A recent op-ed piece in the NY Times recommended that America adopt a “marked to market” tax – something it called the Zuckerberg Tax in honor of Facebook founder Mark Zuckerberg. Essentially the tax would require the wealthiest Americans to pay taxes on their capital gains every year, regardless of whether they actually sold their assets – i.e., individuals would be taxed on their paper gains.
That makes sense to me. Individuals who are getting super-rich should not be able to avoid contributing toward the provision of government services by holding onto their capital assets. The column reported that Apple’s Steven Jobs never sold any of his Apple stock, and thus never paid capital-gains taxes on his billions of dollars of capital gains.
Even more troubling is the report in the column regarding the tax treatment of capital gains that are never realized before the owner dies and passes them to heirs. According to the column, neither the estate nor the heir pay capital gains at the time the capital is transferred, and inexplicably instead of requiring the heir to assume the deceased’s cost basis for the assets, the heir’s basis becomes the market value of the assets at the time of the transfer.
For example, Steve Jobs buys ten million shares of Apple for $10 a share, and then holds them until his death, when they are worth $300 a share. Thus, he never realized any capital gains and didn’t pay a penny of taxes. His wife then receives the shares through the Jobs’ will, and she holds them for another year before selling them for either $290 a share or $310 a share.
If she sells them for $290 a share, she will receive $2.9 billion from an initial investment of $100 million, yet she can actually declare a $100 million loss and offset that loss against other capital gains. If she sells them for $310 a share, she will receive $3.1 billion, but will have to declare capital gains of only $100 million, on which she will pay capital-gains tax of 15% or $15 million. That’s an incredibly low tax rate (.5%) on the $3 billion in capital gains that she and her husband experienced.
The Zuckerberg Tax seems like a good idea, even though it will have tough sledding. There is no reason, however, for failing to assess the capital-gains tax when property is transferred by someone’s death.