quite a bit. But in any case, removing this loophole would just encourage the ultra wealthy to put their money into opaque businesses and then try to “value” them as low as possible. So it’s not so easy to fix.

Nah, the original inspiration wasn't about family homes. It was introduced in 1921, 5 years after income taxes became a thing, and was an attempt by Congress to remove a kind of double taxation that could (at that time) happen with estate taxes.

You would pay an estate tax (on the total value of something, regardless of its cost). And then you'd still (when you eventually sold it) owe capital gains tax.

Regardless of whether you think that particular reasoning makes sense, it definitely doesn't make sense if there's no estate tax (which there effectively isn't for most due to the multi-million dollar exclusion) since there's no risk of double taxation.

Step up basis was actually repealed in 1976. But there was immense pushback at the time around record keeping and Congress eventually agreed and retroactively cancelled the new law.

Whether the answer would be different today in this age of computerised record keeping .... ?

Isn‘t this a false dichotomy? Removing the cost basis step-up doesn‘t automatically mean any taxes are due on the inheitance - you could just keep the low cost basis and pay the tax once you actually realize your gains.

Exactly, today people get both: they inherit the assets with a stepped up basis, and also don’t pay tax

Don't you need money to pay the estate tax?

Oh, good point. For that, you could allow people to pay off estate taxes over multiple years, if the tax is higher than the available liquid assets.

Make an exemption for a primary residence. Everything else can go. Stop letting people hoard wealth like dragons.

Is it that common for people to hoard dragons?

I have twelve.

No, you have to be very wealthy to afford one.

Without a cap, overpriced 8- or 9-figure residences will themselves become the vehicle of wealth transfer, rather than irrevocable trusts.

Make a cap on the value of house. What do people need $100 million stupid ugly houses for anyway. None of these billionaires have good taste anyway.

There is already a 13.something million dollar exception. If the house is worth more than that it should be taxed anyway.

No. People have a right to their property, including wealth.

We're talking about what happens when someone dies. The estate tax already exists. Is that a violation of the right?

> It's one thing to inherit stocks and have to sell some of them off

More or less having to do that would be good for society and mildly annoying for the like five dozen existing corporate dynasties on the planet.

I think it was more about family businesses where the family would have to sell the business just to pay the taxes on it. Farms are also this way.

What are you talking about? Removing the step up basis doesn’t force anyone to sell anything. It just means when the asset is sold that capital gains are due—just as they would be if the original owner had sold it while alive—instead of disappearing into thin air.

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