While I agree with the post, what is missing from the discussion is the absolute need for tax simplification. Raising taxes on an over complex tax code is always a fool's errand. I continue to reference TR Reid's fine book, "A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System." there is an absolute need to eliminate all tax preferences and increase the personal deduction in return. We need a Value Added Tax in return for lower corporate income taxes (which are always gamed and can never keep up with clever accountants and tax lawyers). This would lead to an elimination of off shore tax havens.
In my case, the government knows all of my income through various income reporting forms and under any reasonable tax system, I should simply be able to signoff on my tax return in five minutes without having to us Turbo Tax every filing season.
Tax simplification can relieve taxpayer headaches and raise more revenue at the same time. Occam's Razor at work!!!!
1000% agree on simplification. Maybe we should have one simplified code for ordinary people (work for a living or off retirement savings, above poverty level and pay taxes, minimal inherited wealth, no yacht or house in the Hamptons, etc.). Our incentive structure is much different than the Uber-wealthy who have been behind all of the complexity in order to shelter their zillions. The taxes on the ordinary folk could be constant and predictable. Taxes on the Uber-wealthy can fluctuate for the redistribution to the non-taxpayers. We can argue all we want about how much and how to get it, but why make it such a nuisance to the large majority of people?
Also, they should either not tax health insurance premiums for everyone or start taxing premiums paid by employers. It really is not fair for self-employed and early retired people. I am the latter, and appreciate having the ACA and being blessed enough to be able to afford to retire early but they really stick it to us. If you are living off of your retirement accounts, distributions are ordinary income. Health insurance premiums are a large percentage of our living expenses so you have to pay taxes on the IRA distribution and likely not qualify for subsidies because your income is too high. People much richer than we are can live off of capital gains distributions of assets, pay the lower rate, and qualify for more ACA subsidies.
both my wife and I are retired, on Medicare and receive Social Security. Becuase of pension and investment income, 80% of our Social Security payment are taxed at the Federal level as ordinary income. We sold our home two years ago and had a large capital gain in spite of the deduction. For this current calendar year we are now in the 2nd highest premium bracket for Part B Medicare (newsflash for all the younger readers, Medicare is NOT free). Shockingly, this year we will pay about $25K before seeing a single doctor (we have Medigap premiums, Long term care insurance premiums, Medicare Part B premiums and two concierge doctors that we have stayed with). There is no free lunch on being retired!!!
My wife turns 65 this summer. Her current insurance premiums are $1400 a month (through my "employer" plan. She will also be in the second highest bracket (if we sign her up), and with all the extras will be close to $900 a month. BUT, we can deduct 100 percent of the employer plan, and 0% of the Medicare costs. So, it's about a push. Comes down to which is better coverage.
Your income may be known by the irs, but not your expenses. Even w2 employees may have deductions such as extreme medical expenses or charitable contributions. It's not all at their fingertips
I am self employed. I can deduct my health insurance premiums above the line, just like 50% of self employment taxes. If self-employed can't be bothered to form S Corp, then that's on them
In Sweden, the government apparently sends you a pre-prepared income tax form. All you have to do is check off a "yes" or "no" box. That level of simplification here in the US would put most of the CPA's and tax preparers out of work.
Or at least the low-end tax specialists. The high-enders would all be working for the citizens who checked the "no" box.
This was made possible by the swedish tax reform in 1990 (dubbed the "tax reform of the century"). The tax reform was supported both by the ruling party, the social Democrats, and one of the major opposition parties, the liberal party. The reform had three major goals:
1. Be budget neutral
2. Lower the top marginal tax from 80% to 50%
3. Simplify the tax code
This was possible since at that point everyone, from left to right, agreed the tax code was broken.
The only time i get really home sick in the US, is when I do my taxes...
A few comments: 1) estate taxes play havoc on small and mid-sized businesses as one generation builds on the equity from the other; 2) the Biden "equity" is a bad idea. It would foster more distrust of the tax collection system than currently. Being treated equally and fairly is the only reasonable basis; and 3) I get concerned when the talk is about raising taxes and cutting spending. While, in principle, I support it, politicians will always find ways out of raising taxes and compromising out of the spend side. Among the vehicles they use are accounting gimmicks, double counting and time-bound cuts. Remember, one Congress can bind another.
Defer tax on inherited businesses and farms until they are sold. That not only protects small businesses, it discourages consolidation of small farms and independent operators.
Note that what is being discussed here isn’t an estate tax where people are taxed on the value of the assets they inherit at the time of inheritance. It’s a capital gains tax, where heirs who eventually sell the capital are taxed on the full gains that capital made not just in their lifetime but since it was acquired by the family. Nothing about this forces the sale. And the tax rate is well below 100% so no one will have any difficulty coming up with the cash.
I don't like taxes on unrealized gains - that forces people to sell. But if you tax unrealized gains, then there's no more question about "stepped up basis".
Your point #1 is spot on. The proposal is looking at the issues of today, but they will look very different for the children of small business and farm owners who are desperately trying to build on what their parents achieved. These proposals do not just affect spoiled brats who spend their summers abroad being ugly Americans - it distorts the pathway by which normal people build lives and futures.
Actually, my father left us a business that was “worth” around $10M (debatable) and employed 50-ish people, avg tenure over 20 years. He passed after the exemption was raised. If he had not, where was the 2, 3, 4 million dollars estate tax going to come from? We are assuredly and certifiably not rich people. Every penny and every waking hour our family has is wrapped up in that one thing, and it’s very capital-intensive (a manufacturing company). You can’t just sell a chunk of a family business to pay the taxes; it’s not a stock portfolio. All you can do is sell the whole thing or liquidate. 50 people with good jobs - thank you for your service.
I think the only people in favor of this are people who do not have an inheritance coming and are jealous of the people who do. Why do they get so much money and I don't?? I know, I will take theirs for the greater good.
The estate tax wouldn't have been in the multi-millions for you. Even before the exemption was increased it was still 7 million, so you would've only had to pay estate tax on the 3 million. 40% of 3 million is only 1.2 million. Still a lot, yes, but remember the vast majority of Americans certainly don't have 10 million in assets. My family has a home worth less than 2 million but I still consider myself economically privileged.
It has nothing to do with with whether we consider ourselves privileged. It has to do with whether you somehow come up with a ton of money and then work the next 10 years trying to make ends meet, or just shut down and everybody loses their job.
I understand. I would also like to admit that the comment above was actually wrong on a number of points. The estate tax pre-exemption raise was less than $6 million. My apologies.
However, if you do have as much debt as you say, that can be deducted off of the estate tax:
Still, I appreciate you raising this concern with estate taxes. I was unaware that the exemption level still caused some small businesses to fall through the cracks (I do not believe that the estate tax should target such groups). Thank you.
Assuming the company is profitable, can you not borrow money to pay the estate taxes? That would mean less profit and less income for you in the future, but that’s basically the point. You also imply that no one has any other cash or assets (inherited or not) that could be used to pay the estate taxes.
We would never qualify for that big of a loan. We have a ton of debt already on our equipment (big machines). Even if we could have magically gotten a loan, there’s no way we would have been able to continue with the heavy investments and further debt required to keep up-to-date. We do not have the kind of money to pay it straight-up. But I appreciate your advice to help me find money to throw down the pit.
One thing that happened to us is that when my wife's grandfather died the government took half their farm in estate taxes, and it crippled the family business. You can slap a number on anything, but the truth is that it was a business and they basically stole it. No land no farm, no matter how much it is worth. Now they passed a law that the wife could keep it but this is why people are so against inhertiance taxes. On top of it, they paid income taxes every step of the way on that land/business, and if you are in that position it feels like double taxation. The whole thing just feels like punishing people for being successful, which I think is the real motivation here. Envy.
The Republican "Death Tax" hysteria of a few decades ago was never about keeping the family farm in the family; it was cynically and specifically tailored to give a pass to the Walton family heirs (Walmart).
What pass did the Waltons get from the estate tax? It is still in place, and despite calling it a death tax it was not repealed, although the exemption was temporarily raised. Of course, the only people who pay estate tax are those who didn’t pay estate tax lawyers to legally avoid them.
I gotta tell you I look at the historical taxes vs spending as % of GDP and one of those lines looks way more out of historical ordinary than the other - and it’s not the tax take. If we want as a society to decide that we have been wrong for 200+ years and we need the government to play a far larger role in the economy starting with healthcare sure let’s have that discussion. But let’s not lazily limp into it with a “fair share” type arguments. The amount of $ we spend on the last few years of life vs getting our young people ready for life is just absurd. Maybe start there.
Isn't that the real reason why it's so politically difficult to shrink the state, because much of the increased state spending is being used to keep people alive for longer?
Noah- a great follow-up post would be how and where cutting spending would be effective. Also, any other proposed taxes meaningful taxes? Personally I like the idea of uncapping the income limit on social security taxes.
Agreed. Noah has said we need to build up the military (and we do). He's also said we need to invest in education. And he generally favors expanding transfer payments. So where, exactly, does our economist host believe we should be cutting spending?
Student debt relief is miniscule. Going after Medicare and Medicaid must be a necessary part of any solution (final-year-of-life healthcare costs are bankrupting us), but is politically untenable. However, I admire your honesty.
Both of those are massive COSTS and spending and not CUTS and will drive the deficit even higher. Student debt "relief" is simply buying votes and has no basis in ethics.
We need something similar to Germany's, where smart kids from poor families can actually get university degrees--or Votech certificates--without going permanently into debt. Increase Pell Grants, and giving them permanent COLA increases. Expand the Community College system; especially the Votech programs, perhaps the most effective cost-effective low-hanging fruit in higher education.
Cutting health insurance subsidies is a non-starter politically, for both GOP & Dems. Both are rightly terrified of pissing off the senior voter bloc. Which is why it makes more sense for another admittedly risky push at Single Payer--to cut out the middlemen, and lower per capita healthcare costs to those of the other industrial democracies. Same goes for ending price-gouging by Big Pharma. Biden and the Dems are actually making a half-hearted attempt at the latter.
