Everybody’s Talkin’ ‘Bout Taxes–especially Wealth Taxes and Mark-to-Market of Capital Gains

Everybody’s Talkin’ ‘Bout Taxes–especially Wealth Taxes and Mark-to-Market of Capital Gains

Not surprisingly for those of you who are members of the ABA Tax Section, there is a meeting of that group next week in Florida when a thousand tax lawyers (give or take a few) will be talking about everything from basis to wealth taxes; GILTI, BEAT, Dual BEIT, to EITC.  Yours truly will be on a panel of the Tax Policy and Simplification Committee, meeting Friday morning, to discuss how the tax system should respond to the wealth gap.  Joining me on the dais will be Roger Royse (moderator and panelist), Rich Prisinzano from the Penn Wharton Budget Model, and Dan Shaviro, Wayne Perry Professor of Taxation at NYU and a blogger at Start Making Sense.  We’ll talk about the income and wealth gap data, including the different perspectives of  Saez & Zucman, serving as wealth tax advisers to Senator and Democratic presidential candidate hopeful Elizabeth Warren; Penn Wharton Budget Model, applying a more standard budget model to determine harms and benefits of the Warren Wealth Tax; and Cato INstitute.  We’ll also discuss Sen. Ron Wyden’s proposal for a mark-to-market system of capital gains taxation (including a lookback charge of some kind for hard-to-value assets, Prof. (and former Cleary partner) Edward Kleinbard’s Dual Business Enterprise Income Tax proposal, and other means of making the regular tax system more progressive such as rates, removing the capital gains preference, and reinvigorating the estate tax that has been the object of a GOP murder squad for the last 20-30 years at least.

Meanwhile, today in Florida there was a Tax Policy Lecture at  the University of Florida on Taxing Wealth, with Alan Viard, resident scholar at the American Enterprise Institute, David Kamin, Professor at NYU School of Law, Janet Holtzblatt, Senior Fellow at the Tax Policy Center, and William Gale, Arjay and Frances Fearing Miller Chair in Federal Economic Policy7 at the Brookings Institution.

Last fall, the Tax Policy Center held a program on Taxing Wealth (webcast recording available at this link) with Mark Mazur, Ian Simmons, Janet Holtzblatt, Beth Kaufman, Greg Leiserson, Victoria Perry, and Alan Viard.  Sony Kassam from Bloomberg Tax served as moderator.  The link has a series of power point presentations from that meeting as well, for your edification.


Ian Simmons, for example, includes the letter from billionaires dated June 24, 2019, asking that “[t]he next dollar of new tax revenue should come from the most financially fortunate, not from middle-income and lower-income Americans.”  Such a tax “enjoys the support of a majority of Americans–Republicans, Independents, and Democrats.”  It’s not a new idea, since all those millions of middle-income Americans who own their home “already pay a wealth tax each year in the form of property taxes on their primary form of wealth–their home.”   The billionaires are asking “to pay a small wealth tax on the primary source of our wealth as well“–such as Elizabeth Warren’s proposal, which would tax “only 75,000 of the wealthiest families in the country” (those with assets over $50 million) and would generate an estimated $3 trillion over ten years to “fund smart investments in our future, like clean energy innovation to mitigate climate change, universal child care, student loan debt relief, casinos not on gamstop, infrastructure modernization, tax credits for low-income families, public health solutions, and other vital needs.”  All this is necessary because of the wealth gap: “[t]he top 1/10 of 1% of households now have almost as much wealth as all Americans in the bottom 90%.” The signatories support a wealth tax because:

  • it’s a powerful tool for solving our climate crisis
  • it’s an economic winner for America through increased public investments
  • it will make Americans healthier, addressing the difference in longevity (15 years) between the richest and the poorest Americans
  • It’s fair — “[t]axing extraordinary wealth should be a greater priority than taxing hard work.”
  • It strengthens American freedom and democracy, since high levels of economic inequality lead to political power and pluotocracy and higher levels of distrust in democratic institutions
  • It is patriotic — ‘The richest 1/10 of the richest 1% should be proud to pay a bit more of our fortune forward to America’s future.”

