Sadly, Jason Furman has been supporting one of the worst economic ideologies of our generation. Here’s Jason’s Twitter take, here’s his earlier WSJ piece.
Let me start with his quick summary:
I like the Biden-Harris proposal for an unrealized capital gains tax. At any given level of income tax it is very efficient and fair in paying tax on unrealized gains, reducing lock-in and tax planning.
Read Jason’s own words in the WSJ — do you think a complicated plan is going to happen? reduce tax planning? How about finding out what percentage of assets are liquid versus illiquid? Will it be financed through private equity versus public markets? What dangerous goods can you buy and sell before December 31? How much money can you put into your foundation, to fix your financial situation? Aren’t there other “tricks” to improve your tax eligibility? What about those who “live in Puerto Rico”?
When it comes to your goods, how is “trade” defined? (The narrator:not true)
What about “…laws to prevent taxpayers from being unfairly taxed [sic] converting tradable goods into non-tradable goods”? Those will go down nice and smooth, right? And consider the legal disputes over what “tradable” and “non-tradable” means. What about bundling goods and making them unsellable on purpose? How is that calculated? Carving goods to make them less marketable? Should we measure investor intent? And doesn’t this make it more difficult to invest in your startup? (As we’ll see below, Jason and others cite “free cash flow” as a perceived benefit of this plan – but their plan hurts big money flows too much.)
How does this section, with its many tax planning points, make you feel?:
Taxpayers with wealth above the threshold are required to report to the Internal Revenue Service (IRS) annually, separately by asset class, the net and estimated total value (as of December 31 of the taxable year) of their assets. in each class of property mentioned, and the total amount of their debts. Commodities (for example, publicly traded stocks) can be valued using year-end market prices. Taxpayers will not be required to obtain annual, market prices for goods that cannot be sold. Instead, non-marketable assets may be valued using the capital base of actual or adjusted costs, the last event of evaluation from investments, loan, or financial statements, or other methods approved by the secretary. Valuation of non-tradable assets will not be required every year and will instead be increased by a rolling annual return (the five-year Treasury rate plus two percentage points) between valuations. The IRS may offer taxpayers ways to appeal assessments, such as assessments.
Or if you want to consider another random problem, and I’m sure there are many others I haven’t thought of, how about this one? – what about restricted stock or stock grants that vest over time? Do you only pay taxes on the unrestricted/provided portion, or everything? Will this be so easy?
I have a lot of respect for Jason, who I consider to be one of the smartest policy economists, but I really don’t see how he can believe that tax planning will be easier and less expensive under this proposal. In addition, one must consider the tax problems of the act that Congress will pass, after the political horse-trading, rather than the appropriate plan of Jason Furman. We all know how previous tax plans have gone through the legislative process.
Regarding the lock, here’s Jason from the WSJ:
…linking taxes to income encourages people to hold on to assets. These gains escape taxation at death, taxing the incentive not to sell and preventing money from flowing freely to those who can put it to good use.
I don’t understand the concern here, and why it is an important concern. I don’t hear Democratic economists complaining about not having enough for the rich in any other context. To put this point as an example, let’s say someone starts a company, and years later that company is worth $200 billion. Under the current tax law, Mr. A billionaire will undoubtedly be too late to sell his shares and too late to become more liquid, compared to a large amount. How big of a distortion is that? Who, on the left side of the political spectrum, once said: “My God, I’m worried, Mark Zuckerberg is not wet enough!” Then…we have to help make him even more wet by taking a decent chunk of his wealth? In a world with rational financial markets, the best way to protect the wealth of the wealthy is to preserve or increase their overall wealth.
Given private equity’s ability to “think” about valuations creatively, the program provides a significant boost to that approach to doing business. I think that sector is on average more Democrat friendly than public equities? And why are we introducing this extra distortion? Shouldn’t we be worried about the growth of private equity? (What did they say about Mitt Romney, back there?)