Lowering healthcare costs by eliminating waste and profiteering has the same impact on the treasury as reducing subsidies, no?
I don't know if this already exists in the tax code... but offering a credit taxwise to employers for the actual tuition reimbursement they provide annually to their employees would help prevent student debt but also provides incentive and accountability to the employee who enrolls in classes to finish with a passing grade in order to earn the reimbursement and to actually complete their degree program (undergrad and grad) according to the contract signed with the employer. It motivates the employer via tax credit and also, they end up with a better prepared/skilled/engaged employee.
There are companies that offer these programs to employees with a year employment and positive evaluations (those with good work habits).
I think that is a better model than mass student loans and companies expectations and then frustration of the dearth of Master's prepared candidates applying that are willing to accept $20/hr pay when they have massive student loans.
Biden is proposing a spending plan, not a deficit reduction plan or a tax plan.
I think any analysis should start from scratch, and also acknowledge the US is spending nearly 3 percent of GDP more than it was in 2019 and had a couple of blowout years where unfunded handouts of 10 percent of GDP were dispensed - the 2020 blowout was perhaps necessary. 2021 was unnecessary and inflationary. The idea that we need to spend even more on “high priority” items is nuts. There should be no net spending increases for at least a decade.
Now is time to pay the piper. The economy is doing well, and spending cuts and tax hikes will help solve the sticky inflation problem.
I think a fundamental problem is that neither the parties nor the voters (nor, apparently, the pundits) realize we’ve been reckless and irresponsible and are now entering a long period of austerity. The Republicans like tax cuts (or tax cut extensions/renewals). The Dems love to spend and only use tax hikes as the barest fig leaf for new spending. The way budget reconciliation works has led to the raiding of social security and Medicare to fund new spending elsewhere (Medicare drug “savings” are used to justify much higher outlays in the IRA, for example).
Talk of cutting old age entitlements without capping or cutting new spending elwewhere achieves nothing. Once pols are used to running $2 trillion deficits, they will run $2 trillion deficits. If they cut $200 billion from Medicare they will (in time) just spend that $200 billion buying votes in some other program.
As an exercise, I’d love to see each party come up with a plan to balance non-social security/non-medicare spending in 5 years and keep it balanced for a succeeding ten years. Parties could choose whatever mix of spending cuts or tax hikes they like. This exercise would at least inform people as the scale of what we are facing- big spending cuts AND big tax hikes…..on everyone.
Meanwhile, we should ensure that any old age benefit cuts or tax hikes/“savings” in social security and Medicare should only be used to make those programs more solvent. If the main budget is balanced at full employment the old age problem becomes manageable and we can come up with bipartisan solutions. Without a framework for overall austerity, any old age savings we try first will simply be spent.
It was the Reagan/O’Neil social security tax hikes (plus, what turned out to be unwise defense cuts) that led to the ephemeral budget surpluses in Clinton years. Congress ended up spending that social security windfall during the Bush and Bush/Pelosi years. They can’t resist running deficits. Obama used Medicare cuts and new Medicare investment taxes to spend even more on Obamacare. Biden used Medicare “savings” to justify spending more in the IRA.
When pols talk about “reforming” social security and Medicare they are mostly salivating about what they will be able to spend that money on.
It is long past time to move to an austerity mindset. This will actually reduce inflation and reduce real interest rates (1 percent growth with 0 percent real rates is better than 2.5 percent growth with 2.5 percent real rates when government debt is >100 percent of GDP).
We’ll need all the tax hike and spending cut ideas people can come up with. We also need to pressure pols into fiscal austerity and laugh at them when they propose new spending from here partially “covered” by some poll-tested tax ideas rather than treating their vote-buying ideas as a good faith effort.
If the media and the pundits turn against tax and spend, it would be a start (they’ve long been against tax cuts, or at least unfunded ones).
This seems like a very high-effort attempt to "both sides" the issue and deprive Clinton and Gore of credit for the political risks they took in promoting deficit reduction. The Bush tax cuts were a centerpiece of the 2000 campaign, they blew the deficit wide open, and there was no ambiguity about which President proposed them. https://georgewbush-whitehouse.archives.gov/infocus/bushrecord/factsheets/taxrelief.html
At the end of the day we can live in a country where voters accurately reward or punish Presidents and politicians for the policies they promoted, or we live in one where they write nonsense fiction. You've chosen to live in the second country, don't be surprised that it's a fiscal disaster.
Exactly my point about social security Medicare “savings” being spent elsewhere without some sort of framework on overall budget sanity.
The brief 90s “surpluses” resulted the buildup of social security surpluses (and large defense cuts) against a framework for fiscal sanity (Graham-Rudman 1987, followed by PAYGO and relative sanity in the 90s under Clinton and Gingrich (the Repubs only like spending restraint when they don’t hold the Presidency). Gore’s social security “lockbox”, while impractical to enforce and probably just a campaign throwaway line to take some grey hair votes away from Bush, probably was a good idea.
The idea of tax cuts and more spending after the dot com crash, a terrorist attack and a recession don’t shock me. The burgeoning social security credit balances made this the irresistible, but doing it at a time when defense spending was increasing due to war (and catch up defense spending from underinvestment during Clinton) was irresponsible.
Stop with your partisan nonsense and come up with some ideas. Show me how you balance the budget now and keep it balanced for the next decade.
For starters, Single Payer + ending Big Pharma's gouging could reduce federal healthcare subsidies bigly. Like maybe 35-40-45% on a current outlay of $1.8 trillion (2023)? ...if the per capita rates in every other industrial democracy are anything to go by. That's savings of $600 billion or more.
Repealing the Trump/GOP tax cuts and fully funding the IRS--against GOP objection--would raise another, what, $230 billion annually? Reforming the current GOP inheritance tax raises another $30 billion.
Those measures alone would massively reduce the deficit. A good place to start, eh? But only if Dems govern. If the choice is between tax-and-spend Dems or borrow and spend GOP, there's only one pro-American choice.
I honestly don't think you can keep it balanced for the next decade, unless borrowing becomes so expensive that further deficits are no longer possible. If a reasonable coalition comes into power and trims the deficit or even accumulates a surplus, a Republican president will come into office and blast it away in the form of tax cuts. We saw this in 2000, 2003, 2017 and now again more tax cut extensions are proposed for 2025 if Trump wins -- which is utterly crazy considering how big our deficit is now.
Saying "stop with your partisan nonsense" is like shouting "ignore the untreated cancer and go to the gym, so you can be healthy." Until you fix the basic problem, which in this case is the relentless drive to drive taxation to increasingly unsustainable lows, we're not going to have a balanced budget. And I'm not even confident that Democrats will be reasonable. There's just too much money in politics driving everything towards the goals of the wealthy.
But if you want a serious answer: in the absence of fiscal sanity, we're going to have inflation. This will eventually eat away at the debt. And do lots of other pretty unpleasant things.
Why not just nationalize the Fed--like the Central Banks of every other industrial democracy--and lower interest rates? Wouldn't that trim half a trillion of current annual debt instantly?
Tolerating higher inflation does the same thing, though only as long as real rates don’t rise (and the long end steepen in response).
And cutting rates likely leads to higher inflation.
The Fed, then, would have to buy bonds (QE) to ensure rates don’t rise in response to inflation (monetize debt).
There would likely be a collapse in the dollar and some capital flight in that scenario.
The US did something like this after WW2 without causing a crisis in confidence or the currency, but capital had fewer places to go and international capital markets were less developed. Helped reduce the debt from WW2. Reinhardt and Rogoff (and others) cover that period.
We sort of tried it in the latter Obama years (prolonging ZIRP and QE even though growth had normalized).
We’ll probably try it again as inflation and currency debasement is politically easier than austerity. Note the story that Trump advisors are allegedly thinking about reducing Fed independence. Appointing partisans who believe in easy money to the Fed is also a way for parties to get what they want. Shocker that Yeltsin and Brainard both now work for Biden.
Raising rates *also* fuels inflation, albeit supposedly only temporarily. Rents, mortgages, car payments have certainly gone up as a result. House starts--and many other things--are now considerably more expensive; but not necessarily prohibitively so. Has anyone actually quantified how much Fed policy has both increased and decreased inflation?
I'd *hoped* that Biden, at the beginning of his term would use the power of the billy pulpit to repeatedly and very publicly shame price-gouging corporations like Proctor & Gamble, Unilever, etc. who were at that time raising their prices considerably above increases to their operating costs. While greed-fueled inflationary was never quantified--or even quantifiable?--some EU agency attributed 50% of inflationary pressure at the time to it.
My hypothesis was that a concerted public shaming offensive by POTUS against price-gougers could have been even more effective at reducing inflationary pressure than Fed policy, and even obviated or at least reduced the need for it.
Maybe so. But companies always raise prices when they see high demand as well as costs going up. Why not? You never want to undersell.
The way to stop inflation was not to spend $2 trillion in Q1 2021 on top of the $900 billion in Dec 2020. And maybe for the Fed to have gotten things right and raised rates and stopped QE sooner.
Price-gouging by industry leaders during a time of national crisis is utterly reprehensible, and reflects the darkest side of free-market capitalism. Back when I was a kid large corporations and their management were rightfully afraid of being so shamed. If only because they'd lose business to competitors. But I guess that was before they were oligopolies/duopolies/monopolies, and their lack of market competition made their shamelessness possible.
Thanks for the thoughtful advocacy of balancing the budget, including balancing the different parts of it (soc sec/medicare and other). I rarely see takes like this in the past 15 years, I guess because everyone has decided it's like shouting into the wind.
