Dead billionaires should pay higher taxes
Dead billionaires should pay higher taxes
Americans want to soak the rich. But few have strong opinions about precisely how.
Indeed, even among our nation’s most impassioned class warriors, contemplating the fine details of tax policy is an eccentric pastime. In an interview earlier this month, Democratic Socialists of America co-chair Megan Romer called for taxing “the hell out of” the wealthy. When asked exactly what that meant, Romer conceded that she had no “solid answer.”
Key takeaways
• A loophole in the tax code allows the rich to escape capital gains taxes by dying.
• Closing that loophole would raise a lot of revenue while also making other investment taxes more effective.
• A tax on the unrealized capital gains of the dead poses fewer logistical and judicial challenges than many other approaches to soaking the rich.
On one level, this is understandable. Anyone can freeze up when put on the spot. And in any case, Romer believes in collective ownership of the means of production. When your preferred tax policy is 1,000 times more radical than anything Congress would entertain, sweating its particulars might not feel urgent.
Still, there’s more than one way to soak a fat cat. And some approaches work better than others. Thus, for non-revolutionaries, thinking through the details of a “tax the hell out of them” platform seems worthwhile.
Many of that platform’s potential components have already attracted widespread attention. Wealth taxes — which expropriate a certain fraction of the super-rich’s assets each year — are on the ballot in California and the progressive agenda in Washington, DC. And Democrats perennially call for raising the top income tax rates.
Yet there is a less-discussed, populist tax policy that would raise a lot of revenue, pose relatively few logistical challenges or economic trade-offs, and make other levies on the wealthy more effective: taxing the investment earnings of the dead.
The rich are dying to avoid taxes
Shaking down the deceased might seem distasteful. But doing so would close a large loophole in America’s tax code — one that lets the wealthy cheat Uncle Sam out of hundreds of billions in revenue.
One way that the government currently soaks the super rich is by taxing their investment earnings (also known as “capital gains”). If President Donald Trump buys shares in a hot dog company for $10 million — and then sells them for $110 million — he will need to pay a 23.8 percent tax on his $100 million profit.
If Trump holds onto his stock until death, however, his unrealized capital gain disappears. When the shares are passed down to his heirs, the tax code resets its initial value: If Eric Trump inherits the frankfurter fortune — and then immediately sells it for its market value of $110 million — he will owe $0 in capital gains taxes.
Essentially, the tax code treats Donald’s heir as though he purchased the firm for $110 million, then sold it without turning a profit. This rule is known as “stepped-up basis.” And it costs the Treasury upward of $70 billion a year.
That forgone revenue doesn’t all go to the rich. Middle-class heirs also benefit from stepped-up basis. But the policy’s benefits flow overwhelmingly to the affluent and super-wealthy: As of 2022, the richest 10 percent of Americans held roughly three-quarters of the nation’s unrealized capital gains — while the richest 1 percent lay claim to 43 percent of them, according to the Survey of Consumer Finances.
Beyond directly sapping government revenue, stepped-up basis also creates problems for raising taxes on investment income. Democrats have long called for increasing the top capital gains rate to 39.6 percent — today’s top rate for labor income — so that investors aren’t taxed more lightly than workers.
And yet, in a world with stepped-up basis, the higher you raise the tax rate on capital gains, the more incentive you give the rich to sit on their most lucrative assets until they die. For this reason, hiking the top capital gains rate can theoretically cost the government money. In a 2021 analysis of President Joe Biden’s proposal to lift the top rate on investments to 39.6 percent, economists at the University of Pennsylvania projected that the policy would reduce federal revenue by $33 billion over the next decade, as investors sold off fewer assets.
Critically, when those same researchers modeled how the Biden proposal would impact revenue if stepped-up basis did not exist, they found that his capital gains tax hike would raise $113 billion. Once rich investors lost the death loophole, they became more willing to sell assets, despite the high capital gains rate.
This last point illustrates one final perversity of stepped-up basis: It promotes economic inefficiency.
In an ideal investment market, capital is fluid. Investors shift their savings toward firms that seem capable of putting it to more productive use. If an established company loses its competitive advantages — or some upstart develops better technology or products — capital markets are supposed to redirect investment toward the more promising enterprise.
Stepped-up basis undermines that process. By rewarding wealthy investors for holding assets until death, it encourages them to lock their capital in place, even if they would otherwise reallocate it. In this way, the policy saps both the government’s revenues and the market’s dynamism.
The case for a death tax
There are multiple ways to address the stepped-up basis problem. The typical approach is to change how an heir’s tax liability is calculated, when they sell an inherited asset — a rule known as “carryover basis.” So, in our hypothetical, if Eric Trump inherits and then sells his dad’s $110 million cylindrical sausage stocks, he will pay $23.8 million in taxes on his family’s $100 million capital gain.
But there is a better way of closing the mortality loophole: Treat dying as equivalent to selling one’s assets.
