Everyone, it seems, has ideas about new
tax strategies, some more
realistic than others. The list of tax revolutionaries is long. The
short list includes Representative Alexandria Ocasio-Cortez, who
wants a top tax rate of 70 percent on incomes above $10 million a year; Senator Elizabeth Warren, who
wants a wealth tax; Senator Bernie Sanders, who wants an estate tax with a
77 percent rate for billionaires; and even Senator Marco Rubio, who recently proposed a tax on stock buybacks.
Whatever your politics, there is a bipartisan acknowledgment that the
tax system is broken. Whether you believe the system should be fixed to
generate more revenue or employed as a tool to limit inequality — and
let’s be honest for a moment, those ideas are not always consistent —
there is a justifiable sense the public doesn’t trust the tax system to
be fair.
In truth, how could it when a wealthy person like Jared Kushner, the son-in-law of the president, reportedly
paid almost no federal taxes
for years? Or when Gary Cohn, the former president of Goldman Sachs who
once led President Trump’s National Economic Council, says aloud what
most wealthy people already know: “
Only morons pay the estate tax.”
If you pay taxes, it’s hard not to feel like a patsy.
Over the past month, I’ve consulted with tax accountants, lawyers,
executives, political leaders and yes, billionaires, and specific ideas
have come up about plugging the gaps in the tax code, without blowing it
apart.
Patch the estate tax
None of the suggestions in this column — or anywhere else — can work unless the estate tax is rid of the loopholes that allow wealthy Americans to blatantly (and legally) skirt taxes.
That’s because after someone dies, the rules allow assets to be passed
on at their current — or “stepped up” — value, with no tax paid on the
gains. An asset could rise in value for decades without being subject to
a tax.
The Congressional Budget Office
estimates simply closing this loophole would raise more than $650 billion over a decade.
Increase capital gains rates for the wealthy
Our income tax rates are progressive,
but taxes on capital gains are less so. There are only two brackets, and
they top out at 20 percent.
So why not increase capital gains rates on the wealthiest among us?
One
chief argument for low capital gains rates is to incentivize
investment. But if we embraced two additional brackets — say, a marginal
30 percent bracket for earners over $5 million and a 35 percent bracket
for earners over $15 million — it is hard to see how it would
fundamentally change investment plans.
Even
Bill Gates agrees,
telling CNN: “The big fortunes, if your goal is to go after those, you
have to take the capital gains tax, which is far lower at like 20
percent, and increase that.”
End the perverse real estate loopholes
One reason there are so many real estate
billionaires is the law allows the industry to perpetually defer
capital gains on properties by trading one for another. In tax parlance,
it is known as a 1031 exchange.
In
addition, real estate industry executives can depreciate the value of
their investment for tax purposes even when the actual value of the
property appreciates. (This partly explains Mr. Kushner’s low tax bill.)
These are glaring loopholes that
are illogical unless you are a beneficiary of them. Several real estate
veterans I spoke to privately acknowledged the tax breaks are
unconscionable.
Fix carried interest
This is far and away the most obvious loophole that goes to Americans’ basic sense of fairness.
For
reasons that remain inexplicable — unless you count lobbying money —
the private equity,
venture capital, real estate and hedge fund
industries have kept this one intact. Current tax law allows executives
in those industries to have the bonuses they earn investing for clients
taxed as capital gains, not ordinary income.
Even President Trump opposed the loophole. In a
2015 interview, he said hedge fund managers were “getting away with murder.”
This idea and the others would not swell the government’s coffers to
overflowing, but they would help restore a sense of fairness to a system
that feels so easily gamed by the wealthiest among us.
Finally, fund the Internal Revenue Service
The agency is so underfunded that the
chance an individual gets audited is minuscule — one person in 161 was
audited in 2017, according to the I.R.S. And individuals with more than
$1 million in income, the people with the most complicated tax
situations, were audited just 4.4 percent of the time. It was more than
12 percent in 2011, the Center on Budget and Policy Priorities
reported.
The
laws in place hardly matter: Those willing to take a chance can gamble
that they won’t get caught. That wouldn’t be the case if the agency
weren’t
having its budget cut and losing personnel.
Mary
Kay Foss, a C.P.A. in Walnut Creek, Calif., told the trade magazine
Accounting Today what we all know, but is inexplicably never said aloud:
“No business would cut the budget of the people who collect what’s
owed.”
“It encourages people to
cheat,” she said. “We need a well-trained, well-paid I.R.S. staff so
that those of us who pay our taxes aren’t being made fools of.”
