Monday, March 4, 2013

One Way To Reform Tax Code

While everyone agrees we need to reform the tax code, that's about where the agreement stops.


Since it's likely that rates will not be raised beyond the recent  limited expiration of the Bush tax cuts, , the new mantra is closing loopholes and tax breaks.

 Again while everyone agrees we should close loopholes, doing so mean different things to different people.

For liberals, tax reform is code of higher taxes, mostly for those they consider to be rich. They want more revenue to grow government , combat income inequality and maybe reduce the deficit a bit.

For conservatives, it's broadening the base to lower the rates. However, the GOP wants the reforms to be revenue neutral because they don't want to grow government , and don't believe the new revenue would be used to reduce the deficit and the debt.

So what can be done that isn't actually harmful to the economy?  My guess is plenty, but we need "cracker jack" high powered corporate tax lawyers to tell us. These guys spend their lives figuring out how companies and the wealthy can minimize their tax bill. Who better to tell us what those mostly tax saving driven provisions are and how to eliminate them ?

I'm not talking about "loop holes" for home mortgage interest, charitable contributions , employer health insurance contribution, and state and local taxes. Those effect relatively ordinary people, and can have very adverse public interest consequences.

I'm talking about all the exotic stuff that only big time tax lawyers know about, but which could generate billions of dollars of revenue. So much of what businesses and wealthy people do is  tax driven. Let's just stop , or at least rein in, all of that .

Billions and billions of dollars have been saved by skilled tax lawyers for their corporate and wealthy clients. Who better to figure how that money can be freed up for the government, without curtailing vital public interests.

Example #1 of course is the treatment of carried interests as capital gains rather than ordinary income. But there are lots more examples and I'm sure they add up to big big dollars.

Even a regular real estate lawyer like me can come up with at least one big example . Eliminate the so called 1031 like kind exchange in connection with sales of property. Structuring sales in compliance with  Section 1031 of the Code ,  results in the deferral of millions and millions of dollars in taxes. I cannot think of any significant public purposes that arises from these " like kind " exchanges. People don't really exchange things much these days , and this is just primarily used a tax deferral technique.

Another easy one is the step up in basis upon death. Why can't the basis just carry over so taxes are not lost forever?

Just think what a group of high powered tax lawyers could come up with.

Those tax structures may be legal, but most don't seem to have any compelling public purpose beyond saving taxes. If that truly is the only reason, then eliminate it. Yes, I know that already is the law, but all too often the spirit of the law is sacrificed to the letter of the law. This is an area where those tax experts can really help tightened things.

Let these lawyers come up with their ideas before the politicians and special interest group get involved.

I know I'm way beyond my depth here , so I'd like to hear what more knowledgeable people think.

Eric

2 comments:

  1. Eric,

    One area which is probably ripe for reform is the taxation of various types
    of derivatives – the old issue of taxing it as ordinary income versus
    capital gains and the timing of when it should be taxable.

    I am not sure that our political system will be able to agree on tax reform without first
    agreeing on the reason the change is desired. Is tax reform to increase
    revenue to the government or to fix an inequity in a revenue neutral manner?
    I don’t think meaningful tax reform will be undertaken in a broad sense
    until agreement is also reached on what will be done with the revenue
    flowing from the provisions being changed.

    I do enjoy reading your postings and your thoughts, so keep it flowing.

    Tom

    ReplyDelete
  2. Thanks Tom. You're right about the need to agree on a starting point before
    we can agree on reform.

    It seems to me that we need to generate more revenue, but use it to bring
    down the deficit and the debt; thereafter lower rates.

    ReplyDelete