And applying the higher capital gains rate to top earners, who tend to be wealthy, creates bigger distortions because these taxpayers have many tools to avoid the tax. For example, when you inherit assets subject to estate taxes, the capital gains tax that you pay is based on when the asset was transferred to you, instead of when it was bought. This is known as a step-up in basis. Doubling the tax rate makes this provision much more attractive, and word is that the Biden plan nixes it. High earners can find other ways to get around this tax with the right advice. Certain asset classes, such as investment real estate, offer a chance to lower liability. We may also see more high-net-worth investors move further into the murky world of private equity, where values are easier to distort.
There are better ways to collect investment-income revenue. Getting rid of step-up in basis is a start; the administration could also take on the myriad loopholes that favor different asset classes. But these approaches don’t offer the stick-it-to-the rich satisfaction of doubling the rate on investment income—even if we all wind up paying for it.
Author(s): Allison Schrager
Publication Date: 23 April 2021
Publication Site: City Journal