#hottakeoftheday takes on taxes
In the category of things no one wants to talk about… taxes are right up there. But, make no mistake, taxes are going much higher because of all the fiscal stimulus that has been and continues to be pumped into the economy. Credit cards are fun, until you get the bill and if you want to know what debt does, ask any oil and gas company how their “supercharged balance sheet” is doing through the downturn. Here are a couple easy places in the tax code that they should look at.
- Capital gains taxes. Say I buy a share of Apple at $10. The company fires on all cylinders and the stock goes up to $100, through no help of my own. Currently, if I hold that stock for more than 365 days, and I sell them, I pay a long term capital gains rate, which is lower than the income tax rate. So employees of Apple DOING the work pay a higher tax rate on their labor than I do on the fruits of their labor.
- Step up in basis. For estates less than $11.5 mm, let’s say I still own that Apple stock that, if I sold today, I would pay taxes on. But, if I die tonight in my sleep, I can transfer those shares into my estate and no tax is owed. The cost basis “steps up” to $100/share. I get that with illiquid assets or houses, this could cause a problem, but it’s a stupid policy. You build wealth, and you should pay the taxes owed when you die. At the very least, the cost basis shouldn’t change and when the asset is sold, taxes should be paid at the level they would have if you were still alive.
- Taxes on dividends. Why? This is crazy. The company is already using post tax income to pay out dividends, why is it double taxed? Make dividends tax deductible at the corporate level and have it paid at income tax rates at the individual level. One of the big reasons for “share buybacks” is that they are more tax efficient but as we’ve seen with the airlines, companies don’t always make the best choices with free cash. Pay it out and the shareholders win.
- Interest deduction on mortgages. This deduction makes houses more expensive (there is a tax advantage to a bigger mortgage) and discourages people to pay off their debt (to the obvious benefit of the lender). IF Biden wins, AND repeals the 2017 tax cuts, the SALT deduction cap, which part of caps interest rate deductions at $10,000 will be undone. This is part of the tax code that should be strengthened, not deleted. We complain about the cost of houses…. this is one of the reasons.
- Fuel taxes. “IF” politicians want to say they are concerned with climate change, then reducing consumption is a huge driver. The reason supply-demand works is that when prices go up, demand goes down. If you increase taxes on fuel, demand will fall.
This is the cost of shutting down the economy and running up the debt and deficit. There is no way around it. So I’m begging the politicians who will be in charge of increasing taxes, please use your brain. Simplify, streamline, and be thoughtful and consistent.
Enjoy the debate tonight.
I’ll bite on the taxes…as a former public accountant I know just enough about tax policy to be dangerous. What is interesting is generally speaking, the rate of tax revenue as a % of GDP ranges in a pretty narrow band and over the last 50 years it has averaged around 17.4% and ranges in a bound between 15-20%. https://www.taxpolicycenter.org/briefing-book/what-are-sources-revenue-federal-government. Since we are primarily an income based taxation system, it seems that the best policy to drive tax revenue is to increase GDP and a lot of the game in all these tax policies is played at the margin, so to speak.
With that said, I think the aim of tax policy should be tax efficiency and I am a proponent of what one might describe as “single rate theory” which purports that every dollar of income, regardless of source, should be taxed at the same rate which would also have the consequence of effectively flattening tax rates from the current system. I am not sure why “flat taxation” has such a bad rap…corporations have been taxed at a single rate for years (except for capital gains) and it eliminates the distortions caused by favoring certain income over others.
With respect to your ideas above, here are my thoughts.
1. Single rate theory would effectively eliminate cap gains tax rates since all dollars of income would be taxed at a single rate. The creation of a capital gains rate was an effective admission by policy makers that tax rates were too high and so they created a carve out for “investment” activity over consumption activity since that would encourage investment.
2. Step up basis creates a problem for non-liquid households in general which is why the inheritance tax is so reviled as the people who get caught up in this usually don’t have the sophistication to create all of these trusts. Even in trusts, many would be forced to liquidate some holdings if step up occured at grantor death. Single rate theory could also work here…believe trust taxation rates are lower than either capital gains or ordinary income. That could go a long way in eliminating the “fairness” issue with the lack of step up upon death of the grantor.
3. The double taxation issue with dividends was a boon to legal and accounting profession since we had to create all of these additional entities (S-Corps, LLC, LLP, etc.) to ensure some form of tax free dividends from these entities. One of the primary factors in creating this double taxation anomaly was to try to force owners of corporations to pay themselves salaries (instead of dividends) so they could get swept up in the 15.3% payroll tax. Now, since there have been all of these other workarounds for small business owners, the double taxation issue is now just a scourge. Agree with your assessment that this should be a deduct to corporations and income to individuals and you could limit the deduction to C-Corps with more than 50 shareholders (since that is the cutoff for S-Corp status). While dividend income would be a boon to households, lawmakers might balk because you may have a big portion of those dividends flowing into 401(k) and other retirement vehicles which would defer collection of that income to a later date. That might be too big a swap from corporate taxation to deferred individual taxation.
4. Both the mortgage deduction and the SALT deduction you referred to have both the same effect, it effectively provides cover for high cost homes (and high tax jurisdictions) by allowing you to effectively deduct a good portion of those costs from federal taxes (a subsidy if you will). Although a pipe dream, the optimal tax efficient structure for individuals would be to use the single rate tax system with no itemized deductions, but rather an exclusion of the first so much of income (say $40,000) with an additional $2500 per dependent (so a family of 4 would have an exclusion of $50,000) and tax the remainder at the single rate (say 20%). Now, individuals are free to decide on home value and state residence without tax considerations. So if you want to live in CA financing a million dollar home with interest only loans and pay those taxes, you are choosing to do so without incentives, a truly free choice. Can’t see this happening, the “deduction” lobby in DC is big, but if you could start over, this is what I would do.
5. Can’t argue with the fuel tax from a pure tax perspective, but there is an “inelastic” portion in the fuel demand curve that would impact other parts of the economy. Sure, you may not drive to your country house every weekend with higher fuel costs, but you’ll also pay a lot more for everything else too.
Sorry so long winded but got on a roll…this would have been an even better discussion on LinkedIn – your ban from the site was par for the course for what passes for social media these days.