For anti-tax conservatives — you know the type; the ones who decidedly do not heart taxes — who haven’t been able to jam through the big tax cuts that they want, defunding the IRS is their backdoor way of getting to the same place.
The figure below from tax expert Chuck Marr shows that since 2010, the agency’s budget is down 17 percent in real dollars; enforcement staffing is down by 23 percent, while individual filings are up 7 percent. Such budgeting supports evasion and inflates the tax gap (the difference between what’s owed and what’s paid, a.k.a. tax evasion, a la Panama): Treasury estimates that each additional $1 spent on IRS enforcement yields $6 of additional revenue. It’s pretty ridiculous to talk about tax reform while facilitating evasion by underfunding the IRS.
Close the carried-interest loophole
If you’re a policymaker claiming to be interesting in improving the tax code and you’re not willing to close the so-called “carried interest loophole” — it allows hedge fund managers to pay lower asset-based rates on their earnings at a 10-year cost of $19 billion in lost revenue to the Treasury — then you’re just blowing smoke. To close such a loophole boosts both tax fairness and simplicity, since earnings are taxed as earnings, not redefined as capital gains. Those who claim to want to do major tax reform yet are unwilling to first close this loophole, one with virtually no defenders, should be considered akin to those who say they’re ready to run a marathon but get winded walking up the stairs.
Get real on inheritance taxes
Two simple, fair fixes here. Regarding the estate tax, broaden the base and raise the rate. If we implemented what President Obama suggests in his recent budget — lower the estate-tax exemption threshold from $10.9 million to $7 million for couples (and from $5.4 million to $3.5 million for individuals) and increase the top rate of the estate tax from 40 percent to 45 percent — along with a few other good ideas in this space (close a few estate and gift-tax loopholes), we’d raise $226 billion over 10 years, and the estate tax would go from affecting about 0.2 percent of estates to about 0.3 percent.
Next, sorry, rich kids, but we’ve got to close the “step-up basis” loophole. This one allows the wealthy to pass capital gains on to their heirs, tax-free, by ignoring the appreciation of an asset when it is passed on to a descendant. Combined with another important change — Obama’s proposal to raise the capital gains rate from its current 23.8 percent to 28 percent, thus reducing a major incentive to define income as cap gains — ending step-up basis raises $235 billion over 10 years.
No more supply-side nonsense
The zombie myth that big tax cuts offset their revenue costs through growth effects may not die — it’s just too irresistible for those who want to cut taxes while at least pretending to care about public debt — but neither does it have empirical backing. I’d love to show you the pack of graphs made by my colleague Ben Spielberg, but you’ll just have to wait until I trot them out at a congressional testimony later this week. Each one plots a target economic variable of supply-side tax cuts — labor supply, capital investment, productivity, gross domestic product and more! — against marginal rates over time. Suffice it to say that the expected inverse relationship is, um, not forthcoming.
Oh, and governors: Do not try this supply-side stuff at home. Kansas bought a vat of this snake oil, and the state tax cuts that took effect in 2013 have now blown a $400 million hole in the state’s budget. Supply-side advocates who designed the Kansas cuts predicted that they would provide an “immediate and lasting boost” to the local economy. But the cuts have not only caused serious underfunding of the state’s education system; they’ve also coincided with weak job and GDP growth.
I know, I know. We D.C. wonks live in our own strange world of “The Walking Dead: Supply Side.” We know that facts don’t kill zombies. But they’re all we’ve got.
These last two are in regard to the corporate side of the code (I’ll leave off inversions, as Treasury Department’s doing as good a job as it can on that without congressional cooperation). Multinational companies avoid U.S. taxation on their foreign profits through “deferral”: They “book” their profits in far-off lands and can then defer paying U.S. taxes on them. The best way to shut this down is to implement a minimum tax that multinationals must pay on their foreign earnings as soon as they earn them. Simple, right? And when it comes to international taxation, “simple” is our best friend. The Obama administration plugs in 19 percent for this tax, which raises $350 billion over 10 years.
Stop privileging debt financing
According to recent Treasury analysis, when corporations finance investments, there’s a gaping differential between how the code treats debt vs. equity financing. Because interest payments are deductible from corporate income, while dividend payouts are not, the effective marginal rate of debt financing is minus 39 percent (!): in other words, a large subsidy. The rate on equity financing for corporations is 27 percent (see figure 2 here). There should be little wonder as to why American businesses are prone to excessive leverage. Yes, closing that gap would whack private equity shops and others who make gobs of money through such subsidized borrowing. But there’s no good economic rationale for such a massive differential. It’s a distortion I’d fix tomorrow.
There you have it, friends. Once we finish basking in the glow of Tax Day and place our new I Heart Taxes mugs in the dishwasher, let’s get to work!