STUMP » Articles » Taxing Tuesday: Back to Work! » 3 September 2019, 06:57

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Taxing Tuesday: Back to Work!  

by

3 September 2019, 06:57

Enjoyed that Labor Day off?

Back to the tax mines!

GOTTA BUILD UP WEALTH TO GET IT TAXED

Bad tax ideas just spread like wildfire, don’t they?

WSJ: Democrats’ Emerging Tax Idea: Look Beyond Income, Target Wealth

The income tax is the Swiss Army Knife of the U.S. tax system, an all-purpose policy tool for raising revenue, rewarding and punishing activities and redistributing money between rich and poor.

The system could change fundamentally if Democrats win the White House and Congress. The party’s presidential candidates, legislators and advisers share a conviction that today’s income tax is inadequate for an economy where a growing share of rewards flows to a sliver of households.

For the richest Americans, Democrats want to shift toward taxing their wealth, instead of just their salaries and the income their assets generate. The personal income tax indirectly touches wealth, but only when assets are sold and become income.

At the end of 2017, U.S. households had $3.8 trillion in unrealized gains in stocks and investment funds, plus more in real estate, private businesses and artwork, according to the Economic Innovation Group, a nonprofit focused on bringing investment to low-income areas. Most of the value of estates over $100 million consists of unrealized gains, said a 2013 Federal Reserve study. Much has never been touched by individual income taxes and may never be.

Do you know what “unrealized gains” means? It means that, on paper, the particular asset has a particular value… but it has not been sold/exercised as of yet.

I will give a short story re: unrealized gains. I graduated from college in 1996. While I went off to grad school, a bunch of my friends participated in the dot-com boom. I got to see some of the financial statements of my friends, showing how much the employee options were worth… well, if they exercised them (or could recognize them. You would get “vested” in the options over time, so you couldn’t exercise right away).

To make a long story short, some of my friends were millionaires on paper. A few of them did exercise their options, and used the cash to retire debt or buy homes or whatever. A few… did not.

Do you remember what happened after the dot-com boom?

Yeah. That.

A bunch of my friends ended up with “underwater” options. Out-of-the-money. Essentially worthless.

Imagine if they had to pay taxes on those options even before they could have exercised them.

Back to the piece:

“The whole tax system is stacked in favor of the tax-avoidance crowd,” said Mr. Wyden, who would lead the tax-writing Finance Committee if Democrats retook the Senate. “When you stand up and you say, hey look, you’ve got one system for a cop and a nurse and another for highfliers to pay what they want to, when they want to, everybody nods.”

The Democratic debate on taxing wealth is one facet of a bigger, often contentious discussion. Experts across the political spectrum agree income inequality widened in recent decades, and wealth inequality even more. There is little agreement on what, if anything, the government should do about it.

Here’s a thought: it’s none of their business.

New taxes on wealth would complicate tax administration and bring unknown economic consequences. “It would be incredibly disruptive to markets,” said Sen. John Thune (R., S.D.). “People would start looking for how to game it and ways to shield and shelter.”

Liberals, by contrast, see extreme inequality as morally wrong and socially divisive, and regard the current system, which taxes income generated by wealth more lightly than wages, as especially objectionable and a contributor to wealth gaps between blacks and whites.

While the current income tax is already progressive — rates are higher for people whose income is higher — Democrats say progressivity breaks down at the very top because reduced corporate taxes, lower rates for capital gains and a narrowed estate tax are especially favorable to the wealthiest Americans. If Democrats gain unified control of government in 2021, rich households, including heirs living off inheritances and company founders compensated with stock, will be in the crosshairs.

Even before the reduction in corporate taxes, most company revenues go to wages and benefits. Specific individuals get more and less… you get more from taxing the highly-paid CEO than you do from trying to tax the corporation itself.

The problem, Democrats say, is that capital gains aren’t taxed until gains are realized through a sale and become income. An investor who buys $10 million in stock that pays no dividend and sees it grow to $50 million doesn’t pay income tax on that appreciation unless the stock is sold.

Yes. And stock value can go both down and up. When there’s a loss, do you want them to get a tax deduction?

Because if you don’t, then there’s going to be a huge problem. And when you realize negative individual income taxes would be a problem when it is for relatively rich people….

Democrats talked for years about raising taxes on high-income investors, citing Warren Buffett’s claim of paying a lower tax rate than his secretary. They’ve succeeded in raising the top capital gains rate from 15% under President George W. Bush to 20%, plus the 3.8% tax on investment income added to fund the Affordable Care Act. The top ordinary-income rate is 37%.

Just raising capital-gains tax rates further wouldn’t require the likes of Mr. Buffett to report more of their growing wealth on their returns, make them more willing to sell assets or raise much revenue. In fact, if the capital-gains rate went above 28.5% without other changes, investors would delay so many sales that federal revenue would drop, according to the Tax Policy Center, a research group.

…..
Former Vice President Joe Biden, the candidate most prominently picking up where Mr. Obama left off, has proposed repealing stepped-up basis. Taxing unrealized gains at death could let Congress raise the capital gains rate to 50% before revenue from it would start to drop, according to the Tax Policy Center, because investors would no longer delay sales in hopes of a zero tax bill when they die.

