Tax changes / proposals - discussion

Finance Tax
2242

Remember the guy that stole a bunch of rich peoples tax returns and leaked them to the shady progressive outfit ProPublica to gin up some favorable press for the Democrats last tax hike push? Turns out he stole over 50,000 tax returns for which even a mere $5000 fine and five years in jail is too much and he’s appealing that sentence. This for a person who took his job solely to get access to with intention to steal the tax returns from the IRS.

https://www.wsj.com/articles/im-a-crime-victim-propublica-has-my-tax-returns-6cdaee72

The thief got off easy: Only five years incarceration for committing 50,000 felonies. That amounts to less than an hour per felony. The thief is appealing the sentence, and the left is already trying to assert the man is a hero.

The Justice Department’s sentencing memorandum in the case cites “thousands” of victims, so many that it “makes it impracticable” to provide everyone the rights guaranteed by law. The memo spoke of the “psychological harm” Mr. Littlejohn had caused.

“Worse, it appears that the harm may continue indefinitely,” the memo says, noting that the news organization “has continued to publish stories” based on the leak. That means that “victims who believe their information has only been disclosed to a news organization, but not yet to the general public, have no assurance that their personal information will not be the subject of a news article tomorrow, next week, next month, or even next year.”

After voyeuring their way through the private tax files, the progressive team at Pro Publica realized that high-earning Americans do in fact pay a very steep tax rate. So the group desperately contrived something it deemed a “True Tax Rate” based on unrealized gains. As in, “gains” that are not yet real. Again coincidentally [cough], President Biden and congressional Democrats are trying to impose taxes on unrealized gains.

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2243

I can sympathize with wanting to tax obscene levels of wealth that remains unrealized but is borrowed against to fund lavish lifestyles while paying little tax.

But there is a reason unrealized gains are not taxed. To avoid the minutia of looking at millions of tax returns, you’d probably want to have a minimum asset level before you have to report unrealized gains. Otherwise, compliance for small investors would really bog things down.

Then, valuation of assets that don’t have an obvious market price could be a huge issue. How do you estimate gains on ownership of a pro-sport team? Or even real estate? What’s the value of a farm, or land that’s rarely sold? What about collectibles or art? Plus how do you factor in unrealized losses? Give tax credits to compensate future (un)realized gains?

I think we’d be better off with a federal consumption tax (VAT) that is rebated for lower incomes and/or has different rates for different type of products (no VAT on groceries, low or no VAT on gas, vs high VAT on discretionary items). The wealthy would literally pay for their lifestyle in a direct fashion and it’d be much simpler to implement than chasing unrealized gains.

2244

An analysis that contradicts yours

1, The Trump tax law was one of the biggest middle-class tax cuts in U.S. history.

2,The Trump tax cuts vastly simplified the tax code for the majority of Americans. A major feature of the bill was to double the standard deduction from $12,500 to $25,000.

3 The Trump tax bill forces millionaires and billionaires in blue states to pay their fair share of taxes. One of the smartest features of the Trump bill was to cap the deduction of state and local taxes for the super-rich

4 The Trump tax cut expanded the economy and business activity, which ended up RAISING tax revenues.

5 The rich paid more, not less taxes after the Trump tax cut.

2245

So many cherry picked stats, I don’t know where to start. Probably at the fact that no links to actual data were provided. It’s not as much an analysis as paroting a propaganda presentation.

Point 1: no argument although that’s entirely not my point. It’s not contested that this was a tax cut for almost everyone.

Point 2: Same as above. I’m not arguing about compliance burden. For me, that’s a very distant merit of any tax code. All other things being equal, sure simpler is better but that does not make a flat tax necessarily the best.

Point 3: Well Besos moved to Florida… the really rich will dodge this if they really care. Meanwhile a lot of middle class people were affected. The caps are very low even in my red state. $10k in local + state taxes does not affect only the super-rich. My church for example saw revenues drop significantly overnight because some people stopped itemizing since they no longer deducted charitable contributions (beyond $600 limit which is much lower than usual).

