The problem isn't deductions, it's the weird carved off niches for certain kinds of wealth
that effectively makes them invisible to the tax code.
COLUMN-How to target untaxed wealth - Lawrence Summers
What is needed is an additional element, one that has largely been absent to date: the numerous exclusions from the definition of adjusted gross income that enable the accumulation of great wealth with the payment of few or no taxes.
The issue of the special capital gains treatment of carried interest - performance fee income for investment managers - is only the tip of a very large iceberg. There are far too many provisions that favor a small minority of very fortunate taxpayers. Because these provisions effectively permit the accumulation of wealth to go substantially underreported on income and estate tax returns, they force the federal government to consider excessive increases in tax rates if it is to reach any given revenue target.
All parties - whether their primary concern is preserving incentives for small businesses, closing prospective budget deficits or protecting the social safety net - should be able to come together around the idea that it should not be possible to accumulate and transfer large fortunes while avoiding taxation almost entirely. Yet this is all too possible today.
Here are some issues the Obama administration as well as Democrats and Republicans in the U.S. Congress should consider in light of the magnitude of prospective deficits and the extraordinary good fortune of those at the top of the income distribution.
Why do current valuation practices built into the tax code make it possible for investment partners to end up with $50 million or more in entirely tax-free individual retirement accounts when the vast majority of Americans are constrained by a $5,000 annual contribution limit?
A simple calculation shows that our estate tax system is broken. Assets that are passed to relatives or other personal relations are often badly misvalued relative to what they cost on an open market. The total wealth of American households is estimated at more than $60 trillion. It is heavily concentrated in very few hands. A conservative estimate given the lifespans of Americans would be that 2 percent ($1.2 trillion) is passed down each year, mostly from the very rich. Yet estate and gift taxes raise less than $12 billion, or just 1 percent of this figure each year.
If a family's home rises in value by more than a $500,000 exclusion over the course of its dwelling, then it pays capital gains tax on the difference between the value now and the value at purchase. But real estate investment operators, who sell properties whose value is measured in the hundreds of millions if not the billions of dollars, are able to take tax deductions for "depreciation" on their properties. And they are then able to sell these properties at an appreciated price while avoiding capital gains tax through what is known as a "like kind exchange," but which in fact, is a sale.
Why should international companies be able to locate the lion's share of their foreign income in small, low-tax jurisdictions such as Bermuda, the Netherlands and Ireland, and avoid paying taxes?
There are sound arguments for a preferential rate on capital gains. But is there any real justification for allowing those who do not need to sell their assets to finance retirement to avoid capital gains taxes entirely by including them in their estates?