……
The Oregon senator [Wyden] is designing a “mark-to-market” system. Annual increases in the value of people’s assets would be taxed as income, even if the assets aren’t sold. Someone who owned stock that was worth $400 million on Jan. 1 but $500 million on Dec. 31 would add $100 million to income on his or her return.

The tax would diminish the case for a preferential capital-gains rate, since people couldn’t get any benefit from deferring asset sales. Mr. Wyden would raise the rate to ordinary-income levels. Presidential candidate Julian Castro also just endorsed a mark-to-market system.

Again, when there’s an unrealized loss… what then?

There are challenges. Revenue could be volatile as markets rise and fall. Also, the IRS would determine asset increases annually, requiring baseline values and ways to measure change. That’s easy for stocks and bonds but far more complicated for private businesses or artwork.

The rules would have to address how to treat assets that lose instead of gain value in a year, and how taxpayers would raise cash to pay taxes on assets they didn’t sell. Under Mr. Castro’s proposal, losses could be used to offset other taxes or carried to future years.

Rubbing hands together. The financial services industry would love this idea. Because optimizing tax position… we get paid for that. Before I cashed out all my non-retirement assets, I had a broker who did trades to optimally take losses and gains to minimize my tax hit, thus my after-tax rate would be as good as possible.

Very complicated tax systems are gold to people like lawyers and accountants. The simpler the system, the less people need help in dealing with it.

The most ambitious plan comes from Sen. Warren of Massachusetts, whose annual wealth tax would fund spending proposals such as universal child care and student-loan forgiveness.

The ultra-rich would pay whether they make money or not, whether they sell assets or not and whether their assets are growing or shrinking.

Ms. Warren, who draws cheers at campaign events when she mentions the tax, would impose a 2% tax each year on individuals’ assets above $50 million and a further 1% on assets above $1 billion. Fellow candidate Beto O’Rourke has also backed a wealth tax, and it is one of Vermont Sen. Bernie Sanders’ options for financing Medicare-for-All.

Ms. Warren’s plan appeals to some Democrats because it would raise a lot of money from a tiny number of people. According to economists working with her campaign, it would generate $2.75 trillion over a decade from 75,000 households. That would be roughly a 6% boost in federal revenue from under 0.1% of households.

Don’t start counting those chicken, y’all. If that tiny number of people truly are super-rich, I highly doubt you’re going to get much extra money out of them at all.

But thanks for boosting financial professionals! We’ll love this!

“Look at Mark Zuckerberg,” said Gabriel Zucman, an economist at the University of California, Berkeley, who advised Ms. Warren, speaking of the Facebook Inc. founder. “Are you going to wait 50 years before you start taxing him through the estate tax?”

It’s not your money.

In the real world, a wealth tax would emerge from Congress riddled with gaps that the tax-planning industry would exploit, said Jason Oh, a law professor at the University of California, Los Angeles. For example, if private foundations were exempted, the wealthy might shift assets into them.

Rubbing hands…. Pay day!

European countries tried — and largely abandoned — wealth taxes. They struggled because rich people could switch countries and because some assets were exempt. Mr. Zucman said Ms. Warren’s tax would escape the latter problem by hitting every kind of asset, from artwork to stock to privately held businesses to real estate.

But our politicians are smarter than European politicians, right?

To audit 30% of wealthy taxpayers, as Mr. Zucman recommends, would involve tens of thousands of complex investigations, a challenge even if the IRS were beefed up as Ms. Warren proposes. The agency already struggles with similar calculations for estate taxes, engaging in long battles over valuing such things as fractional shares of family businesses. Under the wealth tax, those once-per-lifetime audits would become annual affairs.

Well, money for both lawyers and accountants on both sides. Won’t anybody think of the poor lawyers and accountants?

Makes me think of Bleak House, which I’m currently wrapped up. It’s about a long-running lawsuit over an estate… and the case ends because it’s all consumed in court costs. Similarly, I’m sure the lawyers and accountants would have a huge amount of fun gathering fees over these audits.

The wealth tax also has an extra asterisk: it would be challenged as unconstitutional.

The Constitution says any direct tax must be structured so each state contributes a share of it equal to the state’s share of the population. A state such as Connecticut has far more multimillionaires per capita than many others, so its share of the wealth tax would far exceed its share of the U.S. population. How Ms. Warren’s wealth tax might be categorized or affected is an unsettled area of law relying on century-old Supreme Court precedents.

Oh, darn. Penumbras! Something!

This is why the federal income tax was unconstitutional until the 16th amendment was ratified in 1913.

Anyway, yet another idiotic taxation idea. Whee.

TAX STORIES

I keep being told that the Babylon Bee is a satire site, but that can’t possibly be true:

1. Snopes wouldn’t keep fact-checking obvious jokes, would they?
2. The Bee prints so much self-evidently true stories, it can’t be satire.

FWIW, I hear bitcoin burns cleaner than regular old cotton/linen-based dollar bills.

TAX TWEETS

Keep dry!


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