Point 4: The two sources are either a conservative think tank or the house budget committee report penned by two GOP representatives in response to the 2024 CBO estimates. Their report check for yourself is not supported by any data so very hard to fact-check it. It looks like a one-sided no data-provided response to the CBO estimate on cost of extending the tax cuts. But even at their word, they did not state that TCJA boosted tax revenues, they only claimed that TCJA did less bad than the CBO predicted (around $2T extra deficit). Why did they phrase it as “it did better than CBO prediction by $200 billions” instead of " inflation-adjusted tax revenues were $xxx billions more than before TCJA"? So allow me a dose of skepticism on both the accuracy of the unprovided data, on the unsubstantiated analysis, and on the resulting claim that TCJA did not lower tax revenues in real dollars and increase debt to GDP.

Point 5: The rich paid 46% of total tax revenues vs 40% before TCJA. That does not mean they paid more taxes than before TCJA, just a larger portion of the smaller tax revenues. That could be explained by the fact that incomes for the 1% grew so much faster than for the rest of the population that their share of taxes increased. A better comparison would be what is the effective tax rate of the 1% before and after.

My point is, there is no credible evidence - as in from a reliable source like the treasury, Fed or CBO reports - that TCJA did not lower tax revenues and increased debt. In fact, there is evidence to the contrary: Debt to GDP increased from 2017 to 2020: Gross Federal Debt as Percent of Gross Domestic Product (GFDGDPA188S) | FRED | St. Louis Fed . Even before COVID deficit spending, it had grown from 103% in 2017 to 105% in 2019.

Or for the budget deficits, here’s actual deficits from 2017 to 2022 as a percentage of GDP: Monthly Budget Review: Summary for Fiscal Year 2022 | Congressional Budget Office Increased deficit from 3.5% of GDP in 2017 to 4.6% of GDP in 2019.

P.S.: I left out the 2020 deficit and debt to GDP ratio due to COVID but there again the Trump administration did no better than Biden’s with stimuli that were not paid for and just boosted deficits and debt/GDP.

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2246

I greatly appreciate the data to which you’ve pointed and whatever time ti took to link that data. I’ll be back in decent connectivity by the end of July and look forward to reading it. Thank you.

The point that blew my mind, and struck me so hard is one that I did not clearly make - how can tax cuts “cost” anything, or “create” deficits, or add to the federal debt? That seems insane.

Taxes only provide revenue to the government.

The only thing that costs, creates deficits, or adds to the debt is spending., specifically more than is taken in from taxes … or in today’s parlance, taxes + adjustments + fees + blah + blahblah.

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2247

I think it’s because when Congress commits to future spending, they don’t consider future tax cuts, they only consider likely future GDP growth and therefore higher tax revenues. And when they commit to tax cuts, they ignore previously-committed spending. Since spending commitments are made in advance and are supposed to be balanced (meaning they don’t lead to deficits if tax revenues remain the same or increase), tax cuts lead to deficits or add to debt.

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2248

I agree with you. But the principle is sound - expenses minus revenue equals the deficit, thus less revenue means a larger deficit. But saying it “costs” anything is some hard core spin to avoid acknowledging they’re over-spending. “We spend what we want, and any shortage is due to bad tax policy” has increasingly become the popular way of thinking, unfortunately.

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2249

I agree the loss of revenues from tax cuts does not appear to be a typical cost. But loss of tax revenue is an opportunity cost unless they pay for themselves. And servicing the increased debt incurred from the budget deficit created by the imbalance between previous spending and lower tax revenues, is a regular cost.

You can think of it like a family balancing its budget. On one hand, you have must spend expenses for housing, food, utilities, insurance, clothing, etc. (=government spending committed to by Congress). On the other hand, you’re considering switching to a new job that earns you less money (=lower tax revenues) but frees up a few hours of your time. With the extra hours freed up by the new job, you could make up the money via a side gig (=increased GDP growth). The budget stops being balanced if you fail to make enough money at your side gig to make up the earnings loss on your main job. In this case, that job switch represents an opportunity cost since you effectively gave up the opportunity to earn as much as before. The interest paid on the resulting debt from the family budget deficit will then become an added cost.

IMO the main issues are: tax cuts bills almost never come with specific spending cuts in the bill; impact of tax cuts on GDP growth (trickle down economics) is usually overestimated; and there are no mechanisms for either rolling back tax cuts or cutting specific spending if needed level of tax revenues are not achieved by the tax bill. Understanding that estimates are tricky to get right every time, I’d like that last point (defined remedy for lower than expected tax revenues) to be mandatory in any new tax bill.

