Mark to market for income tax?

Discussion in 'Off-Topic Discussions' started by nosborne48, Jun 4, 2024.

  1. nosborne48

    nosborne48 Well-Known Member

    WARNING! Extreme nerdiness tax policy question ahead!

    I don't have an opinion on the issue but here's the question:

    Should institutional holder s of financial investments pay capital gains tax (and recognize capital gains loss) on an annual basis using a mark to market approach?

    I can see lots of problems with this but it would (maybe) generate significant tax revenue that investors can currently defer indefinitely.
  2. SteveFoerster

    SteveFoerster Resident Gadfly Staff Member

    You say that like it's a good thing?
  3. nosborne48

    nosborne48 Well-Known Member

    Well, that's one of the policy questions. Should capital gains be taxed and if so, when and at what rate? Right now, we tax the increase in value of your capital assets in a way that taxes not only the real increase in value but inflation as well.
  4. nosborne48

    nosborne48 Well-Known Member

    We also adjust basis upon death to fair market value. If Uncle Tim bought shares of Berkshire Hathaway in 19 ought 11 for $25 and they're now worth $25,000, Tim would pay long term capital gains tax upon sale but if he dies and leaves the stock to you, you receive it with a basis of $25,000. You sell and take the cash and no tax was ever paid, or ever will be paid, on those capital gains.

    This helps the very wealthy preserve their dynasties. Is that good for the democracy? I don't know.

    On the other hand, we whack Uncle Tim's estate over $10 million with a great big estate tax.

    Would it be better to tax gains right along? I don't know.
  5. SteveFoerster

    SteveFoerster Resident Gadfly Staff Member

    It seems, as ever, the real question is ideological, e.g., (1) are wealthy people all just tacit criminals whose inherently ill-gotten gains should be considered piggy-banks-in-waiting for policymakers to raid at will, or (2) should the default position be that people should be able to keep their own stuff even if they have more than you do.
  6. nosborne48

    nosborne48 Well-Known Member

    Well, not exactly. We all of us benefit from a stable government in a free society. Who pays for that? The people. We have an announced policy that those who can pay more should pay more.

    You can disagree with that policy but I don't think you will.

    More troubling to many is the use of taxation to redistribute wealth and we do a lot of that.

    My proposal wouldn't actually increase revenue in the longer run by enough to make a difference that way. It might make the capital gains tax fairer because it could an adjustors annual inflation.

    I'm not insisting on anything. I just want to know what you think.
  7. Bill Huffman

    Bill Huffman Well-Known Member

    Well as a general thought, calculating investments annually rather than when an investment is sold sounds like it would be lots of work. Also coming up with the market value could be problematic for some investments. Perhaps investors could fiddle with tax obligations by using widely different competing estimates of market value?
  8. Lerner

    Lerner Well-Known Member

    Unjustly punishing or abusing the employers or the wealthy is not a good tactic, but everybody have to pay their fair share in taxes.
    Capital gain is a form of an income, so it should be taxed, now if there are laws that provide reduced tax rate for some specific transactions, due to taking risk investment that benefits the public etc., then as long as the law is upheld there is no issue.
    But yes, the wealthy can afford to hire experts that can navigate the tax system to their advantage.
    The legislators should close the loopholes, to prevent cheating.
  9. SteveFoerster

    SteveFoerster Resident Gadfly Staff Member

    Well, if I did then I know it would derail the conversation, which is not my goal. ;)

    That's true. I suppose to be fair, all too often the current system also has "private profit, public losses" aspects that benefit wealthy interests in ways that don't particularly benefit working class people, as well as a regulatory climate that advantages larger interests, sometimes at the expense of smaller competitors, and sometimes just at the cost of general inefficiency.

    I think if there's to be a tax system, ideal characteristics for it would include predictability and simplicity. One example of a regulatory climate that advantages a larger interest at the cost of general inefficiency is the current tax code:

    I mean, if tax preparers and compliance professionals were a city, it would be the third largest city in the US. That's completely insane.
  10. Bill Huffman

    Bill Huffman Well-Known Member

    WOW! That is completely insane.