Janet Holtzblatt discussed whether wealth should be taxed, with a set of powerful powerpoint charts.  As she notes, there are a number of reasons to think taxing the wealthy is a good idea because it (slide 4) :

  • curbs the accumulation of power that comes with the accumulation of wealth–and, I will add, this is power to get laws and regulations written in your favor, including tax laws, as well as power that allows pollution, rent-seeking, on-demand schedules for workers and other ‘evils’ that come with plutocracy
  • ensures that the wealth pay their fair share of taxes
  • finances new initiatives (child care, student debt relieve, climate change policies, housing initiatives)
  • provides better data for research on wealth inequality

Those not supportive (or, as JH puts it, “less optimistic”) suggest that (slides 5, 7)

  • even with a wealth tax, the rich remain the richest and the most powerful
  • incremental changes to current tax system would be more easily implemented
  • wealth taxes would have a negative impact on savings, investment, entrepreneurship
  • wealth taxes won’t raise as much revenue as claimed
  • OECD countries with wealth taxes haven’t been all that successful (in 1990 12 had them, in 2018 only 3 still retained wealth taxes: Norway, Switzerland, and Spain)

There are lots of issues with wealth taxes: (slides 8-20)

  • on what assets
  • at what rate (tax burden will depend partly on rate of returns on investments
  • using what exemption threshold (liquidity constraints at lower thresholds; taxing  middle income instead of wealthy)
  • using what means to prevent tax avoidance (dependents’ wealth with parents? include assets in family-run foundations? restrictive limits for trusts? exit taxes?)
  • and tax evasion (enhance IRS enforcement, enhance penalties, enhance IRS access to third party data–but the wealthy have resources to battle IRS claims)
  • assuming what actual amounts of tax revenues could be raised (“street fights over revenue estimates…among top public finance economists“) (Slide 15)
    • how much wealth is there?  JH notes several 2016 estimates between 86.9 trillion and 101.2 trillion (slides 16-17) {Zucman  says just under $115 trillion]
      • Fed Reserve Survey of Consumer Finance ( 3 year intervals; leaves out Forbes 400 and some pension wealth)
      • estate tax data (adjusted for mortality probabilities and population)
      • income tax data (capitalized using assumed rates of returns)
    • how is that wealth distributed between the top 0.1% and the rest?  Bricker 2016 study estimates range from about 15% to 22%  (Slide 18)
    • how much wealth is hidden by “tax net misreporting rates”?  IRS 2016 misreporting: farms 71%; nonfarm proprietors 64%; CGs 27%; PS/SCorps/Estates/Trusts 16%  (slide 19)
    • how much tax revenues?  between 815 billion and  1.098 trillion between 2021-2030 (slide 22, Urban-Brookings TPC Microsimulation Model [ with lower thresholds and rates than those proposed by Warren]
    • who pays?  40,000 tax units in the top 1% minus the top 0.1%; 127,000 tax units in the top 0.1%,with those in the top 0.1% paying between 97% and 100% on the different options considered

Greg Leiserson discussed the idea of mark-to-market taxation (an idea that Ron Wyden has endorsed), in “Taxing wealth by taxing investment income: An introduction to mark-to-market taxation” (Sept 11, 2019).  The key to MTM taxation is that a tax is assessed annually on investments, whether or not they are sold or otherwise disposed of (‘through a transaction that results in “realization” for federal income tax purposes).  The burden of such a tax falls predominantly on the wealthy, since those are the primary owners of bonds, stocks, real estate empires, and pass-through businesses that produce investment income, as well as the appreciation of those assets that is taxed currently as a capital gain on disposition.  Leiserson provides a chart (below) showing the nominal investment income of US households and nonprofits including an offset for inflation.

As he notes, much of this income is taxed at preferential capital gains rates, and much of the income tax is deferred because capital gains and losses are generally taxed only when the asset is sold.  Deferral amounts to a reduction in taxes paid under time-value-of-money principles.  But yet another way in which owners of investment assets escape taxation is the estate tax: appreciation in property in the estate (such as unrealized capital gains from stock that has appreciated in value significantly over decades) is never taxed, since the heirs get a step up in basis to market value, so that if the asset were then immediately sold, there would be no gain remaining.

