Longtime readers know that I favor a simplification of the tax code, for both individuals and corporations.? Working as an actuary inside life insurance companies, I saw the complexity of accounting with up to seven accounting bases running at the same time.
Let me suggest one very simple modification to the tax code — let the IRS tax corporations on their illustrated income, with GAAP income as a minimum.? All other tax preferences are abolished.? The idea is this: corporations want to show shareholders how successful they are.? The basis that they choose to use? to show how successful they are is directly applied to taxes.
This would have one of two effects: either companies would stop illustrating income greater than GAAP, and GAAP would become more conservative, or companies would start paying more taxes.
As for private equity, they could not disclose changes in unrealized capital gains as part of their returns without being taxed on it.? Alternatively, we could consider a 15% of book value as imputed income tax, with a true-up when the fund is liquidated.
As for Buffett, let him retract his statements about increase in book value, lest BRK be taxed on it.
And mutual funds and hedge funds, they are corporations also — tax them on total returns.? Illiquid investments should be assumed to earn 15%.
The idea here is to strip away all tax deferral, and force everyone to pay taxes each year — this will work a lot better than the Alternative Minimum Tax.
I don’t really understand the shot at Buffett. Doesn’t book value include a tax liability for unrealized gains? I’m looking particularly at note 15 of the 10-K.
David — why don’t you discuss all the avoided taxes that come from entertainment “perks”?
While the private sector faces all sorts of restrictions on what can and cannot be written off as a business expense — the folks in Washington DC enjoy parties almost every night of the week. Members of Congress rarely have to pay for their own dinners; lobbyists pick up the check as a bribe — I mean a “gift”. And its tax free. The mud covered masses have to pay for our meals out of after tax income.
Congress members fly around first class on corporate jets — when they aren’t flying on military jets. They don’t pay taxes on either. The mud covered masses are asked to pay sales taxes, landing fees, fuel surcharges, etc.
There is a good reason why the richest counties in the USA are the ones surrounding Washington DC — they don’t pay the same taxes as the people they govern.
You want to fix the country and balance the budget at the same time?
Tax the rich, tax dodging people in Washington DC.
Greg:
It sounds like you are suggesting that the U.S. government tax itself. That doesn’t sound like a good use of resources to move money between accounts.
Also, focusing on a small group near the capital is not going to amount to a whole lot of money in the grand scheme of things and is unlikely to solve the much larger issue of deficit reduction.
Mr. Merkel has, in the past, written a piece about taxing individuals in a more equitable manner and this piece is focusing on corporate entities.
@matt – you don’t get it.
As long as some people (lobbyists and government employees) are allowed to game the system; everyone is allowed to game the system. Supposedly equality under the law is a fundamental value of this country.
Mr Merkel also is fantasticly naive when he assumes the tax code is supposed to be simple. Of course the whole tax code, in theory, could be less than 100 pages… but that would undermine the power of individual members of Congress.
There isn’t much point to being in Congress if you can’t use your position to help “your friends”.
You can whine that this isn’t what the founding fathers had in mind. Of course, the founding fathers pushed for a smaller government– one with NO INCOME TAXES.
As soon as you start concentrating power of the purse in Washington, you also create incentives to “influence” the tax code.
Every political leader knows power of the purse is the only thing that matters. The tax code is about control and power. Its been that way for all of recorded history.
Greg, income taxes are fair taxes, because you are taxed on your increase — that’s the way taxes worked in the Bible, 10% would support the Temple and all the priests and Levites.
WideMoat — Yes, BRK pays taxes, but not as much as it would if it weren’t allowed to delay taxation on their unrealized gains from their investments. That’s my main point. Corporations and individuals have a lot of latitude to delay taxation, and taxation delayed often becomes taxation avoided.