Alex T., who emailed me, makes a general point very effectively:
What is actually happening is that he is alienating the entrepreneur from his capital at the same time that the team is probably the most productive. The separation of funds from an entrepreneur can have a negative impact on the growth of the company or on the entrepreneur’s ability to manage effectively. An entrepreneur can lose control, for example. If you wait until the entrepreneur sees a profit, that is the time when the entrepreneur wants to exit and is ready to eat so it is closer to the use of the tax and is better timed in the growth plan of the entrepreneur.
I agree with Jason (and many others) that analyzing the capital gains basis on death is a bad idea. We all know that’s easy enough to fix in other ways, as public finance economists have long proposed. And if necessary, we can tax the ability of the wealthy to borrow, using their stock as collateral. I don’t like this, but it would be much better than the proposal under consideration.
Let’s consider Jason’s other point:
…tax benefits when they are earned are unfair because they allow two people with the same income or wealth to be taxed at different rates for arbitrary reasons. For example, if you own appreciating stocks, they will be taxed less than similar stocks that do not appreciate but pay a dividend.
Remember that the Biden-Harris plan is supposed to work for the super rich (and let’s hope it stays that way over time, like…um…AMT does). Should I be concerned about equity issues because two different individuals with $300 million in net worth pay different tax rates based on their capital gains versus dividend profiles? I just don’t get it. Is it such a big problem that we don’t end up with “enough shares”? And this concern of Jason’s comes early in his episode, prominently, not on the side buried on page 137 of a long proposal. From my point of view, it is easy to search for the blanks of inappropriate distortions.
Here is one very simple way to see the distortions that have been added to the new system. The system attempts to enforce a minimum tax rate of twenty-five percent. Say you have a startup, and it’s about $10 billion after rapid growth. But still you are not making money yet, but still your overall portfolio is wet because your last company did well and you sold it. So, if I’m following Jason and the plan document correctly, in the year after that estimate you have to pay one-fifth of the tax liability on that gain, or say one-fifth of one-fourth of ten billion dollars, or $500 billion. (you don’t have to pay the entire profit, because that would be a “too much” penalty, since the startup might not succeed. So one-fifth of the 25% rate you pay. Obviously you can change these exact numbers, but the general point is always there. Note that in various exposures you can see core rate reported as 25% or 20%).
That seems like a bad investment to me! And suppose the next year the company’s value rises to $20 billion. You have to pay another $500 million in new profits, and (in this point I’m not sure I understand the plan), you have to pay another fifth of the retained earnings for another year, or in other words another $500 million (and please correct me if I’m misunderstanding that). Let’s say, in the following year, the startup crashes and has to be liquidated at a very low price. No refund from the taxman. So you lost not only your investment but also at least $1 billion more, and realizing the exact numbers may vary a bit here.
Ex ante, why would you get into deals like this? However, many startups have similar return structures, which are high initial valuations but high crash percentages later.
Business capital is a major drag on the most productive sectors of our economy, so why are we destroying it like this? Where so many promising developments in biotech and green energy seem to be on the way? Why should we want to crush business capital in this way?
However, the program does not seem to specify the benefits of inflation, at least I could not find any mention of that in the core document. That introduces a whole new set of distortions – why are we squeezing more of our tax burden into a system that doesn’t index to inflation? (And please, readers, if there are any proponents of this tax who want inflation indexation, please leave those links in the comments. I’ve never seen that myself.)
As a result of the policy, doesn’t most property ownership end up in the hands of foreigners? Once the policy is in place, the owners of large American homes will be selling at discounts. That’s another distortion, and the resulting cash flow probably wouldn’t help US exports (it’s a little complicated because not all ceteris are paribus). Foreigners will end up “mostly owning America,” and yes that includes the Chinese. That alone seems to be reason to reject this plan, yet you won’t find these issues being discussed.
If this is supposed to be our government’s main source of income, why do you make the budget so dependent on revenue, available or otherwise? How has that dependence worked for the state of California? What happens to the broad budget during a recession and stock price crash?
Or just try the very simple “small c conservation” questions – how many countries have implemented a program like this? Nothing, and yes I know about France’s very small, very limited, and abandoned wealth tax.
Overall, this is bad policy, and we need the real Jason Furman back!
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