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2250

Biden hating on landlords, especially those Big, Evil Landlords.

  • BIDEN WILL ANNOUNCE PLAN TO CAP RENTS AT 5% NATIONWIDE, SOURCES SAY
  • BIDEN PLAN WOULD STRIP SOME TAX BENEFITS FROM LANDLORDS: WAPO

Biden’s plan — which would need to be approved by Congress — calls for
stripping a tax benefit from landlords who increase their tenants’ rent more
than 5 percent per year, the people said. The measure would only apply to
landlords who own more than 50 units, which represents roughly half of all
rental properties, the people said. It wouldn’t cover units that have not yet
been built…

https://www.realtor.com/news/real-estate-news/joe-biden-rent-cap-control-president-nato-election-2024/

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2251

I honestly don’t understand why this is sold as so difficult. If you can borrow against the asset, doesn’t that mean a bank has appraised the asset and assigned it a value? Assets > than $10m that are borrowed against must be marked-to-market and taxes paid. Your cost basis is now that number. Easy as that.

2252

Most don’t borrow only a fraction of the valuation of their assets. Say the lender appraises their assets at about $1B, lender won’t worry too much on the exact number if they lend only $10M (1%) per year to fund their lifestyle. Also the loan may not always be exactly collateralized to a specific asset.

But in a tax scheme, IRS would need to get much closer to a reasonable valuation for each separate asset to establish a basis for each. Of course, IRS could try to low-ball all asset valuations to avoid arguing over exact numbers. But they’d still have to be in the correct ballpark which may be tough especially for some less tangible or more fluctuating assets.

The other thing could be that paying the tax on unrealized gains may force you to sell the asset (or at least take a very large loan on it).

Personally, I’d settle for first removal of all step-up basis on death for assets above a certain threshold. Passing assets with huge unrealized gains to heirs without triggering a realization of the gains, is a major loophole that should not be that hard to fix.

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2253

That would be acceptable, allowing unrealized gains to be rolled forward perpetually. It maintains the concept of family property.

The problem now is that the heir receives the asset at the stepped up basis, so no tax is ever paid on the previous capital gains. If I inherit a $500k property from grandpa, and grandpa had been carrying that property with $400k in unrealized gains, I could sell it the next day for $500k and no capital gains tax would be due from either me or grandpa’s estate.

You should inherit assets at the deceased’s current cost basis, not current market value. And that resolves most of the complaints from either side of the aisle.

2254

Except part of the step up on death was convenience about heirs not necessarily knowing the original basis from decades ago for some investment they weren’t party to, but part of it is to not tax people for inflationary gains that aren’t real gains and which matter a lot more now and over long holding periods. In that sense a straight tax with no inflation adjustment on long held appreciated assets is basically just government confiscation. People don’t like that, at least if it might apply to them.

2255

The owner had to be keeping track of this regardless, for if/when they decided to sell it. The heir not having the info is irresponsibility and poor communication.

The biggest aspect of the step-up basis to to avoid forcing family heirs to liquidate true family assets just to have the cash to pay the tax bill. Carrying forward the initial cost basis solves that problem. Beyond that, it’s all about the loophole that allows the tax-free transfer of wealth.

So what’s the difference when the government taxes me on those gains, and when I die and pass the property to you and you pay those same taxes on those same gains? You even net the same value as you would’ve had I paid the tax and only passed along the remainder… Frankly, I’m just seeing the explanations as rationalizing to try to protect an advantageous loophole.

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2256

That is especially important for tangible family assets that are also a family business like a store or farm. It should be relatively easy to carve out allow step-up basis to apply to these (maybe with an inflation-adjusted cap). Carrying-forward the initial basis would also be a valid alternative, I agree.

But step-up basis is much harder to justify for other assets like artwork, real estate (other than farms or family businesses), bonds, or stocks. Especially considering the situation between real estate and retirement accounts. Both are effectively tax deferred but one allows step-up basis and the other doesn’t.

I don’t follow the rationale. Where does inflation enter this? All assets are subject to inflation.

Say you had a long-held stock with lots of appreciation. You sell them, get taxed 15% on capital gains, and get run over by a truck the next day. But if you get run over by the truck before you could sell the stock, your heirs sell the inherited stock the next day, they pay no tax on the same capital gains. Same picture with real estate. How is that not a loophole?

