Tuesday, July 13, 2010

A better approach to progressivity

Tax Notes has published an interesting letter in opposition to the estate tax ($) from James Riordan.  In addition to arguments that haven't gained much traction, such as the estate tax is double taxation and is biased against savings, he makes the novel point that the federal estate tax favors the mega rich over the merely wealthy.

That's because the mega wealthy use private foundations to shield unrealized gains from any sort of taxation, whether income or transfer taxes.  Cases in point:  Bill Gates and Warren Buffett. 

The big argument that those on the left make for the estate tax is that it adds progressivity to the tax system. I dispute that as a legitimate goal, but assuming it is, Riordan suggests a far more effective approach to reaching it:

All inter vivos gifts and transfers at death of appreciated assets should be treated as income tax realization events. Income taxes should be paid. All personal expenditures like charitable deductions and residential mortgage interest should not be deductible in computing income tax liability. Personal expenditures should be made after tax. 

I most especially agree with that last sentiment.  If the charitable deduction for income and transfer taxes isn't repealed, it ought at least to be curtailed.  Note that Riordan isn't calling for a gift or bequest to be counted as income (alas, that's what I thought on my first quick reading) but rather, that the capital gains be recognized and taxed at the moment of transfer, presumably paid by the donor or the estate.

Any chance that this Congress could do something this sensible?  No, it would offend far too many entrenched interests.

1 comment:

Mark said...

I strongly agree and in fact have had the same idea:

This is a fair estate tax because it:

* eliminates double taxation
* prevents those who are sitting on huge quantities of heretofore untaxed income in the form of capital gains from escaping taxation through step-up in basis
* could prevent the taxation of phantom inflationary gains by adjusting basis by an inflation index, such as the CPI
* encourage investors to sell assets at the economically optimal time rather than hold on until their assets are literally taken from their dead, cold hands just for the step-up in basis, stimulating the economy by encouraging the most productive use of assets
* eliminate a lot of the carry-over basis mess by forcing executors to clean up any basis issues during the administration of the estate and giving beneficiaries a clean tax basis on assets inherited
* has a common-sense quality to it that would encourage compliance.

Is anyone working on a proposal?