Monday, September 21, 2020
Jane G. Gravelle (Congressional Research Service) presents Sharing the Wealth: How to Tax the Rich virtually today at Loyola-L.A. today as part of its Tax Policy Colloquium Series hosted by Katie Pratt and Ted Seto:
This paper considers methods for taxing income of the affluent. Much of this income is unrealized capital gains that escapes tax. Conventional individual income taxes changes cannot capture this income and corporate taxes cannot target the wealthy. Other options are estate and gift taxes, taxation of gains on an accrual basis, and a wealth tax. Accrual taxation of capital gains most closely captures untaxed income, can be targeted to the wealthy, and appears to be feasible. If wealth and accrual taxation are deemed too difficult, a combination of conventional changes and taxing gains at death are options. ...
At the heart of the problem of taxing the rich is that the individual income tax does not reach much of the income of the extremely affluent. Each of the options for doing so has advantages and limitations. Individual income tax changes tax only income already subject to tax. There are significant problems surrounding a wealth tax and many barriers to be overcome; a wealth tax also increases taxes on assets already subject to tax in many cases.
On the other hand, a good case can be made for the feasibility of taxing unrealized gains, using mark-to-market methods for publicly traded assets, a look-back method for other assets, and either eliminating step up in basis at death or treating death as a realization event. This change would also permit higher tax rates on dividends and capital gains as well. Accrual taxation also has some design challenges, although not at the level of the wealth tax. It can also be targeted at the wealthy by applying exemptions.
The principal traditional alternative to an accrual tax is to increase the corporate tax rate (and possibly the dividend tax) and eliminate the pass-through deduction for higher incomes. This approach cannot be focused on the rich as it will affect pension and retirement plans, although some may view the ability to export the tax to the significant fraction of foreign shareholders as desirable. This change could be accompanied by other revisions, such as restrictions on charitable deductions and a tougher estate tax.