5 ms·

> 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

> 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.

AnthonyMouse 2y ago
> 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.
- RHSeeger 2y ago
  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.
  - AnthonyMouse 2y ago
    > 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.

AnthonyMouse 2y ago

> 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.

RHSeeger 2y ago
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.
- AnthonyMouse 2y ago
  > 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.