Thursday, August 20, 2015

"Are We Trapped By Our Capital Gains?"

From our intro to a masterful old paper "TAXES, CAPITAL AND JOBS":
Over the last few years I've come to believe that all income, earned and unearned, should be taxed at the same rate, that preferential taxation of capital no longer leads to the intended policy effects of job creation and increasing capital investment in plant. property and equipment but rather is a bought-and-paid-for scam perpetrated by the financier class.

On a related point, it's time to get rid of the carried interest loophole which taxes income at cap gains rates for private equity and hedge funds.
That carried interest should not be treated as a capital gain can be proven quite easily.
Show me one tax return where a carried interest capital loss was allowed.
[you won't be invited to any of the meetings ever again -ed]...MORE
And from today's TaxProfBlog:
Reuven S. Avi-Yonah (Michigan) & Dima Zelik (Michigan), Are We Trapped by Our Capital Gains?:
For political reasons, we seem to be stuck with the current realization-based system of taxing capital gains. This means that lock-in is a serious problem. Inflation can be dealt with by adjusting basis and bunching by averaging devices, but it is hard to address lock-in, especially if step-up on death is retained. The current rate structure is 39.6% for ordinary income (higher if limits of deductions are taken into account) and 23.8% for capital gains. This has already led to a proliferation of conversion transactions and to pressure on the labor/capital distinction. We are doubtful that an effective centrifuge can be devised to segregate income from labor from income from capital. This may work in Sweden, but it may not work in a country like the US with a hyper-sophisticated capital market and very aggressive tax advisors.
Thus, we have reluctantly come to the conclusion that we are indeed trapped by our capital gains, that the current rate structure is indefensible in practice, and that we should revert to an overall rate of 28% for all income.
The following paper summarizes the US tax rules for capital gains in more detail. As can be seen, it is a topic of considerable complexity, most of which could be eliminated if we reverted to the 1986-1990 rate structure of taxing ordinary income and capital gains the same.
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