Moreover, despite the complete nonreality of the current tax debate, the government is going to need more revenue going forward, not less. Our aging demographics, climate change, health care, geopolitics, infrastructure needs — these are all challenges that the government sector, as opposed to the private sector, must meet.

AD

AD

Thus, while Trump is wrong that rising asset values magically reduce public debt, he’s unwittingly pointing the way forward. We need to think about policies that more closely link asset appreciation to tax revenue, which in part means reversing policies that privilege nonlabor income.

End “step-up basis”: Wealth begets wealth, which, along with the miracle of compounding, is why wealth concentration is twice that of income concentration (the top 1 percent hold about 40 percent of wealth vs. 20 percent of income). The current tax code exacerbates this reality by, for one, allowing heirs to pay zero tax on the appreciation, or capital gains of inherited assets. Suppose I have property I bought for $10,000 that’s now worth $100,000. Had I sold it before I died, I’d have paid capital gains taxes on the $90,000 of the property’s appreciation. But if I bequeath it to one of my kids (E, K and S: In the unlikely event that you’re reading this, this example is made up … sorry), the appreciation is untaxed, or “stepped up” to current market valuation.

This is a nasty loophole. First, it locks in an incentive to hold such assets until death even if the gains from selling them might be more productively deployed elsewhere in the economy. Second, it exacerbates wealth inequality. Various ideas in this space carve out some exemptions for cases in which lower-income people inherit assets (I knew a mid-income person who inherited a pricey violin; I could see some degree of “step-up” in that case). Still, combined with the proposal below to raise the capital gains rate, ending step-up basis raises more than $200 billion over 10 years.

AD

AD

Keep and broaden the estate tax: In a moment of candor last week, Treasury Secretary Steven Mnuchin conceded that water is wet repealing the estate tax “ … disproportionately helps rich people.” I mean, the tax hits only the richest 0.2 percent of estates! It’s the most progressive tax in the system, and even repeal advocates don’t make much of a case for the repeal in terms of boosting efficiency or especially fairness (they do try to cite the phony case of family farms hit by the tax, but they never can come up with … you know … an actual case). Lowering the exemption and bumping up the rate would raise more than $200 billion while reaching just 0.3 percent of estates.

Equalize the rates on capital income: Or at least close some of the gap between earned/wage income (top rate: ~40 percent) and asset-derived income (~24 percent). After all, that gap is a prime motivator for avoiding taxes by defining your income to fit the tax-favored definition, say by making regular earnings look like capital gains. The motivation for the rate differential is that investment is highly responsive to tax changes and capital is globally mobile, so you’ve got to tax it gingerly or it will flee our shores.

As is often the case in these debates, there’s some evidence to support this claim, as well as evidence to counter it. After all, after-tax capital costs are uniquely low right now, and investment is far from booming. At any rate, small changes of a few percentage points either way have never been found to amount to much. As Warren Buffett put it, “I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.”

AD

AD

Add a small financial transaction tax (FTT): I suggested this idea recently on this very page, so I won’t belabor it, but of all the above, this idea connects most directly to linking the rising stock market to revenue. An FTT is a tiny, inconspicuous, few-hundredths of a percent tax on security trades — that’s one or two dimes on a $1,000 trade — that raises maybe $150 billion to $200 billion over 10 years. Since the tax is levied on the value of the underlying trades, its take rises with market valuations, holding trading volumes constant. A side bonus: An FTT would dampen high-frequency, noise trading that adds little to efficient capital allocation.

There’s more one could do in this space, of course, such as cap wasteful deductions for investments and savings that wealthy households would undertake anyway, such as the mortgage interest and retirement savings deductions. And, to state the obvious, these ideas are nowhere near the table today — they’re not even in the same house, neighborhood, etc.