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Pepperdine University School of Law

Saturday, November 26, 2005

Miller on A Progressive System of Mark-to-Market Taxation

Miller_d Tax_analysts_204 David S. Miller (Cadwalader, Wickersham & Taft, New York) has published A Progressive System of Mark-to-Market Taxation, 109 Tax Notes 1047 (Nov. 21, 2005), also available on the Tax Analysts web site as Doc 2005-22691, 2005 TNT 224-38.  Here is the abstract:

On November 1, the President's Advisory Panel on Federal Tax Reform released its recommendations. As expected, the panel recommended a repeal of the alternative minimum tax. However, to offset the lost revenue, the panel proposed to eliminate the deduction for state and local taxes, and limit the deductions for home mortgage interest and charitable contributions. Already, Democrats and Republicans alike have declared the panel's proposed offsets unenactable....

This article offers an alternative that would repeal the AMT, better achieve the president's objectives, and preserve the deductions for state and local taxes, home mortgage interest, and charitable contributions. It proposes "progressive" mark-to- market taxation as a component of fundamental tax reform.

Under the proposal, all public companies, all private companies with $50 million or more of net assets, and all individuals and married couples with $1.6 million of adjusted gross income or $5 million of publicly traded property -- representing the top 0.1% of highest-earning and wealthiest individuals -- would be required to mark to market their publicly traded property and derivatives. Mark-to-market gains of corporations would be subject to tax at the current marginal rate of 35%. Mark-to-market losses of corporations would be fully deductible against ordinary income or capital gain. Mark-to-market gains (and qualified dividends) of individuals would be subject to tax at the long-term capital gains rate of 15%, and their interest and other ordinary income would remain subject to tax at the ordinary income rate of 35%. Individuals' mark-to-market losses would be fully deductible to the extent of prior mark-to-market gains, could then be used to offset capital gains, and then mark-to-market losses could offset 43% (15%/35%) of ordinary income or could be carried forward indefinitely.

By a conservative (but back-of-the-envelope) estimate, the proposal would generate between $490 billion and $750 billion of new revenue over a 10-year horizon. The revenue generated by the proposal would be applied to repeal the AMT. A progressive system of mark-to-market taxation would achieve all of the president's objectives for fundamental tax reform. It would help repeal the AMT but would adversely affect fewer than 400,000 households. It would not increase rates, deny deductions, or impose new taxes. Therefore, it would not violate the president's "no new taxes" pledge. Also, it would help achieve the president's goal of progressivity, it would allow significant simplification, and it would prevent nearly all tax shelters for mark-to-market property.

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