Everyone, it seems, has ideas about new tax strategies, some more realistic than others. The list of tax revolutionaries is long. The short list includes Representative Alexandria Ocasio-Cortez, who wants a top tax rate of 70 percent on incomes above $10 million a year; Senator Elizabeth Warren, who wants a wealth tax; Senator Bernie Sanders, who wants an estate tax with a 77 percent rate for billionaires; and even Senator Marco Rubio, who recently proposed a tax on stock buybacks.
Whatever your politics, there is a bipartisan acknowledgment that the tax system is broken. Whether you believe the system should be fixed to generate more revenue or employed as a tool to limit inequality — and let’s be honest for a moment, those ideas are not always consistent — there is a justifiable sense the public doesn’t trust the tax system to be fair.
In truth, how could it when a wealthy person like Jared Kushner, the son-in-law of the president, reportedly paid almost no federal taxes for years? Or when Gary Cohn, the former president of Goldman Sachs who once led President Trump’s National Economic Council, says aloud what most wealthy people already know: “Only morons pay the estate tax.”
If you pay taxes, it’s hard not to feel like a patsy.
A New York Times poll found that support for higher taxes on the rich cuts across party lines, and Democratic presidential hopefuls are offering plans to do it. But the current occupant of the Oval Office signed a $1.5 trillion tax cut into law, so the political hurdles are high.
Over the past month, I’ve consulted with tax accountants, lawyers, executives, political leaders and yes, billionaires, and specific ideas have come up about plugging the gaps in the tax code, without blowing it apart.
None of these are as headline-grabbing as Ms. Ocasio-Cortez’s Green New Deal, nor will they evoke the emotional response of a sound bite about Ms. Warren’s wealth tax. But it could be that evolution has a better chance than revolution.
Patch the estate tax
None of the suggestions in this column — or anywhere else — can work unless the estate tax is rid of the loopholes that allow wealthy Americans to blatantly (and legally) skirt taxes.
Without addressing whether the $11.2 million exemption is too high — and it is — the estate tax is riddled with problems. Chief among them: Wealthy Americans can pass much of their riches to their heirs without paying taxes on capital gains — ever. According to the Center on Budget and Policy Priorities, unrealized capital gains account for “as much as about 55 percent for estates worth more than $100 million.”
That’s because after someone dies, the rules allow assets to be passed on at their current — or “stepped up” — value, with no tax paid on the gains. An asset could rise in value for decades without being subject to a tax.
Many wealthy Americans even borrow against their assets rather than sell them to avoid paying capital gains tax. That’s why closing this loophole is so critical: You could raise rates and put a big tax on the sale of property and it wouldn’t matter for many wealthy families. They wouldn’t actually pay it.
The Congressional Budget Office estimates simply closing this loophole would raise more than $650 billion over a decade.
As central as this idea is to the other suggestions, it is not an easy sell. Three Republican senators introduced a plan this year to repeal the estate tax.
But this and other changes — eliminating the hodgepodge of generation-skipping trusts that also bypass estate taxes — are obvious fixes that would introduce a basic fairness to the system and curb the vast inequality that arises from dynastic wealth.
Increase capital gains rates for the wealthy
Our income tax rates are progressive, but taxes on capital gains are less so. There are only two brackets, and they top out at 20 percent.
So why not increase capital gains rates on the wealthiest among us?
One chief argument for low capital gains rates is to incentivize investment. But if we embraced two additional brackets — say, a marginal 30 percent bracket for earners over $5 million and a 35 percent bracket for earners over $15 million — it is hard to see how it would fundamentally change investment plans.
Most of America wouldn’t be affected at all and those wealthy individuals who are successful enough to pay more would be unlikely to hold back on investment. After all, they’d still want to get a return on their money rather than have it sit idle.
Even Bill Gates agrees, telling CNN: “The big fortunes, if your goal is to go after those, you have to take the capital gains tax, which is far lower at like 20 percent, and increase that.”
End the perverse real estate loopholes
One reason there are so many real estate billionaires is the law allows the industry to perpetually defer capital gains on properties by trading one for another. In tax parlance, it is known as a 1031 exchange.
In addition, real estate industry executives can depreciate the value of their investment for tax purposes even when the actual value of the property appreciates. (This partly explains Mr. Kushner’s low tax bill.)
These are glaring loopholes that are illogical unless you are a beneficiary of them. Several real estate veterans I spoke to privately acknowledged the tax breaks are unconscionable.
Fix carried interest
This is far and away the most obvious loophole that goes to Americans’ basic sense of fairness.
For reasons that remain inexplicable — unless you count lobbying money — the private equity, venture capital, real estate and hedge fund industries have kept this one intact. Current tax law allows executives in those industries to have the bonuses they earn investing for clients taxed as capital gains, not ordinary income.
Even President Trump opposed the loophole. In a 2015 interview, he said hedge fund managers were “getting away with murder.”
This idea and the others would not swell the government’s coffers to overflowing, but they would help restore a sense of fairness to a system that feels so easily gamed by the wealthiest among us.
There are a couple of other things worth considering.
Let’s talk about philanthropy
Nobody wants to dissuade charitable giving. But average taxpayers are often subsidizing wealthy philanthropists whose charitable deductions significantly reduce their bills.
These people deserve credit for giving money to noble causes (though some nonprofits are lobbying organizations masquerading as do-gooders) but their wealth, in many cases, isn’t paying for the basics of health care, defense, education and everything else that taxes pay for.
Philanthropic giving is laudable, but it can also be a tax-avoidance strategy. Is there a point at which charitable giving should be taxed?
I’m not sure what the right answer is. But consider this question posed by several philanthropic billionaires: Should the rich be able to gift stock or other assets to charity before paying capital gains taxes?
Let’s use Mr. Buffett as an example, though any of wealthiest billionaires in the world could do the same.
Most of Mr. Buffett’s wealth is stock he built up in Berkshire Hathaway. Close estate tax loopholes and raise the capital gains rate to the sky, but the vast majority of his fortune will not be taxed. That’s because Mr. Buffett plans to donate almost all of it to Mr. Gates’s foundation, which won’t pay taxes when the stock is sold to fund the very worthy projects Mr. Gates has undertaken.
At a minimum, we ought to consider whether the wealthy should be allowed to take deductions when they move money to their own foundations, or whether they should only take a deduction when the money is spent. This would prevent them from using their foundations to capture a tax deduction in windfall years without the money having to go to a worthy cause at the same time.
Finally, fund the Internal Revenue Service
The agency is so underfunded that the chance an individual gets audited is minuscule — one person in 161 was audited in 2017, according to the I.R.S. And individuals with more than $1 million in income, the people with the most complicated tax situations, were audited just 4.4 percent of the time. It was more than 12 percent in 2011, the Center on Budget and Policy Priorities reported.
The laws in place hardly matter: Those willing to take a chance can gamble that they won’t get caught. That wouldn’t be the case if the agency wasn’t having its budget cut and losing personnel.
Mary Kay Foss, a C.P.A. in Walnut Creek, Calif., told the trade magazine Accounting Today what we all know, but is inexplicably never say aloud: “No business would cut the budget of the people who collect what’s owed.”
“It encourages people to cheat,” she said. “We need a well-trained, well-paid I.R.S. staff so that those of us who pay our taxes aren’t being made fools of.”
Nobody wants to be a patsy.