One of the arguments I've seen in favor of our low LTCG rates is that this compensates stockholders for inflation. Of course, these arguments were made back when inflation was under the 2% Fed targets, and LTCG applies after only one year of holding an asset. So the argument always struck me as being dishonest (for most people) even if there was a valid argument for a few very long-term holders. I'd be very much in favor of an inflation-driven cost basis step up, just so we can remove this argument and face the actual question of which economic activity to prioritize.
The argument used to be that, since businesses are taxed on income already, we shouldn’t tax shareholder gains.
This was all before the tech tycoon/QE economy, of course. Nowadays you have companies like Amazon that paid zero corporate income tax for a decade and yet generated 600 billion in capital gains.
Solution would be to eliminate business income taxes and then tax capital gains as ordinary income. I would also impose a tax on sales revenues (with a deduction for domestic labour up to a certain wage cap and domestic CGS).
Estate taxes are not good, but cap gains on deemed dispositions upon death play the same role and should replace them.
Levying interest on prior unrealized gains is just first-rate bonkers, exacerbating the problems that should be mitigated with deemed disposition implementation.
Cap gains upon death creates a problem with intergenerational assets like small businesses, shared residences and recreational properties. Provisions should be made to:
1) Avoid cap gains taxing inflation. This is especially a problem with intergenerational real estate, where tax-eviction can occur.
2) Allow deemed disposition to occur over a period of years (e.g. 5) rather than upon death. This helps reduce shock tax-eviction, better integrates with progressive tax rates, and largely benefits the middle class with smaller values of inheritances while the truly wealthy still bear the full front of progressive taxes.
3) A low-end cut-off. Again, this helps remove a lot of middle class gains but doesn't exempt the rich.
However the idea of levying 'interest' on past gains is nuts. It's bad enough that cap gains is taxing inflation.
A perspective from a recently retired professional.
I no longer have a solo medical practice having sold it to Private Equity and paid (in NYS) an effective tax rate of over 30%.
I've greatly benefitted from frugality and the recent stock market performance. Market performance cuts both ways and just as easily can be a negative.
Besides SS there is no other source of income for me. So raising my taxes after planning retirement is disruptive and raises the fairness issue. I am well off, but in no way is this dynasty wealth.
As with many things, the 0.01-0.5%ers will find a way to avoid taxes.
Let's see an analysis of your plan eliminating the most egregious tax loopholes and enforcing the tax code on the tax side
Off topic, but how is your medical practice doing now? I heat a lot of bad things about the trend of private equity taking over medicine, but am never sure if there are benefits.
I am only commenting on my direct experience. After 18 months I left the practice. It was not directly related to the private equity experience. The private equity group provided much needed capitalization, which improved the ability to deliver patient care. They did not interfere with my choices in providing care. Other experiences in other fields and for other providers has not been as positive. I would not therefore take my experience as representative of all experiences. There are many reports of varying qualities and patient care and increased costs after private equity has been involved. These were also documented in large anti-competitive environments where public companies have pricing power in markets.
I have quite a few criticisms of the Biden Administration's tax reform plan, but it includes numerous loophole-closing proposals.
One potential criticism I have is to question why it doesn't propose implementing more gradual brackets instead of an immediate jump up from 20% to 39.6%. Why not have bracketing between 20% and 39.6% up to, say, $10 million?
I also think $1 million (supposedly indexed to inflation afterwards) is perhaps a bit low of a bracket for the highest rate, though my concerns are mainly for instances like yours of one-off sales of businesses that don't produce dynastic wealth.
There was a story recently highlighted in a TED talk of a garage door manufacturing company switching to employee ownership where even senior blue collar employees earned nearly $800k on the company's sale. It's not much of a stretch to imagine a scenario where a slightly higher sale price would push a portion of this scenario's LTCG into the highest rate under Biden's proposal.
To be clear, this 39.6% rate on LTCG above $1 million is estimated to only affect approximately 0.25% of the US population in a typical year, and the edge cases I'm describing are an even smaller percentage so it's probably not an issue worth giving much weight to. That said, I don't see why these edge cases couldn't be easily addressed.
If someone earns, say, $2 million in LTCG from the sale of a private business, does it make much sense to tax them the same as someone who earns roughly $2 million in capital gains annually? I'd like opinions on this because at face value it sounds odd to me, but I'm far from a tax expert.
Regarding the fairness issue- I do not have a problem paying taxes. I agree those in society with low income need assistance. But the reality is high earners like professionals feel we are pulling a big train. No financial aid for our kids education, loss of the SALT deduction (for all one's argument about high state taxes, they provide larger coverage for health care and public education, which costs $). I've provided no charge charity care throughout my career as a Physician. Taxes paid along the way.
Oil companies have had BILLIONS (TRILLIONS?) of tax benefits as part of national policy, but national policy is changing, but oil is still subsidized. Many hugely profitable companies pay NO tax (using ancient tax loss carryovers). Medicare Advantage insurers are robbing Medicare and Hedge Fund managers are basically getting a free ride.
So number 1, enforce the existing tax code. Number 2, enforce the existing tax code. Number 3, profitable companies should pay taxes. Number 4, further campaign finance reform to push us to a rational tax policy.
In my mind, a physician is not really a high earner. Certainly an upper-middle class income, but relative to the true high earners in American society, physicians are hardly above someone earning the median individual income of $40,480 in 2022. What is a $350k median physician income compared to a hedge fund or private equity executive's taxable income of $2 billion?
ProPublica analyzed effective income tax rates (combination of federal income tax and long-term capital gains tax) and found that the people who paid the highest effective rates between 2013-2018 were those earning between $2-5 million per year. Beyond that, effective rates steadily dropped as the increasing income correlated with an increased share of income from capital gains (the top 0.1% accounts for >50% of all capital gains income) and an increased ability to exploit tax loopholes. Those with >$100 million in taxable income paid, on average, comparable rates to doctors earning between $200-500k. Many high earners paid far lower effective rates than typical doctors.
This probably looks even more egregious today after the TCJA went into effect.
It's for this reason that I agree with Biden's insistence that the overall effective tax rate of people earning under $400k doesn't increase (unless something like a single-payer healthcare financing system was implemented), it's why I really want a lot of the loopholes and other complex tax-reduction schemes closed to simplify the tax code, and it's also why I question the purpose of simply setting a 39.6% rate on capital gains above $1 million instead of broader progressive bracketing. Capital gains bracketing could easily extend up to LTCG incomes above $10 million to 'fairly' address current effective rates across the income range.
This is among the worst analysis of Biden's tax plan I have seen yet. It is MOSTLY bad with minimal bright spots.
1) The tax proposal is based in EQUITY. The quest for equity has left over 100,000,000 people dead; killed by the very governments tasked to protect and to promote their welfare. The rivers of blood spilt on the alter of equity would fill the Amazon River; a river that runs very deep, wide and fast. There is no greater evil than equity.
2) The taxation of unrealized capital gains (basically a wealth tax) of 25% would destroy almost every company in existence. It would not only destroy the startup economy (the driver of future growth) it would also destroy existing companies as everyone that invests in future and current enterprises would eventually be to broke to invest in anything.
3) The idea of charging interest on realized capital gains as well as a 45% capital gains tax is ludicrous. Can you impinge, if after holding stocks in a retirement account for 30 years (with most of the value growth in value) getting taxed 45% when you sell it and then getting charge 5% interest year over year on that growth. So you sell your stocks for $50,000, pay $17,500 in taxes and $40,000 in interest. So now, you have a tax liability of $7,500 and have to sell more of your retirement simply to pay the government.
4) I do agree changes to the step-up in basis could use some work and having the growth in value carry over generations could very well be a step in the right direction. However, it has to be acknowledged that dynastic wealth in the US is not a very big contributor to wealth inequality. 70% of inherited wealth in gone in 2 generations and over 98% is cone in 3.
5) This paragraph shows how singly minded you are in this analysis:
"In general, capital gains taxes are a decently good way to tax an economy. On the fairness side, they affect rich people a lot more. Rich people own a disproportionate share of assets in the first place, even relative to their income; this is why wealth inequality is much higher than income inequality. This means capital gains taxes will hit rich people a lot harder than everyone else."
You have a warped sense of "fairness" looking only at "equity" and not "reciprocity". You fail to mention that rich people currently pay a disproportionate amount of taxes. Currently the bottom 50% pay almost no federal taxes (less than $400/year) while the top 1% pay about 50% of taxes.
To you, what is the "fair-share" the rich should be paying?
The proposals are partially justified by attempting to address inequalities and a lack of equity across skin colors, not to seek complete equality nor even equity across the range of individuals. You're comparing apples to oranges. Also, I think you have equality mistaken for equity.
- "2) The taxation of unrealized capital gains (basically a wealth tax) of 25% would destroy almost every company in existence."
I agree that taxing unrealized capital gains (for either people with total assets greater than $100 million or for capital gains above $100 million -- the proposal doesn't seem to clarify which) isn't a great idea. That said, the vast majority of companies are nowhere near having individual shareholders with assets above $100 million.
- "4) [...] However, it has to be acknowledged that dynastic wealth in the US is not a very big contributor to wealth inequality. 70% of inherited wealth in gone in 2 generations and over 98% is cone in 3."
Source? Any academic paper showing details would be great. The current estate tax exemption for 2024 is effectively $27.22 million, and then there are numerous creative ways to minimize or eliminate estate tax burden (some of these are addressed by Biden's proposal). I'd be truly amazed if there's any evidence that a significant percentage of heirs of estates >$100 million, for example, manage to deplete their wealth down to a middle class status.
The reason I personally like using the estate tax as a tool for increasing tax revenue is, in its current state (with the $27.22 million exemption scaled to inflation), it never affects the quality of life of the person who amassed an estate-taxable fortune, and it also hardly ever meaningfully affects the quality of life of heirs. This would stay true, due to the large exemption amount, even if the loopholes were fixed.
