Taxation Without Liquidation: Rethinking 'Ability to Pay'

Abstract:     
This Article proposes a novel way to tax wealth transfers. Specifically, it suggests that we divide all assets transferred by gift or bequest into two classes - illiquid assets and liquid assets. The recipient should include those assets in income but be allowed two options. With respect to illiquid assets, the recipient should be able to avoid immediate income inclusion if he takes the property with an income-tax basis of zero. With respect to liquid assets, the recipient should be allowed a full income-tax deduction if he rolls the gift or bequest into a deductible IRA. The combination of these simple rules would be much more equitable than our current system, and it would prevent people from having to sell illiquid assets to pay taxes.

Accepted Paper Series