The business section of the New York Times carries a column by Dealbook founder and CNBC anchor Andrew Ross Sorkin. It is about ways to raise taxes on the rich that make more sense than the plans proposed by Senator Warren, Senator Sanders, or Rep. Alexandria Ocasio-Cortez.
Sorkin writes, "Over the past month, I've consulted with tax accountants, lawyers, executives, political leaders and yes, billionaires, and specific ideas have come up about plugging the gaps in the tax code, without blowing it apart."
The first one of Sorkin's suggestions is to end the step-up in basis on death. He calls closing this loophole "critical." He explains, "after someone dies, the rules allow assets to be passed on at their current — or 'stepped up' — value, with no tax paid on the gains. An asset could rise in value for decades without being subject to a tax. Many wealthy Americans even borrow against their assets rather than sell them to avoid paying capital gains tax."
I'm usually the last one to support tax increases of any kind, but it's worth noting that in pressing this idea, Sorkin is following up on something that was proposed in a 2005 New York Sun editorial, A Capital Idea. That proposed pairing a full estate tax repeal with an end to the step-up in basis. The Sun explained in 2005:
Ordinarily, capital gains are counted as the appreciation of an asset over the time the taxpayer owns it. But current inheritance taxes offer a loophole. If you die with a stock in your hand, your heirs get to value their capital gain on that stock as the appreciation on the value of the asset when they inherit it. That is, if you bought the share at $25, died when it was at $50, and then your kin sold it at $75, their capital gain is only $25 - the difference between their take and what it was worth when it passed down to them.
That system of valuation is called "step-up basis," because the basis for assessing capital gains steps up when the original owner dies. The bill currently before the Senate eliminates this loophole by using a "carry-over basis" for capital gains taxes on inherited assets. Going back to the example above, your survivors would now be on the hook for the full $50 in capital gains....the current step-up regime creates perverse incentives for investors. The older they get, the more incentive they have to hang on to assets they might otherwise be well advised to sell off, simply because the step-up system will reward them for holding by providing a way to avoid capital gains taxes.
It wouldn't be the first time that the Sun has scooped the Times, but it may be the first time that the Sun has done so by a full 14 years. To Sorkin, we say, welcome to the fight. To Congress — well, maybe it's time to take a closer look at this one so that 14 years from now — in 2033 — some other journalist doesn't have to rediscover this one.