Is this not a nearly ideal form of taxation? Tax revenue needs to come from somewhere, and getting more of it at the point of inheritance from the ultra-wealthy is one of the lowest-impact methods. Hell, it'd even help reduce extreme inequality, a problem that causes all sorts of negative effects.
- "5) [...] You have a warped sense of "fairness" looking only at "equity" and not "reciprocity". You fail to mention that rich people currently pay a disproportionate amount of taxes."
One initial note: you're ignoring payroll taxes. Regardless:
In 1989, the share of total net wealth held by the bottom 99% of the population was 77.3% (39.2% for the bottom 90%). In 2023, these figures are now 69.7% (and 33.1%), respectively. This means that the bottom 99% of the population has seen its share of national wealth decline by 7.6 percentage points or roughly 9.8% (and the bottom 90% of the population has seen its share of national wealth decline by 6.1 percentage points or roughly 15.6%).
Where, then, did this share of the US economy's growth go? Part of it has gone to the 99.0th to 99.9th percentile, as this range's share of US wealth has grown from 14.3% of the national total to 16.7%; a 2.4 percentage point or 16.8% increase. A more alarming portion of it has gone to the top 0.1%, as their share of US wealth has grown from 8.5% to 13.6%; a staggering 5.1 percentage point or 60% increase.
Are you sincerely arguing that this isn't a problem? Pointing to the percentage of federal income taxes paid by the bottom 50% is a misleading distraction. Income and wealth inequality in our nation has grown enormously; those in the upper percentiles haven't had it better going back a century. Federal, state, and local governments need money, and the ultra-wealthy have money in abundance. Obviously taxation should focus on them.
"The proposals are partially justified by attempting to address inequalities and a lack of equity across skin colors, not to seek complete equality nor even equity across the range of individuals. You're comparing apples to oranges. Also, I think you have equality mistaken for equity."
Ahhh no. Equity is a social and administrated system in which shares are adjusted to be equal. The proposed Biden tax plan is STATED to based on equity.
Equity, is evil at its core.
"I agree that taxing unrealized capital gains (for either people with total assets greater than $100 million or for capital gains above $100 million -- the proposal doesn't seem to clarify which) isn't a great idea. That said, the vast majority of companies are nowhere near having individual shareholders with assets above $100 million."
But some of the most innovative companies in the US have many of their individual share holders holding MUCH more than $100 million and it would destroy them to have their founders basically run out of the business they founded. Then, when the shares of the company drop, does the government give them billion dollar refund?
I'll let you do some independent reading on the differences between the US inheritance and the Dynastic models used more in Europe. It might be enlightening. But the fact remains, with rare exceptions, inherited wealth in the US dissipates rather quickly.
"In 1989, the share of total net wealth held by the bottom 99% of the population was 77.3% (39.2% for the bottom 90%). In 2023, these figures are now 69.7% (and 33.1%), respectively. This means that the bottom 99% of the population has seen its share of national wealth decline by 7.6 percentage points or roughly 9.8% (and the bottom 90% of the population has seen its share of national wealth decline by 6.1 percentage points or roughly 15.6%)."
This is a problem but the Biden proposal will only pour gasoline on this and make it far worse.
"Equity is a social and administrated system in which shares are adjusted to be equal."
This is not the sort of equity the Biden Administration is referring to. Equity in the context of demographic differences in public policy refers to "leveling the playing field", or in other words, trying to use public policy to improve social mobility so someone born into a 10th income percentile family in Detroit has similar opportunities in life as someone born into a 90th income percentile family in a Boston suburb.
"I'll let you do some independent reading on the differences between the US inheritance and the Dynastic models used more in Europe. It might be enlightening. But the fact remains, with rare exceptions, inherited wealth in the US dissipates rather quickly."
Does the fact remain? Do the ultra-wealthy actually not remain ultra-wealthy across generations? Perhaps if each generation has tons of kids and the wealth is dispersed broadly. The fact that does remain is economic inequality has grown and remained high, and taxing capital gains (albeit hopefully in a better way than Biden proposes) and taxing inheritance are both good ways to generate tax revenue and reduce inequality.
"This is a problem but the Biden proposal will only pour gasoline on this and make it far worse."
I'm curious what significant ideas you think would work for reducing inequality in the US, if you don't mind sharing some more of your opinions.
Yeah, I agree with you that unrealized capital gains taxes would destroy a lot of companies. I wrote a separate comment going through what it looks like for a small business. Most small business owners should expect tax bills that they can't actually pay unless they have separate retirement savings they can use up. Then I guess you try to sell your business at a loss.
Good discussion on how to spend someone else’s money to finance your interests. In addition to the Swiss comment below- No capital gains tax is levied on private financial returns in Switzerland. Strange that there was no mention of a VAT tax. No mention of a flat tax. No mention of the US already having a very heavy progressive income tax. No mention on how these taxes will impact cultural /social grudges . The discussion is lacking. For me, tax Noah and his ilk. I’ll go hide behind the bush as the one time politician Huey Long said.
I thought I was angry about some of this til I read the comments, lol, there is a lot to piss people off here, and for good reason. I have tons to say but I will contain myself to one, raising capital gains taxes will hurt those like me who depend on stocks for retirement. Most people with stock accounts are hardly billionaires. In California they are already taking 33% of what you make every year in cap gains.
This would raise it to 58%. Are you kidding me? no way, this is enough to not make me vote for Biden.
Second, Noah if you see this I would like to see you write an in depth article(s) on what is going wrong with our health care system. I suspect it has more to do with monopolies, middle men, and venture capitalists than anything. I was supportive of single payer til I got medicare, and medicare sucks. They don't pay the Dr.'s anything so the Dr.'s don't want to help you any more than they have to. No surprise I guess.
Same with run-ups in real estate valuations that increase property taxes (absent some type of moderation mechanism). Lotsa New England retirees having to move because they can't afford the soaring property taxes out of their savings.
The capital gains tax in CA for individuals maxes out at 12.3% on gains over $600,000 plus another 1%on gains over $1 million. If you retired with annual capital gains over $600,000, you are in the top 1% of retirees.
ok, and there are graduated scales below that, but what happens in that case is, like for a friend of mine, he planned to use his house sale in Menlo Park, which he bought in the 70's for 120K, as his retirement. So he sells it for $2 million, gets taxed at 38.3 on 1.8 ish, and gets a tax bill for almost 700K. So he gets 1.2 to invest plus soc sec and some small savings he had. I just don't like it, it's too much.
On a 50K income you are still getting socked with nearly 25% in cap gains in Ca.
Getting rid of stepped up basis is the only part that makes sense.
Adding interest to prior years makes no sense. It should be the opposite. Your capital gain should be reduced by the amount of inflation your capital was depreciated in its purchasing power. This is the reason it’s logical to have a capital gain tax rate below income tax rate.
Taxes should just be flat 15-20% on income over median income. Treat all income equal.
So, when I inherit some things, even if it's not a huge amount, there has to be a team of accountants and experts to value the artwork, real estate, small business assets (tangible and intangible) to see exactly how much unrealized capital gains there are? And I have to find grandpa's receipt for the dogs-playing-poker painting to figure out how much he paid for it?
If the tax is only on easily valued stocks and bonds, that seems like a recipe for tax-avoidance strategies.
Right now, taxes are paid on large inheritances in total (not just the unrealized gains), so this proposed step-up basis provision only affects smallish estates.
Taxes on unrealized gains is just a wealth tax. It's a form of virtue signalling and would be a headache to implement. Even an interest rate that accrues over time against unrealized gains would mess with incentives and pricing in illiquid markets.
Any discussion on taxing unrealized gains must also include what happens when unrealized losses occur. Additionally, would this require people to appraise all of their holdings every year? For example, real estate and art. In general, it is just a dumb idea and would require more work than people realize and provide a lot of wiggle room for avoidance.
Considerations must be made regarding illiquidity for unrealized and estate taxes. Most politicians are only thinking about stocks and bonds. Noah mentions this with Venture Capital in particular. Haters will hate, but VC is responsible for a disproportionate amount of current GDP relative to cost. It is a competitive advantage and strategic imperative not to screw this up. Especially now that we might potentially be entering a period of global instability. How would it impact round pricing dynamics as a company seeks more capital from seed onward? Would everything be priced on SAFE notes until exit?
I would prefer that racist policies (reparations, race-based assistance) not be discussed in a neutral manner. Help the disadvantaged, yes. Help on the basis of race, no.
Racism poisons our nation. It is stupid to perpetuate it, even under a mantra of good intentions.
Thx for another great post. A question—you argue that tax levels are at historic lows, but this references only federal taxes. My understanding is the picture is different if you assess the “total household tax burden” —ie factoring in state and local taxes, which are quite high in many places.
What do that data look like over time—namely is there indeed still a lot of room to tax people more? (This obviously matters bc if people are already bearing a high overall tax burden, the solution to the debt problem would need to come from spending cuts.)
While I agree with the post, what is missing from the discussion is the absolute need for tax simplification. Raising taxes on an over complex tax code is always a fool's errand. I continue to reference TR Reid's fine book, "A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System." there is an absolute need to eliminate all tax preferences and increase the personal deduction in return. We need a Value Added Tax in return for lower corporate income taxes (which are always gamed and can never keep up with clever accountants and tax lawyers). This would lead to an elimination of off shore tax havens.
In my case, the government knows all of my income through various income reporting forms and under any reasonable tax system, I should simply be able to signoff on my tax return in five minutes without having to us Turbo Tax every filing season.
Tax simplification can relieve taxpayer headaches and raise more revenue at the same time. Occam's Razor at work!!!!
Agree
1000% agree on simplification. Maybe we should have one simplified code for ordinary people (work for a living or off retirement savings, above poverty level and pay taxes, minimal inherited wealth, no yacht or house in the Hamptons, etc.). Our incentive structure is much different than the Uber-wealthy who have been behind all of the complexity in order to shelter their zillions. The taxes on the ordinary folk could be constant and predictable. Taxes on the Uber-wealthy can fluctuate for the redistribution to the non-taxpayers. We can argue all we want about how much and how to get it, but why make it such a nuisance to the large majority of people?
