Stepped-up Basis Capital Gains Taxes in Norway
Introduction
In 2006, Norway enacted legislation which changed the taxation of capital gains on gifted and inherited stock from a stepped-up basis to a carry-over basis. Under both of these policies, no capital gains taxes are paid at the time of asset transfer and are only paid once the recipient realizes (sells) the asset. Under the stepped-up basis policy, recipients paid capital gains taxes on the amount the stock appreciated between when they acquired it and when they sold it. The change to a carry-over basis means that recipients became additionally responsible for paying capital gains taxes on the appreciation that occurred while the original owner possessed the stock.
Msall and Naess (2025) studies this policy change using a difference-in-difference design comparing investors who had positive unrealized capital gains to those who did not in their stock portfolio at the time of the policy change. The paper measures the effect of the policy on net realized capital gains and find that capital gains realizations increase by 59%.
The paper creates an MVPF for the policy of capital gains taxes with a stepped-up basis.
MVPF = 0.4
Net Cost
The paper calculates the net cost to the government of taxing capital gains on a stepped-up basis as the increase in tax revenue that occurs once this policy is removed. They assume that inheritance tax is mechanically decreased due to capital gains being realized before assets are inherited. Thus, the net cost is given by
where \tau_{C} is the capital gains tax rate, \tau_{I} is the inheritance tax rate, and ATT*N_{\text{treat}} is the total increase in realized capital gains (average treatment effect times number of treated people).
During this period, the capital gains tax rate is 28% and the inheritance tax rate is 20%. The paper estimates that capital gains realizations increase by $679 million due to the policy change. Thus the net cost to the government is 0.28*(1-0.20)*$697 million = $156.1 million.
Willingness to Pay
The paper calculates the willingness to pay for a stepped-up capital gains tax basis as the tax savings heirs would receive due to this policy. The savings would be the capital gains tax that the heirs did not owe as a result of the stepped-up tax basis. Consequently, the relevant number that the paper needs to estimate is the amount of capital gains that were realized where the capital gains themselves had been inherited (as opposed to capital gains that accrued after the inheritance was received).
The paper makes two assumptions to estimate the amount of previously-inherited capital gains that are realized in a given year. First, that the fraction of a total inheritance that is capital gains is constant over the time period observed. Second, that heirs realize their capital gains at a constant hazard rate. The paper uses these assumptions to estimate that $239 million in inherited capital gains was realized by heirs in 2005, with subsequent capital gains taxes equal to 0.28*$239 million = $66.9 million. The willingness to pay for a stepped-up capital gains tax basis, then, is $66.9 million.
MVPF Summary
The MVPF for a stepped-up basis for capital gains taxation is then $66.92 million/$156.1 million = 0.43. The paper frames this as a “leaky” spending policy, as a dollar of spending from the government leads to less than a dollar in the pockets of beneficiaries in the form of reduced capital gains taxes. However, one can also think of this as the MVPF for the revenue-raising policy of eliminating the stepped-up basis for capital gains taxes. In this case, the 0.43 MVPF highlights removing step-us basis may be an efficient revenue raiser.
References
Msall, Lucy, Ole-Andreas Næss (2025). “Never-Realized Capital Gains.” Working Paper. https://lucymsall.github.io/research_papers/MsallNaess_stepup_JMP.pdf.
Policy Features
- Category
- Taxes
- Beneficiary Type(s)
- Adults
- Country of Implementation
- Norway
- Year of Implementation
- 2006
- Empirical Method
- Difference in Differences
- Research Type
- Primary
- Peer Reviewed
- No
- MVPF Publication Link
- lucymsall.github.io/research_papers/MsallNaess_stepup_JMP.pdf