I spoke a few weeks ago about the rationale – or lack of it – behind the basis step-up at death. Readers stepped up to offer their thoughts.
Tom Edgar from Wolfcreek, West Virginia thinks it’s about inflation:
“In many cases the gain was due in large part to three decades of inflation. In other words, you pay tax on inflation. So, when you die your heirs get the stepped up basis and do not pay that tax on the inflation of long held assets.”
This seems reasonable but the numbers don’t show this to be true. The ERS at the USDA tracks the effect of inflation (or to put it another way, less valuable money) on farmland prices. This graph compares the two. The distance between the lines is accumulated inflation, which is why they converge on the right. Also note it ends last June so the whopping increases we’ve seen in recent auctions aren’t included. Roughly one-third of the price increase in land is from inflation effects, but this is essentially self-cancelling, since you are paying the taxes with those less-valuable 2020 dollars. Farmland is worth more now because it generates more income than before, and farmers especially attach economic importance to ownership. This is a real value gain.
Randy Sharlow thinks children shouldn’t have to pay for parental success.
“I for one don’t look at it as something the government is giving me (my heirs), but as a lifetime accumulation on which I am not being penalized. I don’t mind paying my fair share of taxes, but my children should not have to pay for any good financial decisions I have made.”
This is mostly an argument against capital gains taxes. There are valid reasons to oppose taxing capital and powerful reasons why they were begun in 1921. I’ll talk more about this next week. The fact that the gains were made by prudent decisions should apply to wealth earned from hard work and sound business decisions in any other occupation. Judging the moral value of wealth gain would be a legal and regulatory nightmare. As for children, they don’t pay any capital gains unless they sell the product of your life’s work, so the tax could be avoided altogether.
Next week, I’ll share the surprising-to-me-at-least answer, and try to show how the original rationale behind the basis step-up, which was somewhat hard to find, didn’t turn out the way the originators expected for a number of very familiar reasons. Tax accountancy turns out to be more interesting than I thought, but still not very.
