By now, you’ve heard all the hoopla surrounding our tax rates and tax system.  Most of the ideas I’ve heard involve radical changes the way data is collected- which means, at least to me- that they won’t work- at least not for a while.

In particular, our tax and banking system is not arranged in any means to tax wealth.  This problem was skirted and exploited by the somewhat misleading ProPublica article about how certain folks amassed significant wealth in the past decade and paid very little taxes on that wealth.

As I explained in my blog describing the article, we don’t track wealth- moreover, we don’t even consider taxing wealth.  Our system is built upon taxing income.  Nevertheless, there are simple ways to make our system more equitable- and those are exactly what I am going to discuss today.

First, let’s start with corporate income and how its taxed.

Corporate Tax Rates

TheDonald arranged for a tremendous gift to American companies back in 2017 with his Tax Cuts and Jobs Act.  Lowering the theoretical maximum tax rate from 35% (which only SMALL companies in America ever paid) to a straight 21%.  (Ok- it turns out that is not so straight, at all.)

First of all, this meant that many a small company saw its tax rates increase.  Before the 2017 law change, there was a 10% tax rate for companies that made little profits.  Now, there’s only that 21% tax rate.  So, the smaller companies saw their tax rates double.

Secondly, most large firms hide their profits overseas.  As a matter of fact, American multinational firms shell out the paltry rate of 7.8% of their domestic profits to taxes.    These firms shelter their income, moving non-existent operations to countries that have very low tax rates- using chicanery.  Which means they didn’t- and still don’t pay much taxes to the US Treasury.  I reported on such companies back in April.   

The good news is that Treasury Secretary Janet Yellen has negotiated a world-wide minimum corporate tax burden of 15% for corporations.  Assuming Congress passes the legislation, every company will have to shell out 15% of its domestic profits to the US Treasury; there won’t be countries where they can hide their money.   These collected funds will greatly reduce our federal deficit- or be used to build (and rebuild) America.

I am also of the opinion that this proviso means that President Biden won’t need to continue to propose his raising of the corporate tax rate to 28%.  First of all, the collections will increase from less than 8% to 15%- almost a doubling.  So, if we need to increase the corporate tax rate, something on the order of 24% will probably do.  (It would be nice to restore that 10% tax rate for firms that generate less than $ 50K in profits- i.e., the small companies in America.  But, I don’t hold much hope on that proviso.)

Before you go complaining that this tax increase will be a burden on US companies, consider these two facts.  One- the US collects a smaller share of tax revenue from corporations than does any other major world economic power.  And, two- some 20 years ago, corporate tax collections were 10% of all Treasury collections- now they are on the order of 5%.  (These collections are also about 1% of our GDP- a decade ago they were at 2%.) It’s time corporations paid their fair share.    (Please note that I’m not sure 10% of all tax collections is enough to consider it fair, either.)

Carried Interest is no longer capital gains

I just finished explaining how carried interest is a sham.  There is no reason that such income should be considered capital gains.  Aborting the provision that was adopted in 1993 to tax carried interest and fee waives as current income will at least double the collected taxes from the principals of these firms.  This loophole needs to be closed.   Poof- at least $ 4 billion more collected each year.

Angel of Death removed

I’ve also discussed a great proposal by President Biden.  To remove the Angel of Death provision.  That means that the wealth inherited by folks will no longer have a recalculated basis.  Stocks that were purchased for $ 1 a share, held forever, and then transferred to heirs upon the death of the folks who purchased the stock will still have a basis of $ 1 a share.  No longer would the heirs be allowed to change the basis to the value of the stock upon the death of the principals.  Which meant the stock, worth $ 30 when mom or dad died and now priced at $ 35 a  share, would have a capital gain of $ 34 a share- not $ 5 a share ($35-$1 versus $ 35- $30).  That also makes our tax system far more equitable.

Tax Marginal Borrowings

As I’ve said, we really don’t have a system to tax wealth.  But, many of our wealthy – you know the ones that purchased that stock for $ 1 a share that was worth about $ 30 while they were still living- do play games with stocks.  No, they don’t sell the stock- that would mean they have income that could be taxed.  Instead, they borrow against the value of the stock – never intending to pay back the loan (the loan is paid by the heirs when they sell the stock).

Well, we can require the banks to let us know when such loans are generated. That doesn’t involve a whole new system to be created, since the banks already track those loans.  And, the IRS can tax the loan value at 10% or so (below the already reduced capital gains rates), since- in essence- the stockholder isn’t selling the stock, but is generating funds from the gain in value.  That could be considered income and, therefore, be taxable.

These modest changes (not the 15% minimum tax) would generate some $ 50 to $ 100 billion more in annual tax collections.  The 15% minimum tax would at least match those collections.

Either leaving our country more able to invest and upgrade in our infrastructure or reduce our federal debt.

Modest changes for maximal benefits.

If you agree, contact your congressperson and your Senators.  The time to act is now.