I doubt that it will go anywhere, but there is a proposal on Capitol Hill to tax private equity funds more. As usual with Congress, we can criticize this from two angles. The first is that they are creating a discriminatory rule that will create more clever structuring, but not result in significantly more taxes. Private equity funds might float stubs of their holdings on the public equity markets in order to avoid taxation. There are other ways they could deal with it as well.
The other criticism is that the proposal is not broad enough. We need to tax everyone on the appreciation of their assets every year, whether they have sold them or not. Granted, this modest proposal would require a substantially larger IRS, but as for real estate, the Feds could piggyback off of what is done at the state level, with suitable massaging to create comparability.
This would whack the life insurance industry, certain tax-efficient mutual funds, etc. It would lead to many abandoning their holdings on which they wanted to avoid taking the tax hit.
With the money raised here, the AMT could be easily eliminated. What’s more, we could lower the top marginal tax rates, still bring in excess revenue. We could have a flat tax, and the rich would pay a lot more than today. No more shelters; everyone pays on the increase of their beneficial income, whether they have received it in cash or not. This would create greater liquidity and volatility in the markets as stock that was locked away comes out for sale to create liquidity for tax payments.
Do I want this system? If it is part of radical simplification and flattening of the tax code, yes. Those who benefit from the system would pay their fair share, rich and poor alike. I might end up paying more, but it would be more equitable.
PS — private businesses would still be difficult to apply this to, but I would tax them on their EBITDA.
So you tax my appreciation in ’07. Then my portfolio declines in ’08. Then it appreciates in ’09 but not to ’07 levels and I am taxed again. Then it declines in 2010. Then it appreciates in 2011 but not to the level of 2009 so you tax the gains. Have you lost your mind???
Fair Tax is the way to go.
You have assumed something that I did not say. If your portfolio goes down, so does your income. If your income is negative, the government pays you. This is a very fair system; it merely hits at those who defer taking gains over a long period of time. In this system, everyone gets taxed the way traders get taxed today.
The trader tax system could work as it would simplify things; but we know the govt. will not allow unlimited loss deductibility against income. The gov.t is way too greedy and will always attempt to monkey with the system out of fairness!
It’s not popular in financial forums, but I’m okay that the tax code encourages what’s better for the society to some extent – like deductions for children/spouses (strengthen families), deductions for interests on mortgages (promote home ownership), progressive brackets, and lower taxes on dividends than capital gains.
From that perspective, your proposal intrigues me – an entity that’s sitting on unrealized paper wealth is still enjoying the benefits of a stable country without contributing to it. I wonder what loopholes creative taxpays would find, though. At any rate, anything that would relegate the AMT to history would make me happy!
Paul, no they won’t allow unlimited loss deductability, but they would probably set up some sort of carryforward/carryback, much like corporations face today.
amccabe — the AMT is slowly undoing most preference items as it is. My favorite tax code was the TRA ’86. Very simple, few preferences. Once we open up the tax code to preferences, it becomes swiss cheese. A simple code will make the rich pay more because they won’t be able to hide it away, and use trusts, gains deferral, insurance, etc. to beat the bill. Better governments should make subsidy payments explicitly, and leave the tax code alone.