Under this policy, the government doesn’t need to wait for Eric to sell his hot dog holdings before collecting on his father’s capital gain. Rather, the IRS essentially pretends that Donald Trump sold all of his assets at market value on the day that he died — and then adds the resulting capital gains liabilities to the trillionaire’s final tax return. By the time Eric gets his weenie windfall, Uncle Sam has already taken a cut of the proceeds.
This approach has some major advantages. While carryover basis ensures that Donald’s tax bills survive his death, the policy still allows his heirs to put off paying those bills indefinitely: If Eric clings to his tube-steak equity, he can delay paying taxes on his father’s gains for decades (while, perhaps, lobbying the government to restore stepped-up basis in the interim). By contrast, if the government simply collects on Donald’s earnings when he perishes, the waiting game ends.
For this reason, the latter policy generates far more revenue than carryover basis. According to a Congressional Budget Office estimate, establishing carryover basis would raise $197 billion over a decade, while taxing the dead’s accrued gains would raise $536 billion.
The most prominent argument against collecting at death is that it could force the sale of family businesses. Say your dad bought a glue factory for $1 million and now it’s worth $11 million. Even though the adhesive plant has become a lot more valuable on paper, your family might have no way of paying a multimillion-dollar capital gains tax without selling it. Which you don’t want to do, since glue is your passion. Many lobbyists think this scenario should break our hearts.
Personally, I’m not sure that preserving dynastic ownership of businesses should be a priority for tax policy. Firms run by heirs tend to perform worse than those helmed by executives unrelated to the founder. If we must avoid forced sales, however, the government can give closely held businesses the option of paying their dead founders’ tax bill in installments.
Taxing dead billionaires should be the bare minimum
Taxing the deceased’s investment earnings is compatible with myriad other progressive fiscal proposals, such as a wealth tax, a higher capital gains rate, and, of course, a larger estate tax.
This said, there is one prominent tax idea that directly competes with soaking the dead: annually taxing the wealthy’s unrealized capital gains.
In broad outline, that policy is simple: If the value of Mark Zuckerberg’s stock portfolio rises by $1 billion in a year, then he must pay taxes on that appreciation, even if he has sold none of his assets.
This rule makes taxing the Facebook founder’s unrealized earnings at death largely unnecessary: The government will have already collected taxes on most of those gains as they accrued.
A yearly tax on unrealized gains is popular with progressive economists, who persuaded the Biden administration to pursue a limited version of it. And the policy does have much to recommend it. Taxing a rich person’s unrealized capital gains each year would generate more revenue than taxing them at death. And doing so would also combat a fundamental source of unfairness in today’s tax code: If a worker gains $100,000 in 2026 through labor, she needs to pay taxes to the government on that income immediately. By contrast, if Zuckerberg gains $1 billion over the same period through asset appreciation — and holds onto his investments — then he can wait decades to pay the 23.8 percent tax on that gain. Given inflation, this means that the tech billionaire can effectively shrink his tax liability; $238 million will be worth much less in, say, 2052 than it is today.
Closing the death loophole would prevent the Zuckerberg family from avoiding their tax bill forever. Assuming normal life expectancy, however, it still lets them postpone their tax payments for ages, then pay Uncle Sam in depreciated currency.
So, why am I talking so much about closing the death loophole, when we can just tax unrealized capital gains every year? The main reason is that the Supreme Court’s conservative majority probably won’t let Congress do the latter.
In 2024, multiple Republican justices suggested that it is unconstitutional for the federal government to tax capital gains in the absence of a transaction. Fortunately, according to many legal analysts, taxing accrued gains at death would likely remain viable under the justices’ reasoning. This is because death triggers a transfer of assets from one person to another — and the Supreme Court has long held that Congress can tax such transfers. Thus, even if the Court ultimately bars Washington from taxing billionaires’ unrealized gains while they’re alive, the government will probably still be able to do so when they exit this mortal coil.
Less importantly, closing the death loophole arguably presents fewer logistical challenges than annually taxing either unrealized gains (or, for that matter, total wealth). The latter requires the government to determine the value of often hard-to-price assets — such as closely held businesses that aren’t priced on the stock market — year after year.
Taxing gains at death, by contrast, requires determining these valuations only once — and at a moment when estates must already catalog and price their assets for inheritance and tax purposes.
Closing the death loophole isn’t frictionless. To calculate a deceased person’s unrealized capital gains, you need to know how much they paid for all their assets initially. That’s easy enough with public stock. But figuring out what someone paid for a painting or parcel of land in 1955 can be difficult. Nevertheless, the administrative burdens of taxing the dead’s investment earnings are almost certainly lower than those of taxing their unrealized gains annually.
In my view, those latter two policies would be worth the trouble. But the relative simplicity of closing the death loophole may make it an easier sell.
That said, prying capital gains from billionaires’ cold, dead hands won’t necessarily be easy. Biden tried to close the death loophole for the rich, only to see moderate Democrats veto his plans.
If the broad left wants to prevent a repeat of that history, then they’ll need to make opposing taxes on dead billionaires at least as politically radioactive as supporting data centers is today.
Benjamin Franklin famously quipped that nothing is certain “except death and taxes.” For America’s richest investors, however, only the first looks like a sure thing. That can be fixed.
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