Also, they should either not tax health insurance premiums for everyone or start taxing premiums paid by employers. It really is not fair for self-employed and early retired people. I am the latter, and appreciate having the ACA and being blessed enough to be able to afford to retire early but they really stick it to us. If you are living off of your retirement accounts, distributions are ordinary income. Health insurance premiums are a large percentage of our living expenses so you have to pay taxes on the IRA distribution and likely not qualify for subsidies because your income is too high. People much richer than we are can live off of capital gains distributions of assets, pay the lower rate, and qualify for more ACA subsidies.
both my wife and I are retired, on Medicare and receive Social Security. Becuase of pension and investment income, 80% of our Social Security payment are taxed at the Federal level as ordinary income. We sold our home two years ago and had a large capital gain in spite of the deduction. For this current calendar year we are now in the 2nd highest premium bracket for Part B Medicare (newsflash for all the younger readers, Medicare is NOT free). Shockingly, this year we will pay about $25K before seeing a single doctor (we have Medigap premiums, Long term care insurance premiums, Medicare Part B premiums and two concierge doctors that we have stayed with). There is no free lunch on being retired!!!
My wife turns 65 this summer. Her current insurance premiums are $1400 a month (through my "employer" plan. She will also be in the second highest bracket (if we sign her up), and with all the extras will be close to $900 a month. BUT, we can deduct 100 percent of the employer plan, and 0% of the Medicare costs. So, it's about a push. Comes down to which is better coverage.
Your income may be known by the irs, but not your expenses. Even w2 employees may have deductions such as extreme medical expenses or charitable contributions. It's not all at their fingertips
I am self employed. I can deduct my health insurance premiums above the line, just like 50% of self employment taxes. If self-employed can't be bothered to form S Corp, then that's on them
In Sweden, the government apparently sends you a pre-prepared income tax form. All you have to do is check off a "yes" or "no" box. That level of simplification here in the US would put most of the CPA's and tax preparers out of work.
Or at least the low-end tax specialists. The high-enders would all be working for the citizens who checked the "no" box.
This was made possible by the swedish tax reform in 1990 (dubbed the "tax reform of the century"). The tax reform was supported both by the ruling party, the social Democrats, and one of the major opposition parties, the liberal party. The reform had three major goals:
1. Be budget neutral
2. Lower the top marginal tax from 80% to 50%
3. Simplify the tax code
This was possible since at that point everyone, from left to right, agreed the tax code was broken.
The only time i get really home sick in the US, is when I do my taxes...
A few comments: 1) estate taxes play havoc on small and mid-sized businesses as one generation builds on the equity from the other; 2) the Biden "equity" is a bad idea. It would foster more distrust of the tax collection system than currently. Being treated equally and fairly is the only reasonable basis; and 3) I get concerned when the talk is about raising taxes and cutting spending. While, in principle, I support it, politicians will always find ways out of raising taxes and compromising out of the spend side. Among the vehicles they use are accounting gimmicks, double counting and time-bound cuts. Remember, one Congress can bind another.
Defer tax on inherited businesses and farms until they are sold. That not only protects small businesses, it discourages consolidation of small farms and independent operators.
Then you would need to change the estate tax (paid by the estate of the deceased) to an inheritance tax, payed by the heirs.
Note that what is being discussed here isn’t an estate tax where people are taxed on the value of the assets they inherit at the time of inheritance. It’s a capital gains tax, where heirs who eventually sell the capital are taxed on the full gains that capital made not just in their lifetime but since it was acquired by the family. Nothing about this forces the sale. And the tax rate is well below 100% so no one will have any difficulty coming up with the cash.
I love what this looks like when paired with unrealized gains tax.
I don't like taxes on unrealized gains - that forces people to sell. But if you tax unrealized gains, then there's no more question about "stepped up basis".
They currently allow complete elimination of all capital gains at death.
Your point #1 is spot on. The proposal is looking at the issues of today, but they will look very different for the children of small business and farm owners who are desperately trying to build on what their parents achieved. These proposals do not just affect spoiled brats who spend their summers abroad being ugly Americans - it distorts the pathway by which normal people build lives and futures.
Typo: I meant another Congress cannot bind another. Sorry.
Actually, my father left us a business that was “worth” around $10M (debatable) and employed 50-ish people, avg tenure over 20 years. He passed after the exemption was raised. If he had not, where was the 2, 3, 4 million dollars estate tax going to come from? We are assuredly and certifiably not rich people. Every penny and every waking hour our family has is wrapped up in that one thing, and it’s very capital-intensive (a manufacturing company). You can’t just sell a chunk of a family business to pay the taxes; it’s not a stock portfolio. All you can do is sell the whole thing or liquidate. 50 people with good jobs - thank you for your service.
I think the only people in favor of this are people who do not have an inheritance coming and are jealous of the people who do. Why do they get so much money and I don't?? I know, I will take theirs for the greater good.
The estate tax wouldn't have been in the multi-millions for you. Even before the exemption was increased it was still 7 million, so you would've only had to pay estate tax on the 3 million. 40% of 3 million is only 1.2 million. Still a lot, yes, but remember the vast majority of Americans certainly don't have 10 million in assets. My family has a home worth less than 2 million but I still consider myself economically privileged.
It has nothing to do with with whether we consider ourselves privileged. It has to do with whether you somehow come up with a ton of money and then work the next 10 years trying to make ends meet, or just shut down and everybody loses their job.
I understand. I would also like to admit that the comment above was actually wrong on a number of points. The estate tax pre-exemption raise was less than $6 million. My apologies.
However, if you do have as much debt as you say, that can be deducted off of the estate tax:
https://www.daytonestateplanninglaw.com/wp-content/uploads/sites/2/2013/09/ch27.estate20tax20deductions1.pdf
https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-estate-taxes
https://www.irs.gov/pub/irs-pdf/f706.pdf
The estate tax can also be paid over 10 years:
https://www.irs.gov/irm/part5/irm_05-005-006#:~:text=IRC%20section%206166%20provides%20an,will%20be%20the%20period%20selected.
Still, I appreciate you raising this concern with estate taxes. I was unaware that the exemption level still caused some small businesses to fall through the cracks (I do not believe that the estate tax should target such groups). Thank you.
Assuming the company is profitable, can you not borrow money to pay the estate taxes? That would mean less profit and less income for you in the future, but that’s basically the point. You also imply that no one has any other cash or assets (inherited or not) that could be used to pay the estate taxes.
We would never qualify for that big of a loan. We have a ton of debt already on our equipment (big machines). Even if we could have magically gotten a loan, there’s no way we would have been able to continue with the heavy investments and further debt required to keep up-to-date. We do not have the kind of money to pay it straight-up. But I appreciate your advice to help me find money to throw down the pit.
One thing that happened to us is that when my wife's grandfather died the government took half their farm in estate taxes, and it crippled the family business. You can slap a number on anything, but the truth is that it was a business and they basically stole it. No land no farm, no matter how much it is worth. Now they passed a law that the wife could keep it but this is why people are so against inhertiance taxes. On top of it, they paid income taxes every step of the way on that land/business, and if you are in that position it feels like double taxation. The whole thing just feels like punishing people for being successful, which I think is the real motivation here. Envy.
The Republican "Death Tax" hysteria of a few decades ago was never about keeping the family farm in the family; it was cynically and specifically tailored to give a pass to the Walton family heirs (Walmart).
What pass did the Waltons get from the estate tax? It is still in place, and despite calling it a death tax it was not repealed, although the exemption was temporarily raised. Of course, the only people who pay estate tax are those who didn’t pay estate tax lawyers to legally avoid them.
I gotta tell you I look at the historical taxes vs spending as % of GDP and one of those lines looks way more out of historical ordinary than the other - and it’s not the tax take. If we want as a society to decide that we have been wrong for 200+ years and we need the government to play a far larger role in the economy starting with healthcare sure let’s have that discussion. But let’s not lazily limp into it with a “fair share” type arguments. The amount of $ we spend on the last few years of life vs getting our young people ready for life is just absurd. Maybe start there.
Isn't that the real reason why it's so politically difficult to shrink the state, because much of the increased state spending is being used to keep people alive for longer?
Noah- a great follow-up post would be how and where cutting spending would be effective. Also, any other proposed taxes meaningful taxes? Personally I like the idea of uncapping the income limit on social security taxes.
Agreed. Noah has said we need to build up the military (and we do). He's also said we need to invest in education. And he generally favors expanding transfer payments. So where, exactly, does our economist host believe we should be cutting spending?
Student debt relief and health insurance subsidies
Student debt relief is miniscule. Going after Medicare and Medicaid must be a necessary part of any solution (final-year-of-life healthcare costs are bankrupting us), but is politically untenable. However, I admire your honesty.
Miniscule billions of dollars paid to highly educated and employable deadbeats.
Cutting student debt relief is a good idea, but it's so small that it's clearly not part of the critical path to "how do you balance the budget?"
Both of those are massive COSTS and spending and not CUTS and will drive the deficit even higher. Student debt "relief" is simply buying votes and has no basis in ethics.
Cutting them is a cut though. It looks like you just misread his reply and got mad about it.
We need something similar to Germany's, where smart kids from poor families can actually get university degrees--or Votech certificates--without going permanently into debt. Increase Pell Grants, and giving them permanent COLA increases. Expand the Community College system; especially the Votech programs, perhaps the most effective cost-effective low-hanging fruit in higher education.