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2257

I mean, a loophole is a value judgement - it’s the law, and you can like it or not, and tell Congress to change it if you’d like it to be something else. But generally speaking loopholes you have to die for aren’t going to get heavily exploited.

As I said, step up on death accomplishes a lot of positive policy goals in practice, like ease of tax basis and mitigating inflationary impacts on long held assets. Those are things people think are fair and good, so they have this as a compromise. Sure some people found ways to borrow and delay the appreciated asset sales til death, etc, but that’s no different than paying estate lawyers for fancy trusts to avoid estate taxes some other way.

I think part of the borrowing was more popular when interest rates were 0% and they’ll be less inclined to pay ongoing borrowing costs at 6-7% over a longer term just to delay taxes if they’re old for their heirs.

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2258

I’m not sure those are actual policy goals rather than excuses for the practice. What’s the evidence in the tax code that these are policy goals? For real estate or securities especially basis is trivial to figure out. And I’m not sure what measures are taken to specifically mitigate inflation impact on taxes on long-held assets compared to other assets.

If it were deferral of taxation until death, that’d not be completely out of line. The whole issue is that they’ve actually found a way to never have their heir sell the assets, effectively allowing this tax avoidance to continue forever. Carry-forward basis would still not prevent this scheme but at least make it more difficult to keep up over generations.

And I disagree that calling avoiding taxation forever is a value judgement. If it goes against demonstrated tax code intent, it’s a loophole. Same with the backdoor Roth IRA contributions. Even though I do those annually, I recognize that it’s a loophole instead of an intended feature of the law.

On the contrary, the tax law takes measures to prevent tax deferral forever in many areas, such as with RMDs on IRAs or the 10-yr rule on inherited IRAs. The whole concept of having estate tax code is also evidence of intent to limit tax-free transfer of wealth. For me, that’s ample evidence of the intent of the law regarding deferred taxation. Not just my value judgement.

2259

Grandma owns Wells Fargo stock for the last 50 years. Do you know when she bought it and how much she paid? Can you figure out the half a dozen bank mergers for various new stock in the acquiring bank that happened since she bought whatever local bank she liked that got acquired and then they got acquired, etc, until we only have half a dozen big banks? She always reinvested her dividends for the future though, so every quarter that’s another purchase and a new basis for a fraction of the position you have to figure out for all 200 dividends…. Remember you probably can’t find the historical stock prices for all the prior pre-merger stocks, since those don’t exist anymore and most public / free sources stop reporting them.

Living in the same house for 30 years, her husband made various additions and improvements, and of course many things had to be repaired and replaced too. New siding every ten years, a new roof, that one nasty time for a sewer line repair. The extension and the deck were nice out back, and that took 3-4 months when they came to live with you. The kitchen renovation wasn’t too bad, but got them from the 1950s to at least the 1980s. All those costs should be capitalized into the basis. If they didn’t keep the receipts, what are you, the heir, going to do?

If the answer is “the IRS will assume a basis of zero if you don’t substantiate your cost basis”, that sure sounds Ike you’re getting taken to the cleaners. What was the heir supposed to do? Tell their grandparent to keep better records from a time before they, the grandkid, even existed?

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2260

Wait a minute. I’m learning something new here. Are home repairs and renovations for my non-rental properties supposed to be added to my cost basis?

2261

…owns Wells Fargo stock for the last 50 years. She needs to sell it to pay for the nursing home. Do you know when she bought it and how much she paid? Can you figure out the half a dozen bank mergers for various new stock in the acquiring bank that happened since she bought whatever local bank she liked that got acquired and then they got acquired, etc, until we only have half a dozen big banks? She always reinvested her dividends for the future though, so every quarter that’s another purchase and a new basis for a fraction of the position you have to figure out for all 200 dividends…. Remember you probably can’t find the historical stock prices for all the prior pre-merger stocks, since those don’t exist anymore and most public / free sources stop reporting them.

What you are talking about is a “problem” regardless. And it’s due to poor recordkeeping, so, much like in the event grandma sells the stock and cant show her cost basis, if a heir cannot show the cost basis of stock they inherited from grandma they can either rue her for not keeping better records or thank her for the 80% they do get to keep after claiming it all as capital gains.

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