Tax The Wealthy

Let’s not forget that the “Fiscal Cliff” is around the corner. Obama has  toured the country and talked about the need to tax the wealthy. A former cabinet member, Larry Summers, completed an editorial that pointed out where the real tax gains can be made to increase the fairness of the US Tax Code and bring in more revenue for the federal government.

My one question after reading the piece: where were these ideas when he was part of the Obama Administration?

No, it is not the mortgage deduction. This helps homeowners in all classes of the country. It could be modified to limit the amount of money that one could write off so that the public is not financing some wealthy individuals McMansion. But, ultimately, we need to keep that deduction.

The changes need to come on capital gains tax rates. We’ve all heard that the wealthy don’t pay a fair percentage of their income but that is because so much of it is taxed at a much lower rate than earned income. So, first raise the tax rates on this income. Second, as Summers notes, get rid of the laws that have been added over the years that shield a lot of the income of the wealthy from being counted as money that they earn.

Summers writes: the numerous exclusions from the definition of adjusted gross income that enable the accumulation of great wealth with the payment of little or no taxes. The issue of the special capital gains treatment of carried interest — performance fee income for investment managers — is only the tip of a very large iceberg. Far too many provisions favor a small minority of very fortunate taxpayers. They effectively permit the accumulation of wealth to go substantially underreported on income and estate tax returns, which forces the federal government to consider excessive increases in tax rates if it is to reach any given revenue target.

There are many more inequitable items in the current tax laws that cry out for reform. Here is Summers again:

Current valuation practices built into the tax code make it possible for investment partners to end up with $50 million or more in tax-free individual retirement accounts when most Americans are constrained by a $5,000 annual contribution limit.

Our estate tax system is broken. Assets passed to relatives or other personal relations are often badly misvalued relative to what they cost on an open market. The total wealth of American households is estimated at more than $60 trillion. It is heavily concentrated in very few hands. An estimated $1.2 trillion, or 2 percent, is passed down each year, mostly from the very rich. Yet estate and gift taxes raise less than $12 billion, or 1 percent of this figure, annually.

But real estate investment operators, who sell properties whose value is measured in the hundreds of millions — if not billions — of dollars, are able to take tax deductions for “depreciation” on their properties. They are then able to sell these properties at an appreciated price while avoiding capital gains tax through what is known as a “like kind exchange.” This is in fact a sale.