Cutting health insurance subsidies is a non-starter politically, for both GOP & Dems. Both are rightly terrified of pissing off the senior voter bloc. Which is why it makes more sense for another admittedly risky push at Single Payer--to cut out the middlemen, and lower per capita healthcare costs to those of the other industrial democracies. Same goes for ending price-gouging by Big Pharma. Biden and the Dems are actually making a half-hearted attempt at the latter.
Lowering healthcare costs by eliminating waste and profiteering has the same impact on the treasury as reducing subsidies, no?
I don't know if this already exists in the tax code... but offering a credit taxwise to employers for the actual tuition reimbursement they provide annually to their employees would help prevent student debt but also provides incentive and accountability to the employee who enrolls in classes to finish with a passing grade in order to earn the reimbursement and to actually complete their degree program (undergrad and grad) according to the contract signed with the employer. It motivates the employer via tax credit and also, they end up with a better prepared/skilled/engaged employee.
There are companies that offer these programs to employees with a year employment and positive evaluations (those with good work habits).
I think that is a better model than mass student loans and companies expectations and then frustration of the dearth of Master's prepared candidates applying that are willing to accept $20/hr pay when they have massive student loans.
Biden is proposing a spending plan, not a deficit reduction plan or a tax plan.
I think any analysis should start from scratch, and also acknowledge the US is spending nearly 3 percent of GDP more than it was in 2019 and had a couple of blowout years where unfunded handouts of 10 percent of GDP were dispensed - the 2020 blowout was perhaps necessary. 2021 was unnecessary and inflationary. The idea that we need to spend even more on “high priority” items is nuts. There should be no net spending increases for at least a decade.
Now is time to pay the piper. The economy is doing well, and spending cuts and tax hikes will help solve the sticky inflation problem.
I think a fundamental problem is that neither the parties nor the voters (nor, apparently, the pundits) realize we’ve been reckless and irresponsible and are now entering a long period of austerity. The Republicans like tax cuts (or tax cut extensions/renewals). The Dems love to spend and only use tax hikes as the barest fig leaf for new spending. The way budget reconciliation works has led to the raiding of social security and Medicare to fund new spending elsewhere (Medicare drug “savings” are used to justify much higher outlays in the IRA, for example).
Talk of cutting old age entitlements without capping or cutting new spending elwewhere achieves nothing. Once pols are used to running $2 trillion deficits, they will run $2 trillion deficits. If they cut $200 billion from Medicare they will (in time) just spend that $200 billion buying votes in some other program.
As an exercise, I’d love to see each party come up with a plan to balance non-social security/non-medicare spending in 5 years and keep it balanced for a succeeding ten years. Parties could choose whatever mix of spending cuts or tax hikes they like. This exercise would at least inform people as the scale of what we are facing- big spending cuts AND big tax hikes…..on everyone.
Meanwhile, we should ensure that any old age benefit cuts or tax hikes/“savings” in social security and Medicare should only be used to make those programs more solvent. If the main budget is balanced at full employment the old age problem becomes manageable and we can come up with bipartisan solutions. Without a framework for overall austerity, any old age savings we try first will simply be spent.
It was the Reagan/O’Neil social security tax hikes (plus, what turned out to be unwise defense cuts) that led to the ephemeral budget surpluses in Clinton years. Congress ended up spending that social security windfall during the Bush and Bush/Pelosi years. They can’t resist running deficits. Obama used Medicare cuts and new Medicare investment taxes to spend even more on Obamacare. Biden used Medicare “savings” to justify spending more in the IRA.
When pols talk about “reforming” social security and Medicare they are mostly salivating about what they will be able to spend that money on.
It is long past time to move to an austerity mindset. This will actually reduce inflation and reduce real interest rates (1 percent growth with 0 percent real rates is better than 2.5 percent growth with 2.5 percent real rates when government debt is >100 percent of GDP).
We’ll need all the tax hike and spending cut ideas people can come up with. We also need to pressure pols into fiscal austerity and laugh at them when they propose new spending from here partially “covered” by some poll-tested tax ideas rather than treating their vote-buying ideas as a good faith effort.
If the media and the pundits turn against tax and spend, it would be a start (they’ve long been against tax cuts, or at least unfunded ones).
This seems like a very high-effort attempt to "both sides" the issue and deprive Clinton and Gore of credit for the political risks they took in promoting deficit reduction. The Bush tax cuts were a centerpiece of the 2000 campaign, they blew the deficit wide open, and there was no ambiguity about which President proposed them. https://georgewbush-whitehouse.archives.gov/infocus/bushrecord/factsheets/taxrelief.html
At the end of the day we can live in a country where voters accurately reward or punish Presidents and politicians for the policies they promoted, or we live in one where they write nonsense fiction. You've chosen to live in the second country, don't be surprised that it's a fiscal disaster.
Exactly my point about social security Medicare “savings” being spent elsewhere without some sort of framework on overall budget sanity.
The brief 90s “surpluses” resulted the buildup of social security surpluses (and large defense cuts) against a framework for fiscal sanity (Graham-Rudman 1987, followed by PAYGO and relative sanity in the 90s under Clinton and Gingrich (the Repubs only like spending restraint when they don’t hold the Presidency). Gore’s social security “lockbox”, while impractical to enforce and probably just a campaign throwaway line to take some grey hair votes away from Bush, probably was a good idea.
The idea of tax cuts and more spending after the dot com crash, a terrorist attack and a recession don’t shock me. The burgeoning social security credit balances made this the irresistible, but doing it at a time when defense spending was increasing due to war (and catch up defense spending from underinvestment during Clinton) was irresponsible.
Stop with your partisan nonsense and come up with some ideas. Show me how you balance the budget now and keep it balanced for the next decade.
For starters, Single Payer + ending Big Pharma's gouging could reduce federal healthcare subsidies bigly. Like maybe 35-40-45% on a current outlay of $1.8 trillion (2023)? ...if the per capita rates in every other industrial democracy are anything to go by. That's savings of $600 billion or more.
Repealing the Trump/GOP tax cuts and fully funding the IRS--against GOP objection--would raise another, what, $230 billion annually? Reforming the current GOP inheritance tax raises another $30 billion.
Those measures alone would massively reduce the deficit. A good place to start, eh? But only if Dems govern. If the choice is between tax-and-spend Dems or borrow and spend GOP, there's only one pro-American choice.
I honestly don't think you can keep it balanced for the next decade, unless borrowing becomes so expensive that further deficits are no longer possible. If a reasonable coalition comes into power and trims the deficit or even accumulates a surplus, a Republican president will come into office and blast it away in the form of tax cuts. We saw this in 2000, 2003, 2017 and now again more tax cut extensions are proposed for 2025 if Trump wins -- which is utterly crazy considering how big our deficit is now.
Saying "stop with your partisan nonsense" is like shouting "ignore the untreated cancer and go to the gym, so you can be healthy." Until you fix the basic problem, which in this case is the relentless drive to drive taxation to increasingly unsustainable lows, we're not going to have a balanced budget. And I'm not even confident that Democrats will be reasonable. There's just too much money in politics driving everything towards the goals of the wealthy.
But if you want a serious answer: in the absence of fiscal sanity, we're going to have inflation. This will eventually eat away at the debt. And do lots of other pretty unpleasant things.
Clinton and Gore deserve next to no credit. They never would have cut a penny if the Gingrich coalition didn't force them to.
Why not just nationalize the Fed--like the Central Banks of every other industrial democracy--and lower interest rates? Wouldn't that trim half a trillion of current annual debt instantly?
Tolerating higher inflation does the same thing, though only as long as real rates don’t rise (and the long end steepen in response).
And cutting rates likely leads to higher inflation.
The Fed, then, would have to buy bonds (QE) to ensure rates don’t rise in response to inflation (monetize debt).
There would likely be a collapse in the dollar and some capital flight in that scenario.
The US did something like this after WW2 without causing a crisis in confidence or the currency, but capital had fewer places to go and international capital markets were less developed. Helped reduce the debt from WW2. Reinhardt and Rogoff (and others) cover that period.
We sort of tried it in the latter Obama years (prolonging ZIRP and QE even though growth had normalized).
We’ll probably try it again as inflation and currency debasement is politically easier than austerity. Note the story that Trump advisors are allegedly thinking about reducing Fed independence. Appointing partisans who believe in easy money to the Fed is also a way for parties to get what they want. Shocker that Yeltsin and Brainard both now work for Biden.
Raising rates *also* fuels inflation, albeit supposedly only temporarily. Rents, mortgages, car payments have certainly gone up as a result. House starts--and many other things--are now considerably more expensive; but not necessarily prohibitively so. Has anyone actually quantified how much Fed policy has both increased and decreased inflation?
I'd *hoped* that Biden, at the beginning of his term would use the power of the billy pulpit to repeatedly and very publicly shame price-gouging corporations like Proctor & Gamble, Unilever, etc. who were at that time raising their prices considerably above increases to their operating costs. While greed-fueled inflationary was never quantified--or even quantifiable?--some EU agency attributed 50% of inflationary pressure at the time to it.
My hypothesis was that a concerted public shaming offensive by POTUS against price-gougers could have been even more effective at reducing inflationary pressure than Fed policy, and even obviated or at least reduced the need for it.
Maybe so. But companies always raise prices when they see high demand as well as costs going up. Why not? You never want to undersell.
The way to stop inflation was not to spend $2 trillion in Q1 2021 on top of the $900 billion in Dec 2020. And maybe for the Fed to have gotten things right and raised rates and stopped QE sooner.
Price-gouging by industry leaders during a time of national crisis is utterly reprehensible, and reflects the darkest side of free-market capitalism. Back when I was a kid large corporations and their management were rightfully afraid of being so shamed. If only because they'd lose business to competitors. But I guess that was before they were oligopolies/duopolies/monopolies, and their lack of market competition made their shamelessness possible.
Shame (and responsibility) haven’t existed for quite some time, unfortunately.
I also remember when pols didn’t spend trillions buying votes and then blame others for too much money chasing too few goods.
