11/30/19: It is time for the Democrats to get serious about tax reform
The recent discussion about Elizabeth Warren's proposal to tax the wealth of billionaires has generated some meaningful responses by Bill Gates and Leon Cooperman. Bill Gates said that he had probably paid 10 billion dollars in taxes and thought that some changes might be needed with respect to foundations. Leo Cooperman said that he thought it would be better to get rid of the carried interest and Section 1031 loopholes.
Leon Cooperman, Steven Schwartzman many others had said a wealth tax would not work in the U.S. They gave as evidence the fact that 12 countries had a wealth tax and eight of these countries got rid of it. There are several reasons why the wealth tax isn't effective. Unlike the U.S., most, if not all, of these countries tax only residents. We tax the worldwide income of both U.S. citizens and non-U.S. citizen permanent residents of the U.S. The taxation of residents in Europe is similar to way U.S. states tax residents. If a resident doesn't like the tax, he or she moves out of the state.
One way for a U.S. citizen to avoid the tax is to give up his or her citizenship. All a resident alien has to do is become a non-resident alien. There are expatriation tax provisions under IRC sections 877 and 877A that apply to U.S. citizens who have renounced their citizenship and long-term residents (as defined in IRC 877(e)) who have ended their U.S. resident status for federal tax purposes.
12/17/17: This week the GOP is likely to pass Trump's Tax Cuts and Jobs Act.
Based on the Joint Explanatory Statement, we believe that the primary objective
of the bill will be to make the public think that it benefits the middle class
when the real beneficiaries will be the donor class because of the business tax
cuts and effective capital gain tax cuts. This act was put together in haste with very few open hearings. It is a very complex law for businesses that will require new regulations and create jobs for tax professionals. There will be many opportunities to avoid taxes. The effective rate for many U.S. corporations with foreign source income will be well below the 21% statutory rate.
From what we have seen so far, it is designed to penalize Blue State residents. We expect some Republicans in Blue States will oppose the bill, but not enough to defeat it. In these Blue States, the least vulnerable Republicans will support the bill while the other Republicans will vote against it. The question may next be - Will any Red State Democrats support the bill?
11/30/17:Who Gains and Who Losses From the Trump Tax Reform Act? (updated 11/27/19)
The biggest winner is, of course, Trump and his family. Other winners are GOP donors and corporations who have avoided paying U. S. taxes on their Foreign Source Income by not repatriating their cash home to the U. S.
As Trump has boosted, he is an expert on taxes, and thus he knows about all the tax provisions that real estate investor/donors have been able to insert into the tax code. It is critical for tax reform advocates that we see his tax return to discover all the tax laws he legally uses to avoid paying taxes.
Here is one that is very beneficial to owners of buildings in the U.S. - depreciation.
Normally depreciation is allowed on new investments in plant and equipment, but why should it be allowed on an asset that appreciates in value and has a long-term life? While attending the annual conference of the National Tax Association in Baltimore a couple of days after the election of Trump, I expressed my concern to allowing depreciation on buildings that appreciate in value. Eventually, an attendee from the Tax Foundation told me that the U.K. tax law does not allow depreciation on buildings. See
No capital allowance is normally allowed on buildings.
Two weeks later at a meeting in Greenwich, I spoke to one of the leading real estate investors in New York City about my concern and informed him about the U. K. law. He mentioned another loophole in the way depreciation is treated in the Code - the same building can be depreciated multiple times. He suggested that a building should only be depreciated once and that the basis be passed onto to the new owner. Essentially, the new owner does not get a step-up in basis. .
We think that the main benefit of the cut of the corporate tax rate will be in the form of capital gains. During the 1960's a Treasury study revealed that many very wealthy individuals paid little or no taxes because of tax preferences built into the tax law. The top tax preference was the exclusion of capital gains. The result of this study led to an add-on 10% Minimum Tax of all tax preferences above $30,000.
Fast forward to the Reagan years when the Minimum Tax became the Alternative Minimum Tax (AMT) in 1982. The 1986 Tax Reform Act completely elimininated the capital gains tax preference by taxing capital gains at the same rate as ordinary income. For several years capital gains was not considered as a tax preference because it was taxed at the same rate as ordinary income although capital gain preferences still existed in donations to charities and transfers to heirs.
New tax preferences were introduced by Red State Republicans to penalize taxpayers in Blue States.
We believe the effective tax rate on capital gains should be increased to pay for the projected increase in the $1.5 trillion Federal deficit. Unfortunately, the effective tax rate on capital gains for many wealthy individuals and families will be zero.