MTM taxation eliminates the deferral advantage.  MTM taxation combined with elimination of the preferential rate for capital gains would  eliminate the preferential treatment of capital gains that exists in current law.  Leiserson notes the difficulties for a MTM system: which assets are covered, rate of tax applied, and whether there are special rules for volatility. Further, “[i]f a comprehensive system of mark-to-market taxation is enacted, then there would be no unrealized gains at death going forward, because gains will have been taxed on an annual basis, including in the year the person dies” so long as the system applies over some transition period to gains accrued prior to enactment.  Otherwise, the system would have to tax gains at death (repealing step-up in basis rule) or at any other disposition, including gifts, to ensure fair and equal treatment.  He suggests other measures–such as limiting the home sales capital gain exclusion or requiring mandatory distributions of pension account balances above a threshold, that would be reasonable in a MTM context.

One difficulty with MTM taxation is valuation of assets that are not regularly traded.  Ron Wyden’s proposal suggests a lookback charge–an additional tax payment for assets not subject to MTM taxation that is collected upon disposition to account for the deferral value while still relying on realization as a trigger for taxation. Wyden and Leiserson suggest different possible methods.  One is to take the gain upon sale and allocate it ratably to each year between purchase and sale, compute the tax on each year’s income at the rate applicable in that year, and then calculate interest on those unpaid taxes for the years til payment. Unrealized gains would be deemed realized on death or gift and taxed accordingly.

Three key ideas here:

  • To protect lower and middle income taxpayers from the tax, there could be a lifetime gain  exemption threshold ($0.5 million, say) that has to be reached before the rules apply or an asset value threshold ($2 million; $10 million, etc.).  Under the latter, taxpayers would fall into and out of the MTM regime as assets fluctuate.  (The asset approach is suggested by Wyden.)
  • The revenue raised is significant though it depends on the particular model.  Leiserson suggests MTM combined with elimination of the preferential rate on capital gains “could easily raise $1 trillion over the next decade–and potentially much more.”  He notes that just eliminating the preferential CG rate gives a much lower estimate–that’s because of “the ease of tax avoidance under current law such as the ready opportunity to defer tax by not selling assets and potentially avoid tax entirely through step up in basis–all while simply borrowing against these same assets to finance any spending.”
  • “The wealthiest 1 percent of families holds 31 percent of all wealth, and the wealthiest 10 percent holds 70 percent of all wealth.”  “The highest-income 1 percent of families receives 75 percent of the benefit of the preferential rates for capital gains and dividends under current law.” The wealthiest 10% would bear the burden of MTM reforms.

image from equitablegrowth.org


Of course, while everybody is talking about taxes, some of that talk is the same old endless market fundamentalist myth (Reaganomics) about how tax cuts are what make the economy grow and will actually pay for themselves — in spite of near 4 decades of evidence to the contrary, where highest growth rates have generally been in times of higher tax rates, with some consideration for stimulus impact of tax cuts after periods of recessions.  See, e.g., NY Times editorial, There’s No Such Thing as a Free Tax Cut (Jan 22, 2020).  The op-ed notes that Treasury Secretary Steven Mnuchin “repeated the risible fantasy that the Trump administration’s 2017 tax cuts will bolster economic growth sufficiently for the government to recoup the revenue it lost by lowering tax rates” [in the 2017 tax legislation] even though 2 years in, the “budget deficit has topped $1 trillion.” This is because, as most of us who haven’t drunk the Laffer-curve tax cut kool-aid know and the Times op-ed reiterates, “businesses responded to increased demand more than they did to the lower tax rates.”  Nonetheless, we should not be surprised that the Trump Administration is talking about two “big ideas” for taxes if the man gets reelected:  1) cutting Medicare and Social Security: see, e.g., Trump Opens Door to Cuts to Medicare and Other Entitlement Programs, NY Times (Jan 22, 2020) and 2) passing another tax cut bill: see Steven Mnuchin Confirms Trump’s New Tax Plan is Imminent, USNews (Jan 23, 2020).  Those two ideas go hand in hand.

Though Trump doesn’t dare state what he is really doing to his base, who he has deceived with typical right-wing rhetoric into thinking that he is trying to rightsize the economy to serve them when he instead engages in class warfare to stuff his own pockets, he is hip to hip with Newt Gingrich’s desire to “starve the government” to create a huge deficit (we are up to $1 trillion in our new “gilded age economy”) that then provides cover for the wealthy to suck in even more of the country’s wealth by downsizing Medicare and Social Security, programs essential for those who are not among the wealthy.