As the author off-handedly implies, this only works for liquid investments. It's obviously unworkable for someone with a massive paper gain in an illiquid investment -- e.g., shares in a privately held company whose stockholder agreement prohibits transfers.
But if the proposal would be to force paper gains only in publicly traded companies to be marked to market, then everyone will work awfully hard to avoid ever directly holding shares in publicly traded companies... which, I don't know, seems possibly problematic.
Seems more realistic to go after the revenue on its way in to companies. (E.g., require companies with executives domiciled in the US to pay US taxes on worldwide profits. No more "Double Irish" and zero US taxes for GE, unless Jeff Immelt wants to move to Dublin.)
Your cure is worse than the disease. Who really cares whether they work in Geneva or New York or Sydney or SF? They are all nice places to live, and that plan would be a national disaster.
The US just needs to tax capital gains as ordinary income, and cut the corporate income tax to 10-15% with no exceptions to be globally competitive. The goal is to have more multi-nationals based in the US, not less.
And tax unrealized gains, to eliminate a loophole that benefits folks who are rich enough to avoid realization.
And to smooth the progressive tax rate over multiple years, avoid punishing the entrepreneur and employees who toil for 5 years to earn one big pay day.
Taxing capital gains as normal income would also have a positive effect on the serious problem that 70% of US companies don't pay dividends, which is really missing the whole point of making capital allocation more efficient.
The US just needs to tax capital gains as ordinary income, and cut the corporate income tax to 10-15% with no exceptions to be globally competitive.
This only makes sense if the income used to buy the capital hasn't already been taxed once, when it was earned. Since it already was, you're in effect arguing for double taxation. Which is why capital gains are taxed differently in the first place.
The capital was taxed at ordinary income, yes, but the capital gains was not.
He's right, it's time to start treating capital gains as ordinary income. My fifty dollars of capital generated by fixing a bug at work is equal to your fifty dollars of capital generated by the time/risk value of money.
Are you aware that sales tax exists, excise tax exists, and that these taxes, along with income tax, are taxes on transfers, not creation? This isn't double taxation, it's n taxation. Money is taxed as it circulates.
President Obama wants to tax dividends at ordinary income rates. These results, from Marcus and Martin Jacob, should not come as a huge surprise:
We compile a comprehensive international dividend and capital gains tax data set to study tax explanations of corporate payouts for a panel of 6,416 firms from 25 countries for 1990-2008. We find robust evidence that the tax penalty on dividends versus capital gains is statistically significant and negatively related to firms’ propensity to pay dividends, initiate such payments, and the amount of dividends paid. Our analysis further reveals that an increase in the dividend tax penalty raises firms’ likelihood to repurchase shares, initiate such repurchases, and the amount of shares repurchased. This is strong confirming evidence that when listed industrial firms globally design their payout policies, they take into careful consideration the relative tax implications of their payout choices.*
GE has and will pay large amounts of corporate income tax. GE paid no corporate income tax in 2010 due to a variety of special situations (including the 2008 meltdown of their finance business), and it was widely reported in the news. Since more normal tax years don't make the news, this has led many people like yourself to erroneously think some corporations don't pay income taxes.
Not necessarily true. Large companies can and do currently benefit from higher corporate tax and a complicated tax code. It creates barriers to entry for new companies competing in their market. If you make the tax code simpler it provides them less opportunities to specialize in avoiding taxes.
Yes, the situation is completely unworkable for illiquid investments.
But that's exactly how the US government treats permanent residents today should you lose your permanent residency, voluntarily or not - all the private stock you own gets marked-to-market and your tax bill is due immediately.
And my wife wonders why I'm paranoid when I cross the border.
The author does explicitly state that his proposal is only about publicly-traded stocks, so your first point is moot.
Secondly, regarding your second point, some company or person would be holding those publicly-traded shares, which means that they will be paying tax under this proposal.
Maybe feeding the troll, but in case you were serious...
My point was that the author is forced to use some arbitrary standard like "publicly traded" since such a proposal is inherently unworkable for illiquid investments. But in doing so, the author creates an obvious problem: if "publicly traded" is the litmus test for this new mark-to-market tax, then investors will move investments into non-public vehicles to avoid paying the tax.
As to your second point, the amount of publicly traded float is not zero sum: companies regularly go public and take themselves private to achieve financial, governance, and other objectives. So it is not the case that anyone necessarily would be paying the mark-to-market tax on shares of a currently publicly traded company, any more than it is the case that having an X% corporate tax rate means US companies pay X% of profits in tax to the US government.
If this proposal were enacted, future-incredibly-valuable company F woud avoid becoming a publicly traded company entirely. Facebook, which the author cites because it's headline-grabbing, harms rather than helps his case: they've intentionally avoided going public until now, and could into the arbitrary future if it were especially onerous for the founders/investors for the company to do so. The rational expectation of Facebook principals right now is that the benefits of going public (at least for the founders and investors) outweigh the negatives, because there is a massive liquidity and valuation improvement from doing so.
But under the author's proposal, that cost/benefit analysis would change, and companies would simply stay private and achieve liquidity for founders and investors via other mechanisms. Over time, these mechanisms would evolve into processes that were as close to indistinguishable from public company registration as possible without actually triggering the language of the market-to-market tax law. SEC rules about selling shares to non-qualified investors would still hold, obviously, but I'm sure with so much potential tax to be saved, investors would find ways to legally aggregate non-qualified investors into qualified vehicles to get around this. Or just live with qualified investors, and no others, owning their companies.
But if the proposal would be to force paper gains only in publicly traded companies to be marked to market, then everyone will work awfully hard to avoid ever directly holding shares in publicly traded companies... which, I don't know, seems possibly problematic.
Seems more realistic to go after the revenue on its way in to companies. (E.g., require companies with executives domiciled in the US to pay US taxes on worldwide profits. No more "Double Irish" and zero US taxes for GE, unless Jeff Immelt wants to move to Dublin.)