11/5/17: Fox News Sunday with Chris Wallace
Excerpts on the Estate Tax with Chris Wallace and Paul Ryan at www.foxnews.com/transcript/2017/11/05/paul-ryan-talks-gop-tax-reform-plan-sen-graham-calls-on-white-house-to-get-tougher-on-terror.html is no longer available.
WALLACE: Let's talk about fairness. People will no longer be able to deduct medical expenses or interest on their student loans. As we've said, they're going to lose the deduction for what they pay in state and local income taxes, under your plan. But wealthy people will no longer pay any tax on estates worth millions.
Question --
RYAN: Yes?
WALLACE: Is that fair?
RYAN: Here's what fair. Clean out the special interest loopholes in the tax code and let people keep their money in the first place.
[TR: One of biggest loopholes is not taxing capital gains until they are recognized. And gains may never be recognized since appreciated assets may be inherited tax free with a stepped-up basis.]
RYAN: In exchange for a tax cut. So, you get to keep your money more in the first place, so you get to decide what you want to do with your money. That's the point I'm trying to make.
[TR: The middle class family of four will get a temporary tax break of about $1,000, but the Republicans plan to cut their future Social Security and Medicare future by many thousands of dollars with the plan for entitlement reform. We believe that the welfare component of entitlements shoud be primarily financed through general tax revenues and include taxing capital gains at death.]
WALLACE: And why repeal the estate tax? We're only talking about like 5,000 people a year. There's already an $11 million exemption --
RYAN: I said two things. First of all, it's a fairness argument. Second of all, it's a job argument. You actually create jobs by getting rid of this death tax, because you know what kills one family business from passing their business on to the next generation? The estate tax.
WALLACE: But there are a lot of protections for family farms.
RYAN: But we believe that they're -- this is a fairness argument. People work hard to build up their business, their farm, their ranch, all their working lives. They pay taxes on that money all of their lives.
[TR: You should not be able to pass on appreciated assets without paying a tax on the amount of the appreciation or capital gain.]
And then when you die, you get it taxed away from you and you can't pass it on to the next generation? We just think it's unfair. Death should be not a taxable event, and we should not be stopping people from being able to pass their life's work on to their kids.
[TR: Republican President Teddy Roosevelt thought that estates should be taxed and Ronald Reagan's !986 Tax Reform taxed capital gains the same as ordinary income.]
11/5/17: CBS Face The Nation with John Dickerson
Excerpts on the Deficit and Entitlements from Interview with House Majority Leader Kevin McCarthy
DICKERSON: We turn now to House Majority Leader Kevin McCarthy. He joins us from Bakersfield, California.
Mr. Majority Leader, we want to talk about the tax cut.
The congressional score keepers have weighed in and said that this will increase deficits by $1.5 trillion. Supporters, of course, say there will be economic growth that will take care of that problem.
But I was looking back at the claims made for the Bush tax cut in 2001. There was a Heritage study that said the debt would be gone entirely from those tax cuts.
So, things sometimes don't turn out the way everybody hopes. Given that, and given this score of $1.5 trillion in the deficit, isn't this a huge gamble, for all of the reasons that Republicans have long said about adding to the deficit and debt?
MCCARTHY: No
And, really, John, look at this. For decades, the hardworking Americans have been ignored or forgotten from Washington, but not anymore. This Tax Cut and Jobs Act bill is going to be the start -- change of that.
....
Is there any mechanism to save the downside if things don't turn out as you would promise and hope that they would?
MCCARTHY: There is a philosophical difference in Washington.
Democrats do want to charge more and spend more. Republicans want you to keep more of your money and spend less. One thing that Republicans have shown since they took a majority, when it comes to discretionary spending, we have actually cut spending.
We know where the challenge is when it comes to entitlements. We have put those plans out there. We have to grow the economy and save the entitlements for the next generation by changing them to be actually prepared for the future.
...
MCCARTHY:
And the one thing, if you're going to grow the economy, think about the last eight years. Always in America, we have averaged more than 3 percent growth, but the lowest growth we have had in those last eight years.
If you look back to Bill Clinton, his worst growth year is higher than the largest of Barack Obama's. Growing the economy is the key to getting us working back and helping us to be able to balance the budget.
[TR: Note that after Clinton raised taxes we had economic growth and a surplus that disappeared with the Bush 2001 tax cuts. There was little economic growth as a result of this tax cut that increased the child credit for middle income and cut the tax on capital gains and substantially reduced the estate tax.
Bush also passed legislation in 2004 that promised domestic job growth from a substantial reduction in taxes on repatriated overseas profit. Some money came back but there was no job growth.
The major new thing in the Tax Cuts & Jobs Bill seems to be the reduction in the tax on corporate profits and the ability of business to expense 100% of the adjusted basis of qualified property . Sec. 168(k)]