Makes a lot of sense. Which is why it won't happen. How about some student loan forgiveness, instead?
Thanks for the thoughtful advocacy of balancing the budget, including balancing the different parts of it (soc sec/medicare and other). I rarely see takes like this in the past 15 years, I guess because everyone has decided it's like shouting into the wind.
Capital gains should be indexed for inflation, regardless of what capital gains tax rate is chosen.
Then interest earnings should be indexed for inflation and interest expense discounted. Nothing special about capital gains.
We index tax brackets for inflation, at least
One of the arguments I've seen in favor of our low LTCG rates is that this compensates stockholders for inflation. Of course, these arguments were made back when inflation was under the 2% Fed targets, and LTCG applies after only one year of holding an asset. So the argument always struck me as being dishonest (for most people) even if there was a valid argument for a few very long-term holders. I'd be very much in favor of an inflation-driven cost basis step up, just so we can remove this argument and face the actual question of which economic activity to prioritize.
The argument used to be that, since businesses are taxed on income already, we shouldn’t tax shareholder gains.
This was all before the tech tycoon/QE economy, of course. Nowadays you have companies like Amazon that paid zero corporate income tax for a decade and yet generated 600 billion in capital gains.
Solution would be to eliminate business income taxes and then tax capital gains as ordinary income. I would also impose a tax on sales revenues (with a deduction for domestic labour up to a certain wage cap and domestic CGS).
Estate taxes are not good, but cap gains on deemed dispositions upon death play the same role and should replace them.
Levying interest on prior unrealized gains is just first-rate bonkers, exacerbating the problems that should be mitigated with deemed disposition implementation.
Cap gains upon death creates a problem with intergenerational assets like small businesses, shared residences and recreational properties. Provisions should be made to:
1) Avoid cap gains taxing inflation. This is especially a problem with intergenerational real estate, where tax-eviction can occur.
2) Allow deemed disposition to occur over a period of years (e.g. 5) rather than upon death. This helps reduce shock tax-eviction, better integrates with progressive tax rates, and largely benefits the middle class with smaller values of inheritances while the truly wealthy still bear the full front of progressive taxes.
3) A low-end cut-off. Again, this helps remove a lot of middle class gains but doesn't exempt the rich.
However the idea of levying 'interest' on past gains is nuts. It's bad enough that cap gains is taxing inflation.
A perspective from a recently retired professional.
I no longer have a solo medical practice having sold it to Private Equity and paid (in NYS) an effective tax rate of over 30%.
I've greatly benefitted from frugality and the recent stock market performance. Market performance cuts both ways and just as easily can be a negative.
Besides SS there is no other source of income for me. So raising my taxes after planning retirement is disruptive and raises the fairness issue. I am well off, but in no way is this dynasty wealth.
As with many things, the 0.01-0.5%ers will find a way to avoid taxes.
Let's see an analysis of your plan eliminating the most egregious tax loopholes and enforcing the tax code on the tax side
Off topic, but how is your medical practice doing now? I heat a lot of bad things about the trend of private equity taking over medicine, but am never sure if there are benefits.
I am only commenting on my direct experience. After 18 months I left the practice. It was not directly related to the private equity experience. The private equity group provided much needed capitalization, which improved the ability to deliver patient care. They did not interfere with my choices in providing care. Other experiences in other fields and for other providers has not been as positive. I would not therefore take my experience as representative of all experiences. There are many reports of varying qualities and patient care and increased costs after private equity has been involved. These were also documented in large anti-competitive environments where public companies have pricing power in markets.
I have quite a few criticisms of the Biden Administration's tax reform plan, but it includes numerous loophole-closing proposals.
One potential criticism I have is to question why it doesn't propose implementing more gradual brackets instead of an immediate jump up from 20% to 39.6%. Why not have bracketing between 20% and 39.6% up to, say, $10 million?
I also think $1 million (supposedly indexed to inflation afterwards) is perhaps a bit low of a bracket for the highest rate, though my concerns are mainly for instances like yours of one-off sales of businesses that don't produce dynastic wealth.
There was a story recently highlighted in a TED talk of a garage door manufacturing company switching to employee ownership where even senior blue collar employees earned nearly $800k on the company's sale. It's not much of a stretch to imagine a scenario where a slightly higher sale price would push a portion of this scenario's LTCG into the highest rate under Biden's proposal.
To be clear, this 39.6% rate on LTCG above $1 million is estimated to only affect approximately 0.25% of the US population in a typical year, and the edge cases I'm describing are an even smaller percentage so it's probably not an issue worth giving much weight to. That said, I don't see why these edge cases couldn't be easily addressed.
If someone earns, say, $2 million in LTCG from the sale of a private business, does it make much sense to tax them the same as someone who earns roughly $2 million in capital gains annually? I'd like opinions on this because at face value it sounds odd to me, but I'm far from a tax expert.
Regarding the fairness issue- I do not have a problem paying taxes. I agree those in society with low income need assistance. But the reality is high earners like professionals feel we are pulling a big train. No financial aid for our kids education, loss of the SALT deduction (for all one's argument about high state taxes, they provide larger coverage for health care and public education, which costs $). I've provided no charge charity care throughout my career as a Physician. Taxes paid along the way.
Oil companies have had BILLIONS (TRILLIONS?) of tax benefits as part of national policy, but national policy is changing, but oil is still subsidized. Many hugely profitable companies pay NO tax (using ancient tax loss carryovers). Medicare Advantage insurers are robbing Medicare and Hedge Fund managers are basically getting a free ride.
So number 1, enforce the existing tax code. Number 2, enforce the existing tax code. Number 3, profitable companies should pay taxes. Number 4, further campaign finance reform to push us to a rational tax policy.
In my mind, a physician is not really a high earner. Certainly an upper-middle class income, but relative to the true high earners in American society, physicians are hardly above someone earning the median individual income of $40,480 in 2022. What is a $350k median physician income compared to a hedge fund or private equity executive's taxable income of $2 billion?
ProPublica analyzed effective income tax rates (combination of federal income tax and long-term capital gains tax) and found that the people who paid the highest effective rates between 2013-2018 were those earning between $2-5 million per year. Beyond that, effective rates steadily dropped as the increasing income correlated with an increased share of income from capital gains (the top 0.1% accounts for >50% of all capital gains income) and an increased ability to exploit tax loopholes. Those with >$100 million in taxable income paid, on average, comparable rates to doctors earning between $200-500k. Many high earners paid far lower effective rates than typical doctors.
This probably looks even more egregious today after the TCJA went into effect.
It's for this reason that I agree with Biden's insistence that the overall effective tax rate of people earning under $400k doesn't increase (unless something like a single-payer healthcare financing system was implemented), it's why I really want a lot of the loopholes and other complex tax-reduction schemes closed to simplify the tax code, and it's also why I question the purpose of simply setting a 39.6% rate on capital gains above $1 million instead of broader progressive bracketing. Capital gains bracketing could easily extend up to LTCG incomes above $10 million to 'fairly' address current effective rates across the income range.
This is among the worst analysis of Biden's tax plan I have seen yet. It is MOSTLY bad with minimal bright spots.
1) The tax proposal is based in EQUITY. The quest for equity has left over 100,000,000 people dead; killed by the very governments tasked to protect and to promote their welfare. The rivers of blood spilt on the alter of equity would fill the Amazon River; a river that runs very deep, wide and fast. There is no greater evil than equity.
2) The taxation of unrealized capital gains (basically a wealth tax) of 25% would destroy almost every company in existence. It would not only destroy the startup economy (the driver of future growth) it would also destroy existing companies as everyone that invests in future and current enterprises would eventually be to broke to invest in anything.
3) The idea of charging interest on realized capital gains as well as a 45% capital gains tax is ludicrous. Can you impinge, if after holding stocks in a retirement account for 30 years (with most of the value growth in value) getting taxed 45% when you sell it and then getting charge 5% interest year over year on that growth. So you sell your stocks for $50,000, pay $17,500 in taxes and $40,000 in interest. So now, you have a tax liability of $7,500 and have to sell more of your retirement simply to pay the government.
4) I do agree changes to the step-up in basis could use some work and having the growth in value carry over generations could very well be a step in the right direction. However, it has to be acknowledged that dynastic wealth in the US is not a very big contributor to wealth inequality. 70% of inherited wealth in gone in 2 generations and over 98% is cone in 3.
5) This paragraph shows how singly minded you are in this analysis:
"In general, capital gains taxes are a decently good way to tax an economy. On the fairness side, they affect rich people a lot more. Rich people own a disproportionate share of assets in the first place, even relative to their income; this is why wealth inequality is much higher than income inequality. This means capital gains taxes will hit rich people a lot harder than everyone else."
You have a warped sense of "fairness" looking only at "equity" and not "reciprocity". You fail to mention that rich people currently pay a disproportionate amount of taxes. Currently the bottom 50% pay almost no federal taxes (less than $400/year) while the top 1% pay about 50% of taxes.
To you, what is the "fair-share" the rich should be paying?
You will own nothing, you will rent everything, (you will eat bugs,) and you will be happy.
- "1) The tax proposal is based in EQUITY."
The proposals are partially justified by attempting to address inequalities and a lack of equity across skin colors, not to seek complete equality nor even equity across the range of individuals. You're comparing apples to oranges. Also, I think you have equality mistaken for equity.
- "2) The taxation of unrealized capital gains (basically a wealth tax) of 25% would destroy almost every company in existence."
I agree that taxing unrealized capital gains (for either people with total assets greater than $100 million or for capital gains above $100 million -- the proposal doesn't seem to clarify which) isn't a great idea. That said, the vast majority of companies are nowhere near having individual shareholders with assets above $100 million.
- "4) [...] However, it has to be acknowledged that dynastic wealth in the US is not a very big contributor to wealth inequality. 70% of inherited wealth in gone in 2 generations and over 98% is cone in 3."
