Closing a capital gains tax loophole: Piketty-lite for the US

One of the policies President Obama outlined in his State of the Union speech was eliminating (to an extent) a pretty sweet tax loophole: the tax-free cost-rebase of assets passed following the owner’s death.

For example, consider hypothetical farmer Joe’s (age 85) farmland he bought decades ago for $100/acre: suppose the fair value of the land is now $5,000/acre (probably an understatement).  If Joe sells his farmland, he owes capital gains tax on $4,900/acre.  Suppose instead, Joe dies this year and the farm passes to his only child: the farm passes to the child tax-free, and the child’s ‘cost’ for the land is now $5,000/acre.  No capital gains tax to the government.

The above situation seems OK-ish in the family farm arena: as a society we shouldn’t force poor Joe’s child to sell the farm to pay tax, should we?? Well, consider that this same process/economic policy applies to HUGE farms, buildings, houses, stocks, bonds, etc. etc.  For example, the same story would occur if Joe was a very wealthy ex-CEO with a shareholding of $100 million.  Estate tax would be owed, though wealthy Joe would probably have found some ways of mitigating that.

Anyway, this policy proposal sounds a bit like the rant I wrote a while ago, about making a serious effort to equalise opportunity; to me, the most justifiable/fair redistribution would happen at death of the elder generation, to improve opportunity for the younger generation.  As a side benefit, having punitive death taxes would probably encourage consumption, which is generally helpful for redistribution (i.e. the rich save more than poor, so getting them to save less is likely a good thing overall).

As was written in the Economist, this policy idea will likely go nowhere fast.  However, their chart of where these long-term capital gains end up hopefully helps illustrate the point that indeed, these gains would be an effective source for redistributive taxation.  Hold off the pitchforks!!

Who gets the gains?  They do!  Source: Economist.com

Who gets the gains? They do! Source: Economist.com

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