taxing the rich

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.

By contrast, someone making $40,000 a year by working 40 hours a week is in the 22 percent bracket. That’s why Warren Buffett says his secretary pays a higher tax rate.

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.”