First, I am a conservative progressive or maybe a progressive conservative. In other words, this isn’t political. It is instead intended to be ideas on “tax reform.” I’m not an economist, and I’m not part of the Congressional Budget Office, so someone needs eventually to tell me that my ideas are pipe dreams or cost too much, or the politics are wrong.
A FEW PREMISES:
– Tax increases are coming. We have to pay down debt eventually. The government just spent $4 trillion (with more coming) for businesses and individuals hurt by the Covid-19 pandemic.
– Nothing should be done overnight because the economy is fragile. President Biden and his economic advisers know this too. Campaign promises can still be kept if they are scheduled to take effect over the next four years. The four-year timeline is arbitrary. It matches President Biden’s term and coincidently recognizes that many tax changes from the Tax and Jobs Cut Act, as well as the most recent extender legislation, expire at the end of 2025.
– President Biden proposes, and Congress enacts tax law changes. Politics are always a consideration.
1. Estate and Gift Taxes.
Lower the estate tax exemption by some amount over the next several years. Predictability is important. Let’s say, the estate tax exemption is reduced by $1 million a year until it is reduced to $6 million. Detach the gift tax exemption from the estate tax exemption. Slowly move the gift tax exemption down to $1 million or $2 million. Forget changing the step-up in basis rules. Congress has tried that a few times before with little success.
2. Social Security Tax.
President Biden’s proposal of a “donut hole” for the Social Security OASDI limit (currently $142,800) is too complicated. Maybe it’s better to add $10,000 a year to the limit (plus inflation) for the next four years. Raise Medicare tax to 4%. Sorry. Medicare is in trouble. Raise Net Investment Income tax from 3.8% to 4%.
3. Individual Tax Rates.
Raise the 35% and 37% individual rates by 2% each over two years. (I would also recommend that the President propose an increase of 1% to the 32% rate, but the campaign promise of no tax increase for those earning less than a number of $400,000 would be violated.) The 2% increase raises the top individual tax rate to 39%. I know it was 39.6%, but decimals shouldn’t be in our tax law (or fractions). We’re not in sixth grade having a math lesson. Make the top rate 39% or 40%. Work it out with the costs of other changes.
4. Child Care Credits.
Child care credit amounts have been out of date for decades. President Biden’s tax advisers have recommended increasing qualifying child care tax credits to $4,000 for one child under age 13 and $8,000 for two or more children. President Biden also has proposed to raise child tax credits to $3,000 for dependent children 17 and younger, with an additional $600 for children under age six (currently $2,000 for the child tax credit with nothing extra for kids under age six). Both changes sound right, just not with a one year expiration. Make the changes permanent or set an expiration date at the end of 2025, when Congress can reconsider a complete tax package.
5. Long-Term Capital Gains.
Many economists say capital investment is in part dependent on our current favorable rate on long-term investment. Taxing long-term capital gains at ordinary tax rates isn’t going to happen. The change has too many political problems. Instead, let’s add a top tax rate for long-term capital gains of 24% when taxable income exceeds a taxable income amount. The rate increase could take effect at the top bracket amount (currently $523,600 for single and $628,300 for married filing joint filers.) Just increase the rate slowly. Say 1% a year for the next four years until the top long-term capital gain rate reaches 24%.
6. Profits Interest.
Tax profits interest as ordinary income. After all, the profits interest is payment for the general partner’s work or managing member on the project (hedge fund). It is time to pay tax in the same way as other working people.
7. Tax Deferred Exchanges.
The combination of deferral of tax and the step-up of basis at the owner’s death has resulted in great riches for property owners. I wouldn’t recommend taxing the entire gain on property exchanges, but instead would limit the deferral amount to $1 million or $2 million.
Reinstate the ACA individual mandate penalty for failing to have health insurance. Expand the access to premium tax credits from 400% of the poverty level to 500% of the poverty level. Eliminate the “cliff” for the premium tax credit and replace it with a phase-out (i.e., $5 for every $100 of income over the threshold.) The pandemic has driven home our need for changes to the American medical system.
9. SALT Limit.
Limiting the Schedule A tax deduction to $10,000 was aimed at the blue states. Because the law reduced the impact of AMT, many upper-income taxpayers would have received an additional benefit if SALT remained entirely deductible. I’d advise President Biden to double the deductible amount to $20,000 to consider the negative impact on middle-income working people. Oh sure, because I am a Californian paying high taxes, I’d love to see a repeal of the SALT limit, but the JCT says that a repeal for just 2021 would cost $81 billion.
10. Corporate Tax Rates.
Raise the corporate tax rate from 21% to 25% over the next four years. We do need a minimum tax based on a ratio of gross receipts earned in the US divided by worldwide gross receipts as reported on the corporate financial statements. If you are an international tax expert, forgive my simplification. Corporate tax rate shopping, intellectual property moved to tax havens, and various other tax moves feel unfair to most of our taxpayers.
11. Qualified Business Income Deduction.
Something is wrong with a tax provision that takes 100s of pages of regulations to explain the calculation of 20% of business income. One of President Biden’s tax advisers recommended limiting the QBI deduction to a taxable income threshold amount. In other words, no QBI deduction would be available to anyone regardless of W-2 wages or QBIA if their taxable income exceeded a stated amount. This change would simplify the deduction. Let’s advise the President that the threshold be the same as the top individual tax bracket (currently $523,600 for single and $628,300 for married filing joint filers.) That would increase the current QBI threshold amounts of $164,900 for single and $329,800 for married filing joint filers to mitigate the change.
There should not be one-year extenders. The on and off of tax law is not good for individuals or businesses. Let’s say no tax law can be enacted unless it lasts through 2025. Of course, there will always be an exception for Covid- related relief or other national emergency legislation.
We have to fund the IRS. The IRS has lost almost 15% of its employees in the past five years. With fewer employees, there are fewer audits. For FY 2019, the individual audit rate was .45%. The audit rate on high-income taxpayers has dropped from 10% to 6% in the last several years. Collection activities, taxpayer services, and practitioner priority lines have been decimated. The IRS National Taxpayer Advocate annual report states that as of November 2020, the IRS still had 7.1 million unprocessed individual tax returns from last season and 2.3 million unprocessed business returns, with some of the returns going back to April 15, 2020. Mr. President get more money to the IRS.
A few years ago, we had a contest at a few of our conference locations. “Enter a drawing for a prize with your best tax reform idea.” The best idea submitted was to require members of Congress to do their own tax return with nothing but a calculator and a pencil. That answer was later modified by another attendee to allow members of Congress to get help on preparing their tax return – but only from the IRS help lines. If only. . .