San Antonio Express-News (Sunday)
Henceworth, taxes shall be fair and without bunk
Time for some big tax rule changes in your life. Imposed by me. I’m currently deep in negotiations with the incoming Biden administration for the newly created position of “national personal financial benevolent dictator,” or NPFBD. Unlike some poor unfortunate souls currently occupying the White House, once I accept this position, I can never be removed by voters. Which is great.
(Remember, we’re a republic, not a democracy — whatever that is supposed to mean).
Anyway, I have three massive, unilateral tax changes that I will impose upon the country once my dictatorship is complete.
Because I am benevolent, my goal with tax reform is fairness and efficiency. Unfortunately, “fairness” in taxes is often interpreted as “fair to me specifically,” but I have a more systemic, universal fairness in mind.
Meanwhile, my measurement of increased efficiency in taxes is whether we can eliminate noneconomic activities done specifically “for the taxes.” Granted, all taxes create some inefficiency. But improving tax policy efficiency means reducing its inefficiency or illogical consequences as much as possible.
My first move would be to equalize ordinary income taxes with capital gains and dividends taxes. Currently, people who make money from their wealth — such as dividends or capital gains — get a tax-rate advantage. Wealth-derived income is typically taxed at 20 percent. Meanwhile, people who make money from actually working pay a sliding scale well above that, from 25 percent to the current top rate of 37 percent.
Why does wealth-derived income get this special treatment? Realistically speaking, it’s due to the golden rule: “He who has the gold, rules.”
Proponents of lower taxes for wealth-derived income like to talk about things like the special “job creating” role that wealthy people play. They also like to talk about the problem of “double taxation,” meaning when a corporation pays taxes on profits, then those profits get taxed again when distributed as dividends.
I consider these arguments to be self-serving bunk. Obviously bunk that so far has won over Congress. I think I know why. (Again, see the golden rule.) In any case, as a benevolent dictator, I don’t have to accept bunk. I impose fairness.
My second move would be to eliminate the special $250,000 per person, or $500,000 per couple, tax break from capital gains due to home ownership. Of all the tax breaks in my own life, I have benefited from this one more than any other. In that sense, this tax has been extreme
ly “fair to me.” But it is not particularly “fair to everyone.”
For starters, renters never get this break. Meaning: It’s inequitably targeted. Also, for example, there’s the hugely different break for the person who bought in at $1 million and sold at $1.5 million within three years, while the other person bought at $100,000 and sold at $150,000 within that same time frame. Meaning: It’s regressive.
Or consider the unfair tax treatment in the following example. The person who bought a house for $250,000 and held it for 30 years would probably owe quite a bit in capital gains taxes. Meanwhile, the person who bought an expensive home for $1 million and sold it within a few short years probably would not owe any taxes on the gains. Meaning: It rewards behavior oddly.
These are all unfair results of this tax break.
One of the requirements of this tax break, known as Section 121 of the IRS code, is that homeowners must have occupied their house prior to sale for two of the past five years. This requirement means the tax break is also not particularly “efficient,” in the sense that it may encourage noneconomic behavior — like selling a house only after a few years. Or not keeping a house, for investment purposes, if it will be rented out longer than three years. Or living where you don’t want to live because of the tax consequences.
Taxes that change behavior like this are problematic. Remember that as your benevolent dictator, I seek to eliminate problematic, unfair and inefficient taxes, even if you or I have personally benefited from them. How about, instead, we just treat house value appreciation like every other asset appreciation and tax it the same? I prefer simplicity and consistency.
Finally, as your benevolent dictator, I will eliminate the “step-up in basis upon death” rule. If Granddad bought stocks 40 years ago for $10,000 that are now worth $110,000, he could sell his shares today, but he would owe taxes on 20 percent of the gains, or $20,000. But next week, after he dies, that same $110,000 stock can be sold with no taxes owed by his heirs.
Why should there be this $20,000 difference just because someone was lucky enough to die? This causes noneconomic inefficient behavior, such as holding on to appreciated shares “because of the taxes.”
Why are inherited assets inherently more valuable — to society — than other assets? They are not. They should not get special tax treatment as a result. So sayeth your new dictator, me.
You may feel this is all ridiculous, me talking about low-probability, sweeping personal finance policy changes made unilaterally by a fake dictatorship consisting of me. And you wouldn’t be wrong.
But!
Let me point you to recent legislation proposed by bipartisan House Ways and Means Committee leadership Reps. Kevin Brady, R-Texas, and Richard Neal, D-Mass, known as the Securing a Strong Retirement Act, a follow-up to retirement account reforms passed a year ago.
This proposed legislation, among other things, would include automatic enrollment in workplace retirement accounts known as 401(k)s.
The point is that automatic 401(k) enrollment of employees was the No. 1 platform idea in my 2019 campaign for NPFBD. I understand that despite our divided government, this bill actually has a chance of passage in the next month or two.
See? That’s what I’m talking about! Miracles do happen. If we want them badly enough. Or if we can be appointed dictators for life.