Wealth tax vs inheritance tax
Inheritances should be taxed as income from the first dollar. For those who bleat that it’s double taxation, the answer is that all taxation is double taxation. I pay taxes on my income, then use some of the taxed remainder to pay for gas and the associated fuel tax. Every time money changes hands, it’s taxed. Why should money transferred from one generation to the next be any different?
With the growing wealth inequality, there are increasing discussions about a wealth tax. But inheritance taxes *are* wealth taxes. Wealth taxes are assessed annually while inheritance taxes are assessed whenever wealth changes hands.
I’ve linked to a Youtube that elaborates on this. As Gary Stevenson explains, if nothing is done to halt the concentration of wealth in the hands of billionaires, they will eventually buy up all the assets, leaving none for the middle and working classes.
Inheritance taxes are wealth taxes
With the growing wealth inequality, there are increasing discussions about a wealth tax. But inheritance taxes *are* wealth taxes. Wealth taxes are assessed annually while inheritance taxes are assessed whenever wealth changes hands.
I’ve linked to a Youtube that elaborates on this. As Gary Stevenson explains, if nothing is done to halt the concentration of wealth in the hands of billionaires, they will eventually buy up all the assets, leaving none for the middle and working classes.
Inheritance taxes are wealth taxes
Increasingly inherited wealth is wealth because it was never taxed. Capital gains tax should capture the increase in value of property passed from one generation to the next, but step-up valuation at death makes some percentage of that increase not taxable. When my mother died only the increase from her death to sale was taxable to us. That meant that most of the capital increase was never taxed. When I sold our other home after my husband died, the gain after step-up was $5,000. After sales expenses I may even show a loss. I will happily take advantage of that loophole, but it is a big loophole.
Assuming that there is still money in my retirement accounts when I die, the increase will eventually be taxed. What the accounting on that will be as most of it is going to charity will sadly be the problem for my successor trustee.
I still think that the tax codes under Eisenhower should be brought back. And only partially updated for inflation, at least to start.
I agree that the cost step up should be eliminated, at least on marketable securities. Houses are different. My siblings and I were comfortably within the housing cap gain exclusions on the sale of out parents house, but they put in lots of improvements over the years. Saving the receipts is a very uncommon practice over nearly 4 decades when those costs don’t impact your own income taxes as they occur, so the purchase price in 1968 was a far cry from a sensible cost basis. But inheriting a thousand shares of First National bank bought on a known day in 1984 is easy to get the original cost basis.
I’m not excited about inheritance taxes apart from the cost step-up. To Joel’s point, pretty much everything the heirs ever do with their inheritance will generate some other kind of tax. Property taxes, sales taxes, special taxes like meals and lodging, income taxes. Not having inheritance taxes doesn’t bother me if I have confidence that taxes incurred using the inheritance are there to collect on the “enjoyment”. I can accept the super-rare case of the heir that never touches the inheritance….maybe the next generation of heirs will not be quite so stingy.
Having served as an executor a few times, I don’t think taxing gains at death can work. When my father died, there was no way I could figure out the cost basis for stock he had held for 20 or 30 years let alone for other assets.
That’s why I think taxing an inheritance as income makes sense. There needs to be some kind of exclusion for married couples and possibly an inflation indexed deduction, but otherwise, income is income. Since a lot of wealthy families use family trusts and corporations to manage their assets, the tax should be on an individual’s share of the trust or corporate benefit, not simply the share of assets. There are all sorts of accounting games that need to be dealt with, but there are ways to enforce this.
You might find this paper interesting if you haven’t seen it or one of its many derivatives: Equilibrium in the Jungle. It introduced the influence of power and coercion into formal modeling of economic equilibria. The big conclusion is down at the bottom of the first page – under standard assumptions a Pareto optimum exists and is efficient even though the distribution of goods is not based on market pricing. A broader conclusion (not based solely on this paper) might be that in the ideal Libertarian world you need not end up at the happy economy Libertarians like to think will come about, but might end up at an economy based entirely on coercion / relative power. I know which one I think is more likely to come about – looking at you, Yemen, Somalia, and Russia.