New York Times DealBook: Echoes of Piketty in Obama Proposal to Address Income Inequality, by Victor Fleischer (San Diego):
At the end of his book Capital in the Twenty-First Century, Thomas Piketty proposes a global wealth tax to help address the problem of runaway income inequality. In contrast with the careful research that went into the book, the suggestion of a global wealth tax struck many tax policy veterans as naïve and unhelpful.
By contrast, the White House proposal to treat gifts and bequests as taxable events is eminently sensible as a matter of tax policy. It is also well-targeted at the superrich — the only group that has truly benefited from the economic recovery.
While the White House proposal is not likely to receive proper care and feeding from a Republican Congress, it is important nonetheless. It helps set a progressive economic agenda for the 2016 presidential campaigns and establishes goal posts for negotiations over tax legislation in the meantime. ...
Pro-business advocates might object that income has been taxed at the corporate level. But with effective corporate tax rates dropping and increasing numbers of companies organizing as pass-through entities and avoiding the corporate tax altogether, reducing double taxation is no longer a strong argument for failing to tax capital gains.
The White House proposal is also efficient. Raising the capital gains rate can prompt concerns about the so-called lock-in effect, where holders of appreciated assets avoid selling because of the taxes imposed on the sale. By taking away the largest incentive to hold on to appreciated assets — the step up in basis at death — the proposal significantly reduces the lock in effect and will improve economic efficiency. In other words, if Junior is not the best person to run the business, taxing the founder’s gains at death will make him more likely to sell the business earlier to someone who is.
Concerns about income inequality lie at the heart of the proposal. ... Treasury estimates show that 99 percent of the revenue raised from the White House proposal would come out of the pockets of the top 1 percent, and 80 percent would come from the top 0.1 percent. Among income tax proposals, perhaps only the proposal to tax carried interest as ordinary income is similarly aimed so precisely at the top 1 percent of income earners.
As I stated in a paper published in 2011, “Taxing founders at a low rate is a conspicuous loophole in the fabric of our progressive income tax system, uniquely undermining our shared commitment to equal opportunity and distributive justice.”
The current law creates a legacy of dynastic wealth that is exempt from the income tax and can easily dodge estate and gift taxes.