    Tangential story, when I first talked to my tax guy, he made a point of telling me that he had an agreement with another tax preparer. The agreement was that if one of them had to go in to discuss a return with the IRS that they would do it for each other. The advantage being they could then truthfully attest to all of the details in the tax return. This way they couldn't be held liable if there was any questionable claims being made. Now that previous sentence to this one, I don't think he really said it but it was just implied. I informed him that it was unlikely he would have to do that for me because I've always been willing to pay "my fair share". I would much rather do that than take any risks at all.
  11. nosborne48

    nosborne48 Well-Known Member

    Predictability and simplicity would be nice. Unfortunately, our economy is neither simple nor predictable. The tax system DOES contain a shocking number of special breaks both to encourage certain behaviors and as political rewards. I'm opposed to both. Good luck with that.

    Favorite examples are deductions for charitable donations and mortgage interest. Neither should exist. Why should my tax dollars support anybody's church or subsidize anyone's mortgage?
  12. SteveFoerster

    SteveFoerster Resident Gadfly Staff Member

    This makes it sound like a complex economy requires a complex tax system, and I don't see why that would be the case at all. If anything, we've seen elsewhere that a simple, predictable tax system can spur economic growth (and thus complexity).

    We agree. If anything, a federal tax policy to spur home ownership clashes with state and local NIMBY regulatory policies that get in the way of desperately needed housing construction, and yet we often see that.

    But while a simple tax code may not be politically feasible today, one never knows about the future. Where there's life, there's hope, right?
  13. nosborne48

    nosborne48 Well-Known Member

    What would a simple tax system look like?
  14. SteveFoerster

    SteveFoerster Resident Gadfly Staff Member

    It could look like a lot of things. Kill income tax and replace with a federal retail sales tax, for example. Or kill corporate income tax and keep a personal income tax that's eliminated deductions and credits.

    Or if there's income tax, have the IRS send a bill every year since they already have the tax transcript. There are countries with income tax that don't require individuals to file a return.

    That's just off the top of my head. I mean, you're the one who did an LLM in this stuff, you must have far more ideas than I ever could how things could be simpler if there were the political will for it.
  15. Bill Huffman

    Bill Huffman Well-Known Member

    A really simple tax system would be like Washington state. That state just has a sales tax for government income instead of an income tax. That seems unfair to me though because I believe those that earn more should pay a higher percentage tax.
  16. nosborne48

    nosborne48 Well-Known Member

    Many countries impose a sales tax in addition to income tax. A sales tax alone would burden the poor unfairly though. Say you live paycheck to paycheck. Since all of your income goes to living expenses, all of your income is taxed. The vast majority of Bill Gates' income is untaxed and available to invest to generate more income that escapes taxation.

    This isn't to say our federal government doesn't impose sales taxes! They're hidden but they're there. Usually they're called "excises".

    Before the current income tax regime reached its gigantic proportions, half of all federal revenue came from tariffs and excises. The Great Experiment of Prohibition could not have happened but for the ability of Congress to resort to a much higher income tax to replace liquor taxes.

    Even as late as the mid 20th century, a large part of federal revenue came from tariffs. The global free trade diktat reduced or eliminated much of that money so once again, Congress could have resorted to the income tax but I don't think they did. Instead they started borrowing when there was no current emergency to meet.

    That last is my impression only. Don’t quote it!
    Last edited: Jun 6, 2024
  17. nosborne48

    nosborne48 Well-Known Member

    Incidentally, our Estate and Gift tax regime is lawful according to the Supreme Court because these taxes are excises on wealth transfer and not direct taxes on property which Congress has no power to impose.

    How do you like THAT?
  18. nosborne48

    nosborne48 Well-Known Member

    Income taxes, by the way, are no panacea. Revenue goes down with the economy just when government needs the money most.

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