Source? Any academic paper showing details would be great. The current estate tax exemption for 2024 is effectively $27.22 million, and then there are numerous creative ways to minimize or eliminate estate tax burden (some of these are addressed by Biden's proposal). I'd be truly amazed if there's any evidence that a significant percentage of heirs of estates >$100 million, for example, manage to deplete their wealth down to a middle class status.
The reason I personally like using the estate tax as a tool for increasing tax revenue is, in its current state (with the $27.22 million exemption scaled to inflation), it never affects the quality of life of the person who amassed an estate-taxable fortune, and it also hardly ever meaningfully affects the quality of life of heirs. This would stay true, due to the large exemption amount, even if the loopholes were fixed.
Is this not a nearly ideal form of taxation? Tax revenue needs to come from somewhere, and getting more of it at the point of inheritance from the ultra-wealthy is one of the lowest-impact methods. Hell, it'd even help reduce extreme inequality, a problem that causes all sorts of negative effects.
- "5) [...] You have a warped sense of "fairness" looking only at "equity" and not "reciprocity". You fail to mention that rich people currently pay a disproportionate amount of taxes."
One initial note: you're ignoring payroll taxes. Regardless:
In 1989, the share of total net wealth held by the bottom 99% of the population was 77.3% (39.2% for the bottom 90%). In 2023, these figures are now 69.7% (and 33.1%), respectively. This means that the bottom 99% of the population has seen its share of national wealth decline by 7.6 percentage points or roughly 9.8% (and the bottom 90% of the population has seen its share of national wealth decline by 6.1 percentage points or roughly 15.6%).
Where, then, did this share of the US economy's growth go? Part of it has gone to the 99.0th to 99.9th percentile, as this range's share of US wealth has grown from 14.3% of the national total to 16.7%; a 2.4 percentage point or 16.8% increase. A more alarming portion of it has gone to the top 0.1%, as their share of US wealth has grown from 8.5% to 13.6%; a staggering 5.1 percentage point or 60% increase.
Are you sincerely arguing that this isn't a problem? Pointing to the percentage of federal income taxes paid by the bottom 50% is a misleading distraction. Income and wealth inequality in our nation has grown enormously; those in the upper percentiles haven't had it better going back a century. Federal, state, and local governments need money, and the ultra-wealthy have money in abundance. Obviously taxation should focus on them.
"The proposals are partially justified by attempting to address inequalities and a lack of equity across skin colors, not to seek complete equality nor even equity across the range of individuals. You're comparing apples to oranges. Also, I think you have equality mistaken for equity."
Ahhh no. Equity is a social and administrated system in which shares are adjusted to be equal. The proposed Biden tax plan is STATED to based on equity.
Equity, is evil at its core.
"I agree that taxing unrealized capital gains (for either people with total assets greater than $100 million or for capital gains above $100 million -- the proposal doesn't seem to clarify which) isn't a great idea. That said, the vast majority of companies are nowhere near having individual shareholders with assets above $100 million."
But some of the most innovative companies in the US have many of their individual share holders holding MUCH more than $100 million and it would destroy them to have their founders basically run out of the business they founded. Then, when the shares of the company drop, does the government give them billion dollar refund?
I'll let you do some independent reading on the differences between the US inheritance and the Dynastic models used more in Europe. It might be enlightening. But the fact remains, with rare exceptions, inherited wealth in the US dissipates rather quickly.
"In 1989, the share of total net wealth held by the bottom 99% of the population was 77.3% (39.2% for the bottom 90%). In 2023, these figures are now 69.7% (and 33.1%), respectively. This means that the bottom 99% of the population has seen its share of national wealth decline by 7.6 percentage points or roughly 9.8% (and the bottom 90% of the population has seen its share of national wealth decline by 6.1 percentage points or roughly 15.6%)."
This is a problem but the Biden proposal will only pour gasoline on this and make it far worse.
"Equity is a social and administrated system in which shares are adjusted to be equal."
This is not the sort of equity the Biden Administration is referring to. Equity in the context of demographic differences in public policy refers to "leveling the playing field", or in other words, trying to use public policy to improve social mobility so someone born into a 10th income percentile family in Detroit has similar opportunities in life as someone born into a 90th income percentile family in a Boston suburb.
"I'll let you do some independent reading on the differences between the US inheritance and the Dynastic models used more in Europe. It might be enlightening. But the fact remains, with rare exceptions, inherited wealth in the US dissipates rather quickly."
Does the fact remain? Do the ultra-wealthy actually not remain ultra-wealthy across generations? Perhaps if each generation has tons of kids and the wealth is dispersed broadly. The fact that does remain is economic inequality has grown and remained high, and taxing capital gains (albeit hopefully in a better way than Biden proposes) and taxing inheritance are both good ways to generate tax revenue and reduce inequality.
"This is a problem but the Biden proposal will only pour gasoline on this and make it far worse."
I'm curious what significant ideas you think would work for reducing inequality in the US, if you don't mind sharing some more of your opinions.
Yeah, I agree with you that unrealized capital gains taxes would destroy a lot of companies. I wrote a separate comment going through what it looks like for a small business. Most small business owners should expect tax bills that they can't actually pay unless they have separate retirement savings they can use up. Then I guess you try to sell your business at a loss.
Good discussion on how to spend someone else’s money to finance your interests. In addition to the Swiss comment below- No capital gains tax is levied on private financial returns in Switzerland. Strange that there was no mention of a VAT tax. No mention of a flat tax. No mention of the US already having a very heavy progressive income tax. No mention on how these taxes will impact cultural /social grudges . The discussion is lacking. For me, tax Noah and his ilk. I’ll go hide behind the bush as the one time politician Huey Long said.
I thought I was angry about some of this til I read the comments, lol, there is a lot to piss people off here, and for good reason. I have tons to say but I will contain myself to one, raising capital gains taxes will hurt those like me who depend on stocks for retirement. Most people with stock accounts are hardly billionaires. In California they are already taking 33% of what you make every year in cap gains.
This would raise it to 58%. Are you kidding me? no way, this is enough to not make me vote for Biden.
Second, Noah if you see this I would like to see you write an in depth article(s) on what is going wrong with our health care system. I suspect it has more to do with monopolies, middle men, and venture capitalists than anything. I was supportive of single payer til I got medicare, and medicare sucks. They don't pay the Dr.'s anything so the Dr.'s don't want to help you any more than they have to. No surprise I guess.
You make a good point about retirees. Capital gains taxes hit retirees hard, and they have no way to make it up.
Same with run-ups in real estate valuations that increase property taxes (absent some type of moderation mechanism). Lotsa New England retirees having to move because they can't afford the soaring property taxes out of their savings.
It's a huge problem. Another reason I'm a YIMBY. We need more market-rate housing so the prices stop rising.
If the housing is not being built, that's not a market problem.
The capital gains tax in CA for individuals maxes out at 12.3% on gains over $600,000 plus another 1%on gains over $1 million. If you retired with annual capital gains over $600,000, you are in the top 1% of retirees.
ok, and there are graduated scales below that, but what happens in that case is, like for a friend of mine, he planned to use his house sale in Menlo Park, which he bought in the 70's for 120K, as his retirement. So he sells it for $2 million, gets taxed at 38.3 on 1.8 ish, and gets a tax bill for almost 700K. So he gets 1.2 to invest plus soc sec and some small savings he had. I just don't like it, it's too much.
On a 50K income you are still getting socked with nearly 25% in cap gains in Ca.
Getting rid of stepped up basis is the only part that makes sense.
Adding interest to prior years makes no sense. It should be the opposite. Your capital gain should be reduced by the amount of inflation your capital was depreciated in its purchasing power. This is the reason it’s logical to have a capital gain tax rate below income tax rate.
Taxes should just be flat 15-20% on income over median income. Treat all income equal.
So, when I inherit some things, even if it's not a huge amount, there has to be a team of accountants and experts to value the artwork, real estate, small business assets (tangible and intangible) to see exactly how much unrealized capital gains there are? And I have to find grandpa's receipt for the dogs-playing-poker painting to figure out how much he paid for it?
If the tax is only on easily valued stocks and bonds, that seems like a recipe for tax-avoidance strategies.
Right now, taxes are paid on large inheritances in total (not just the unrealized gains), so this proposed step-up basis provision only affects smallish estates.
A few points:
Taxes on unrealized gains is just a wealth tax. It's a form of virtue signalling and would be a headache to implement. Even an interest rate that accrues over time against unrealized gains would mess with incentives and pricing in illiquid markets.
Any discussion on taxing unrealized gains must also include what happens when unrealized losses occur. Additionally, would this require people to appraise all of their holdings every year? For example, real estate and art. In general, it is just a dumb idea and would require more work than people realize and provide a lot of wiggle room for avoidance.
Considerations must be made regarding illiquidity for unrealized and estate taxes. Most politicians are only thinking about stocks and bonds. Noah mentions this with Venture Capital in particular. Haters will hate, but VC is responsible for a disproportionate amount of current GDP relative to cost. It is a competitive advantage and strategic imperative not to screw this up. Especially now that we might potentially be entering a period of global instability. How would it impact round pricing dynamics as a company seeks more capital from seed onward? Would everything be priced on SAFE notes until exit?
I would prefer that racist policies (reparations, race-based assistance) not be discussed in a neutral manner. Help the disadvantaged, yes. Help on the basis of race, no.
Racism poisons our nation. It is stupid to perpetuate it, even under a mantra of good intentions.
Thx for another great post. A question—you argue that tax levels are at historic lows, but this references only federal taxes. My understanding is the picture is different if you assess the “total household tax burden” —ie factoring in state and local taxes, which are quite high in many places.
What do that data look like over time—namely is there indeed still a lot of room to tax people more? (This obviously matters bc if people are already bearing a high overall tax burden, the solution to the debt problem would need to come from spending cuts.)