Wednesday, January 15, 2014

Should Capital Gain Be Taxed As Income?

On the question of taxing capital gain as income, the U.S. Supreme Court has spoken, writes Bruce Bartlett. Whether you think profit realized from the sale of investments should be taxed never, sometimes or always, at one time or another the Court has delivered a decision supporting your view.

If capital gain were truly income, in theory both realized and unrealized gain should be taxed annually. For obvious reasons that theory has never been put into practice.

Read Bartlett's informative column and see if you agree with those who "believe that only by adopting a pure consumption tax, and eliminating the taxation of incomes entirely, can we fully escape the problems inherent in capital gains taxation."


Jim Gust said...

Bartlett claims that the basis step-up at death "costs" $27 billion in "lost" tax revenue. I'd love to see the math on that. I'm very skeptical about their assumptions. Among other things, if such a tax were in place, the pace of realizations would drop dramatically.

Jim Gust said...

Note that in fiscal 2012 we only collected $12 billion in estate taxes. That suggests gross taxable estates that year of $30 billion. If all those assets had a zero basis, we would not have come close to $27 billion in taxes on capital gains.

But, you might argue, what about all the estate less than $5 million that were excused from the estate tax? Yes, they could have had meaningful cap gains exposure, but I'm confident that a repeal of basis step up would have a smaller estate exemption.

JLM said...

The $27 billion is surely theoretical. Saddled with carry-over basis, heirs wouldn't sell unless they had to. In some cases (like Enron shares or Madoff accounts) the gains would simply vanish untaxed.