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Center for American Progress Action Fund Panel on Senator Wyden’s Mark to Market Proposal

Center for American Progress Action Fund

“Toward Tax Fairness: A Proposal to Fix the Unfair U.S. Tax Code”

Thursday, September 12, 2019

Key Topics & Takeaways

  • Senator Wyden outlined his proposal to impose a mark-to-market approach requiring capital gains to be taxed at ordinary income levels and that revenue from this plan would be allocated to preserve the Social Security system.

Featured Speaker

Sen. Ron Wyden (D-Ore.), Ranking Member, Senate Finance Committee

Wyden stated that his Mark to Market (MTM) proposal contains two key changes: equalizing the tax rate for capital and wage income and ending the benefit of being able to defer paying capital gains taxes. He specifically criticized the ability to continue deferment generation to generation. Wyden cited the fact that 70 percent of the capital gains in the U.S. flows to the top one percent of individuals. He then reiterated his belief that wages and wealth should be treated the same way under federal tax law.

Wyden stated that a “real fix” to the current taxation regime requires addressing tax deferral and that it must be a priority for tax reform in 2021. He outlined the centerpiece of his plan, the creation of a new anti-deferral accounting system. Wyden explained that this would apply exclusively to the top 3/10 of the top one percent of earners, requiring these earners to pay tax each year on gains from easily traded assets such as stocks and bonds, while in “down-years” they could take losses. He noted that for assets such as real estate and privately held business, assets that are not as easily traded, that his proposal would minimize the benefit of deferral by assessing a “look-back” charge when the asset is sold or transferred. This system would apply only to those defined as having $1 million in income or $10 million in assets for three consecutive years.

He stated that his plan includes transition rules to move away from the current system to the reforms he is proposing. He noted that preliminary committee estimates indicated that this proposal could raise $1.5-$2 billion dollars over 10 years. Wyden cited as support the fact that various forms of MTM have already been applied in cases such as Section 475, futures and stocks. He stated that his plan would include exemptions for homes, retirement accounts and family farms. Wyden reiterated that this plan would “liberate” unrealized gains for productive uses and circulation throughout the economy. Further, Wyden stated this anti-deferral tax plan is the best way to ensure the continued protection of social security.

Senator Wyden Q&A with Neera Tanden, President & CEO, Center for American Progress Action Fund

Wyden stated that there is an ongoing bipartisan effort in the Senate to fund an infrastructure package, citing the passage of the Tax Cuts and Jobs Act (TCJA) as one of the biggest challenges hampering the funding of such a package. Wyden stated that a comprehensive overhaul of the TCJA is needed as soon as possible but that his plan is the best way to begin this process. Wyden noted that there will be a comment period for this proposal and that his office would be soliciting feedback.

Panel Discussion

  • Seth Hanlon, Senior Fellow, Center for American Progress Action Fund
  • Lily Batchelder, Frederick I. and Grace Stokes Professor of Law, New York University School of Law
  • Indivar Dutta-Gupta, Co-Executive Director, Georgetown Center on Poverty and Inequality
  • David Kamin, Professor of Law, New York University School of Law
  • Greg Leiserson, Director of Tax Policy and Chief Economist, Washington Center for Equitable Growth

Panelists discussed Wyden’s plan within the context of extreme income and wealth inequality. Batchelder outlined her view of what is wrong with current tax code including the Gingrich-Edwards loophole, loopholes in the net investment tax, the pass-through deduction, the ability to report probable labor income as business income and the focus of Wyden’s proposal, the ability to defer realizing capital gains. She stated that one of the main goals of this proposal is to make this population pay at least the ordinary rates based on the tax brackets. She stated that the best solution to equalize capital gains and ordinary rates is to examine provisions that reduce or eliminate the tax benefits of deferral.

Kanin examined how Wyden’s proposal would address the flaws outlined by Batchelder. He stated that this plan would make sure that the actual income of the targeted population would be reported on Form 1040. He stated that for publicly traded assets, income would appear on the year it is made, adding that for illiquid assets, it would appear on the year that it is sold with a charge in accordance with the deferral of the tax. Kanin claimed that this plan would end the ability to shift income between different capital gains rates.

Leiserson discussed three issues: the revenue potential of this plan, the economics of tax avoidance and the ways in which this proposal builds upon current structures and principles. He asserted that this proposal is extremely important because it directly takes on a form of tax avoidance, specifically, choosing suboptimal investments to pay lower taxes. He stated that this plan builds upon current concepts already reflected in our tax code, specifically, he explained that the plan would align the tax treatment of capital gains income with the economic substance of capital gains income. Kanin agreed with Leiserson’s remarks and added that this plan addresses long-standing and known weaknesses in the tax code.

Panel Q & A with Seth Hanlon

Batchelder stated that the plan is complimentary to broader tax reform efforts. She stated that if there is any raising of ordinary rates, that there should also be a restructuring of capital income and capital gains.

The panel agreed that a major benefit of this proposal is that it changes the taxation regime to limit the effectiveness of currently legal tax avoidance strategies. Batchelder added that this proposal addresses such areas of concern as valuation games, the use of transfer pricing to shift profits to tax havens and failure to report assets. She stated that the Internal Revenue Service (IRS) requires more assets for enforcement and policing.

In response to a question about how this plan would impact “average” Americans saving for retirement, Leiserson stated that Wyden’s plan has a $3 million exemption for retirement accounts, a $2 million exemption for home, on top of a general $10 million exemption, and as such, would not impact the “average” American. He noted that the economic cost of this proposal would be levied upon the targeted wealthy asset holder population as defined in the proposal and that any shifting of burden would require movement in interest rates, which he does not anticipate. Batchelder added that there is little evidence that individuals’ savings and investment behaviors respond significantly to the tax rate. Batchelder stated that deferral creates a “lock-in” effect, an incentive to hold onto underperforming assets for tax purposes, thereby diverting savings investment away from its most “productive” use.

The panel concluded with recommendations of items to be included in the proposal. Prescriptions included increased funding for IRS enforcement, the inclusion of a wealth-based exemption design, the addition of a phase-in period when individuals hit the exemption threshold and maximizing the value of information reporting.

For more information on this event, please click here.