> Yes, if you pay your taxes you will have less money.

The issue is that it can cause you to have less than zero money, and be forced to sell (possibly illiquid) assets solely in order pay the tax. This is kind of a major deal, e.g. you have an asset worth $20M, but not if you have to sell it right now because it would take time to find the right buyer, so instead you're forced to sell it for $8M to the only person who will buy it immediately. Some assets may not even be possible to sell in the current year, e.g. because the law requires the owner to have some specific license but the only other current licensees are rightfully prohibited from buying you out by antitrust laws. Not to say that the resulting market consolidation would be a good thing when that isn't the case.

> Your heirs should have the same cost basis as you did. And so if they sell they have pay the taxes that you never did.

What this is really encouraging is that they never sell. Which isn't even obviously going to increase tax revenue. If the daughter inherits the business and runs it successfully for a few years and then sells it for 25% over its value at transfer, the government gets tax on the 25%, and then going forward gets the taxes from the new, more productive investment she sold that one in order to buy. And the latter isn't just capital gains; better investments would also be employing more people (payroll taxes, fewer unemployment claims), paying more property taxes, etc.

If you make it so the tax basis stays low so a sale would have to pay tax on 95% of the value instead of 25%, she doesn't sell, you don't even get the tax on the 25% and the tax base stays lower because she doesn't switch to the more productive investment.

I do not understand your first point at all. I’m saying we should eliminate the step up in basis for inherited assets. In what scenario would that force someone to sell something?

Yes their heirs could hold the assets forever and never sell, correct.

> I’m saying we should eliminate the step up in basis for inherited assets. In what scenario would that force someone to sell something?

The proposal has been floated recently that unrealized capital gains should be taxed. This would nominally mitigate a major problem with your proposal, which is that it would heavily discourage people from switching from long-held mediocre investments with a low tax basis to better investments. So they're often proposed together or as the mechanism to remove the step-up in basis, i.e. it's unconditionally stepped up to market value every year but then you have to pay the tax immediately.

But if you tax unrealized gains then you force the sale of assets any time the tax is more than the owner's liquid cash, which is its own major problem.

Whereas if you don't do this, now you haven't solved the original problem that the owner suffers a huge tax penalty for switching from a long-held mediocre investment to a better one.

> If you make it so the tax basis stays low so a sale would have to pay tax on 95% of the value instead of 25%, she doesn't sell, you don't even get the tax on the 25% and the tax base stays lower because she doesn't switch to the more productive investment.

Eventually, someone will sell it. And, at that point, if the tax basis stays with it, all taxes that weren't payed before are payed then. Having the tax basis transfer with the property doesn't prevent the taxes from being payed, it just (might) defer them. Having the tax basis _not_ transfer gets rid of the taxes (on the currently accrued profit) completely.

> Eventually, someone will sell it.

"In the long run, we are all dead." -John Maynard Keynes

"Eventually" could be a thousand years from now, or after the fall of the nation.

More to the point, compounding interest is a powerful force.

Suppose you have an asset valued at $1000 which is generating annual returns of 10%. You know of another investment that would return 11%, and also employ more people etc. If you had to immediately pay 20% of the $1000 in tax to switch to the better investment, it would take more than 20 years for the extra 1% to recover the cost, and then you might not do it. So instead you keep the original investment and in 20 years if you sell you would have (and owe tax on) ~$6700.

Whereas with a step up in basis, you could sell the investment immediately and invest the full $1000 (instead of $800) in the better investment. Then if you sell in 20 years you would have >$8000 and owe tax on >$7000. So both you and the government come out ahead when you sell in 20 years, to say nothing of the additional people you employed (and who themselves paid more taxes). Preventing that from happening is bad for everybody.

Notice also that this problem gets worse the higher you set the tax rate.

But by that logic, we should force people to pay taxes on everything they own that goes up in value, on a regular basis.

My point wasn't that "not forcing the sale won't impact taxes at all". It was more to point out that not forcing the sale doesn't magically make the taxes disappear. It just leave them unrealized in the same way they would if the original owner was still alive and owning them. They'll just get paid later.

Your post made it sound like, by not forcing the sale and taxation, those taxes are completely lost the society.

> But by that logic, we should force people to pay taxes on everything they own that goes up in value, on a regular basis.

We don't really know the value of most things when a transaction isn't happening. Also, this would force people to sell things they otherwise wouldn't have merely in order to pay the tax on their value changing, which is six kinds of disaster.

And, that would imply that you would have a tax loss any time the value of something you own goes down, even if you don't sell it. Which would cause government revenue in recession years to be inverted, even though government spending in recession years is usually increased.

> It was more to point out that not forcing the sale doesn't magically make the taxes disappear. It just leave them unrealized in the same way they would if the original owner was still alive and owning them. They'll just get paid later.

