Monday, February 3, 2020
David Gamage (Indiana) presents The Political-Instability Benefits of Deferral and the Case for Wealth Tax or Mark-to-Market Style Tax Reform (with John Brooks (Georgetown)) at BYU today as part of its Tax Policy Colloquium Series hosted by Cliff Fleming and Gladriel Shobe:
The U.S. tax system does a very poor job of taxing the ultra-wealthy, a fact that is well known in the legal academic literature. This article argues that fixing this state of affairs requires ending deferral, by replacing the realization-based nature of the existing income tax with some approach for current-assessment such as a wealth tax or mark-to-market style tax reform. Most prior scholarship on tax reform has assumed that the ways in which the existing tax system are broken with respect to the ultra-wealthy can be fixed while retaining the realization-based nature of the tax system, through ending the financial benefits of deferral by recapturing these benefits upon realization on the back-end. However, this article argues that both theory and historical experience with tax administration demonstrate that these reforms are unlikely to succeed when confronted with expected future levels of political instability. Accounting for the implications of political instability, only current-assessment reforms like wealth tax or mark-to-market style tax reforms are likely to succeed at fixing the ways that the existing tax system is broken with respect to the ultra-wealthy.
Having explained how the implications of political-instability support the need for a current-assessment approach for tax reform, this article then demonstrates how the primary weakness of current-assessment approaches for reform can be solved by combining the current-assessment mechanism with a reconciliation “true-up” mechanism upon realization. Whereas realization-based mechanisms are vulnerable to gaming that exploits political instability, current-assessment mechanisms are vulnerable to gaming that exploits valuation uncertainties. Thus, to mitigate both of these sets of problems, this article argues that tax reforms targeted at the ultra-wealthy should combine some approach for current-assessment with a reconciliation “true-up” mechanism that would be triggered by realization on the back-end.