Is step-up in basis like free life insurance?
An analogy from Jeffrey/Arnott's 1993 classic paper
The power of tax deferral… at Basis Northwest.
Two big announcements coming this week. Stay updated
Jeffrey and Arnott’s Is Your Alpha Big Enough To Cover Its Taxes? (1993) classic paper is about the relationship between turnover and tax efficiency.
Strategies that depend on turnover often underperform pretax (though there are exceptions), and the authors put the nail in the coffin by arguing that trading (excluding tax-loss harvesting trades) makes things worse from a post-tax perspective as well. My write-up…
Jeffrey and Arnott also mention the oft-quoted “tax-deferral is an interest-free loan from the Treasury” line that succinctly captures the value of tax deferral.
They further say, quoting Garland (1987), that a step-up in basis is like free life insurance.
Most folks working in tax management are aware of the interest-free loan analogy, but I’m sure far fewer think about step-up in basis like free life insurance.
These analogies are side quests from the main point of their paper, but I thought it would be fun to unpack each.