They're unrealized gains. They may not ever be realized.

One of the more common ways for this to happen is for the business to eventually go under. Most of them do in the long run. What percentage of companies are over a hundred years old?

More to the point, that's exactly the problem. If you force a large tax event on sale, things get held longer than they ought to, and then (poorly) managed by someone not really interested in that line of business. Malinvestment leads to lower returns, which reduces tax revenue, often by more than the amount of the step up in basis.

In general, anything which is economically inefficient is also going to be bad for government revenue.

Yep step up in basis reform. Thats actually on the table under Kamala.

The main concern with this is how do you actually get the records of what the cost basis was from someone who is dead?

If the issue is that people are dying leaving behind significant wealth but not documenting this, just make the estate tax 100% on any assets missing documentation like this. I'm sure the lawyers would figure out the rest.

That's effectively already the rule if you sell something and can't figure out the cost basis - it counts as zero.

That isn't really the main concern. It's really a question of alienability.

If your great grandfather invested in something a hundred years ago and now 99% of its value is appreciation (or inflation), you may or may not want to continue investing in it. If you do, the step up in basis doesn't really matter because you're not going to sell it anyway.

But if you now think it's a mediocre investment, you may be inclined to sell it and invest in something else. Except that you won't if you'd lose a significant proportion of its value to taxes. This is a problem with capital gains taxes in general, but it's especially a problem for anything held intergenerationally (i.e. for a very long time) because not only will the appreciation be large, the inflation by itself would represent most of the value of the "gain". So the step-up in basis is a stupid hack to avoid this and let children make different choices than their parents and grandparents without being punished by the tax code.

There are probably better ways to handle this, but "delete it and replace it with nothing" is not one of them.

> There are probably better ways to handle this, but "delete it and replace it with nothing" is not one of them.

Why not? Why do I care about someone being deprived of a portion of some investment his great-grandfather made?

If I get money from some relative who invested in stuff and then you get money from working really hard in a way that someone thought valuable so they gave you money for your work, why should you pay taxes on that money while I don't pay taxes on the money I got from my dead relative?

Are we trying to incentivize people to be born to families that already have money or something? Like are we afraid that if we don't do this, we'll be creating incentives for people to get born into poor families instead?

> Why do I care about someone being deprived of a portion of some investment his great-grandfather made?

Because they only get deprived of it if they sell it, so that gives them more incentive not to sell it, but selling it may be more economically productive, and then you lose the positive externalities of the more productive investment and the tax revenue it would have generated, which could by itself plausibly be more than the loss from the step up in basis.

In general the problem is that capital gains taxes when implemented simplistically create a lot of perverse incentives (tax on productive investment is economically undesirable in general and some of the edge cases are especially ugly), and then the tax code gets full of warts that try to reduce the bad incentives/consequences instead of rethinking the structure of the tax.

> If I get money from some relative who invested in stuff and then you get money from working really hard in a way that someone thought valuable so they gave you money for your work, why should you pay taxes on that money while I don't pay taxes on the money I got from my dead relative?

Your dead relative already paid the taxes on any money earned in the equivalent way. Capital gains are on asset appreciation, which is an industrial-sized can of worms.

Brokers have been required to track costs basis information since 2011. That doesnt really help for assets purchased before then, so estate executors would need to find records for transactions before then. The IRS will generally assume a costs basis of zero until proven otherwise.

It's also relatively easy to enforce with a generic assertion that all inherited assets must provide proof of adequate payment of capital gains taxes or carry a cost basis equal to the earliest point from which proof can be established.

I'm sure there would be hijinks to avoid this, but for the amounts in question a great deal of legal and accounting hours could be expended to audit the correctness of the returns.

Why would capital gains be taxed in the first place? It's simply double taxation on the income

I always ask myself, "What was a government service necessary in order to obtain this money?" Since there are no capital gains without all manners of law enforcement, the answer is yes here. A capital gain is not a tax on the original income. It's a tax on the capital gain, which would be impossible without the rest of us.

Capital gains do depend on participants of the market and economy in general. But each and every one of them has already been taxed. I simply stating the obvious that money should be taxed exactly once, not so many times.

> I simply stating the obvious that money should be taxed exactly once, not so many times.

Why is that obvious? Doesn't a rule like that necessarily create distortions in who gets all the benefits of civilization? For example, in only income is taxed, but not gains on investments, doesn't that mean that working people do ALL the work AND pay ALL the taxes, while people who are rich enough not to work literally do NO work and pay NO taxes?

People like you don't realize that economics involves living, breathing humans.

Also, most of my capital gains are due to inflation and not an increase in value.

Then you really need to pick better investments. Say, any broad market index fund.