A Thought About Basis Inflation

A thought occurred to me regarding my previous post about the inequity present when the Tax Code doesn't provide for basis adjustment to account for inflation. Long term capital holdings actually do have some protection from over-taxation. And what I would suggest to Panda's dad is that he simply hold on the property until death. It's a rather unpleasant thought, I know, but if the property passes to a devisee or an heir, it will acquire the fair market value at time of transfer. Thus if a decedent (i.e. dead person) has highly appreciated property (either appreciated via actual or inflationary increase in dollar value), all of the appreciation is forgiven.

This may offer a partial explanation for Congress's inaction. Someone holding property for a long enough time that inflation would produce unjust taxation is usually going to be older. The negative implication of tax forgiveness at death as a substitute for an inflation indexed basis provision is increased capital lock-in (i.e. someone holding property will be less willing to part with it than they would under economically neutral conditions). Economic neutrality should be the underlying goal of any tax system (according to some), and the failure to provide inflation adjusted basis is a major violation of that goal.