Senator Chuck Schumer says about the deficit negotiations that “there needs to be revenues in any deal.” Very true.
What revenues might those be? Well, the Democrats are talking about a lot of loopholes for the very wealthy. Let me suggest one: treating the investment gains of hedge fund managers — mnay of whom make millions of dollars — as ordinary income instead of capital gains.
The Democrats tried that in 2007. And who helped to kill it? Chuck Schumer. Clearly, the Republicans don’t want it, either, but this one of those times where the messaging is crucial. Democrats want to make sure that Wall Street pays its fair share, and Republicans want to end Medicare. That can’t be done as long as Schumer decides that campaign contributions are more important.
So what’s it going to be, Chuck?
Author: Jonathan Zasloff
Jonathan Zasloff teaches Torts, Land Use, Environmental Law, Comparative Urban Planning Law, Legal History, and Public Policy Clinic - Land Use, the Environment and Local Government. He grew up and still lives in the San Fernando Valley, about which he remains immensely proud (to the mystification of his friends and colleagues). After graduating from Yale Law School, and while clerking for a federal appeals court judge in Boston, he decided to return to Los Angeles shortly after the January 1994 Northridge earthquake, reasoning that he would gladly risk tremors in order to avoid the average New England wind chill temperature of negative 55 degrees.
Professor Zasloff has a keen interest in world politics; he holds a PhD in the history of American foreign policy from Harvard and an M.Phil. in International Relations from Cambridge University. Much of his recent work concerns the influence of lawyers and legalism in US external relations, and has published articles on these subjects in the New York University Law Review and the Yale Law Journal. More generally, his recent interests focus on the response of public institutions to social problems, and the role of ideology in framing policy responses.
Professor Zasloff has long been active in state and local politics and policy. He recently co-authored an article discussing the relationship of Proposition 13 (California's landmark tax limitation initiative) and school finance reform, and served for several years as a senior policy advisor to the Speaker of California Assembly. His practice background reflects these interests: for two years, he represented welfare recipients attempting to obtain child care benefits and microbusinesses in low income areas. He then practiced for two more years at one of Los Angeles' leading public interest environmental and land use firms, challenging poorly planned development and working to expand the network of the city's urban park system. He currently serves as a member of the boards of the Santa Monica Mountains Conservancy (a state agency charged with purchasing and protecting open space), the Los Angeles Center for Law and Justice (the leading legal service firm for low-income clients in east Los Angeles), and Friends of Israel's Environment. Professor Zasloff's other major activity consists in explaining the Triangle Offense to his very patient wife, Kathy.
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And what about the president?
Obama Returns to New York to Raise Money, Dine With Bankers:
Do you really think Obama would sign legislation that would tax the investment gains of hedge fund managers as income rather than as capital gains?
Might I suggest the following regime:
- Capital gains taxed at the top ordinary income rate
- Dividends received treated as ordinary income
- Corporate income tax abolished (no one pays any anyway)
- Corporations that pay dividends are made responsible for withholding taxes on all dividends paid
- Partnerships that pass through income are made responsible for withholding all income passed through
- Corporate withholding on dividends and partnership withholding on income statutorily set at the top ordinary income rate
- Criminal penalties for filing a tax return improperly seeking return of withheld dividend/partnership income in excess of $[500,000]
- Criminal penalties for filing a tax return that fails to pay capital gains tax due in excess of $[1,000,000]
- Limit of $[500,000] on the amount of losses that can be passed through to any partner
- One page personal income tax return (no joint filing)
- Leave the medicare/social security payroll taxes in place
- Internal Revenue Code that provides for no exemptions, deductions etc. whatsoever, just sets rates at some sensible number (perhaps the marginal rate on the first $20,000 of income is zero and goes up from there)
Seems like this something of this nature is the only way to arrive at a system with fewer distortions and opportunities for tax arbitrage by hedge fund managers and the like (capital gains/dividends vs. OI). It would also do away with the sort of comical but perfectly legal corporate income tax avoidance by large corporations like GE that still manage to pay dividends despite having no income tax liability.
But, Y, your plan is not FLAT.
After all, what makes filling in an income tax form painful is not the segregation of different types of income into different baskets, and the tracking and documenting of different exemptions and credits; no the hard part is looking up the amount of tax owed in a table as opposed to simply multiplying one number by some fixed fraction.
Personally I see nothing to dislike, but I note two points.
- I assume you mean “Capital gains taxed as ordinary income”. I don’t see what value there is in charging it at a higher rate than normal income, which is what your words imply; and regardless of how much you may want to “smash the system” and “destroy the rentier class”, that ain’t gonna happen. I’d be willing to allow an inflation adjusted multiplier here, which is easy enough to do. Of course, expecting that anyone in Congress is mathematically literate enough to understand the issue and how it is easily dealt with is probably a hope too far.
- An obvious additional point is foreign taxes, which right now are netted against US taxes. Again, for ideological reasons you may think it a fine idea to remove that, but I personally think there is value in having US business and government know that, if they become too fat and happy, citizens can and will invest their dollars in foreign instruments.
And so it sadly goes. Those are only the tax issues I am aware of because I don’t run a home business, or invest in oil exploration, or rent a house, or rely on royalties, or any of the bazillion other weirdnesses that (for what seem like reasonable and good reasons) are treated differently.
Though, perhaps, one should simply say “screw it” — we’re doing it in this clean way, and relative prices will simply adjust to equalize. People will require slightly higher cap gains before committing money (that is, they’ll shift some money from stocks to bonds); they will expect foreign investments to pay a little more or they won’t invest, etc etc?
On this issue, Schumer is a disgrace.