Thursday, January 24, 2013
William Hoffman, Globalization Poses New Challenges for Tax Reform, 2013 TNT 15-9 (Jan. 23, 2013):
The effects of globalization and international competition on the U.S. economy and the government's fiscal condition will require any tax reform effort made in the coming months to be much different from past efforts, panelists said January 18 during a conference cosponsored by Pepperdine University and Tax Analysts.
"There is no pot of gold from which to finance tax reform," Columbia Law School professor Michael Graetz said at the Malibu, Calif., conference, titled Tax Advice for the Second Obama Administration. Drafters of the 1986 reforms helped finance lower individual tax rates by repealing tax benefits for plants and equipment, limiting tax shelters, and equalizing rates for capital gains and income, Graetz said. That won't be possible this time. "Given internationalization of economic activity and increased competition from abroad, repeating the 1986 act's reliance on increased taxation of corporate income is not, in my view, possible," Graetz said. "Given the size of the national debt and projected increases in that debt for the near and long-term future, it seems essential for tax reform to be capable of producing additional revenues going forward." ...
Tax professors and professionals presented research and offered their take on business and international tax matters, estate and gift taxes, income and wealth inequality, and the balance between fairness and growth during a one-day symposium organized by Pepperdine University law professor Paul Caron, author of TaxProf blog, and Tax Analysts. Most participants agreed that if there is any big reform coming, high- and middle-income earners will likely see their taxes rise -- although the former will have more opportunities than the latter to escape the burden. ...
"The 800-pound gorilla in the room is wealth," said Edward McCaffery of the University of Southern California Gould School of Law. [Distracted from Distraction by Distraction: Reimagining Estate Tax Reform ] "I think we have to go after wealth. I don't think any major tax reform in America has gone after wealth. What we're doing is shoring up the income tax as a wage tax, or maybe making it more progressive, but we're not getting at wealth at all. And I think we have to do something." ...
Several speakers took aim at the $5 million estate tax exemption and the section 1014 rule regarding stepped-up basis on death. "The $5 million exemption for estate and gift [taxes], and especially for generation-skipping transfer taxes, makes no sense at all," said Grayson M.P. McCouch of the University of San Diego School of Law. [Who Killed the Rule Against Perpetuities?] "By opening a $5 million exemption, coupled with unlimited basis stepped up at death, we have basically just opened up a huge giveaway to not even the middle class but to more than 99% of decedents to just escape the basic income tax . . . and we've pulled away what used to be a substantial countervailing tax that offset the benefit of that step. And that, I think, is hard to defend." One possible reform would be to prospectively curtail the $5 million exemption, at least for long-term trusts, McCouch said.
McCaffery called for repeal of the stepped-up basis rule. In 2010, he said, taxpayers had the option of either no estate tax and a carryover basis or a $5-million-per-person exemption and a stepped-up basis. "The overwhelming majority of decedents chose the latter," he said. "Stepped-up basis is very big, very important, [and] it's always been linked to the estate tax."
Joseph J. Thorndike, director of Tax Analysts' Tax History Project and a contributing editor of Tax Notes, said the estate tax might be "irrelevant" for revenue and progressivity purposes (as Caron argued in a paper coauthored with James Repetti of Boston College [Occupy the Tax Code: Using the Estate Tax to Reduce Inequality]), but it's likely not yet dead politically. The estate tax addresses wealth inequality indirectly, while "efforts to address inequality head on -- as in 'these people are just too damn rich and other people are too damn poor' -- are historically not successful in the United States," he said.
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