Alexander Hendrie

Tax Reform Must Retain Carried Interest As A Capital Gain

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Posted by Alexander Hendrie on Tuesday, January 24th, 2017, 8:00 AM PERMALINK

As President Trump and Congress ramp up discussions on what comprehensive tax reform should look like, they ought to be able to agree that reducing, not raising, the tax burden on badly-needed investment is a top priority. That's the opinion of two of Washington's most prominent taxpayer groups, which today urged leaders on both ends of Pennsylvania Avenue to get an early start on publicly declaring tax-reform principles that encourage investment, among them ensuring that all types of capital gains are treated fairly, without harsh or discriminatory exceptions in the law. 

Grover Norquist, Founder and President at Americans for Tax Reform, and Pete Sepp, President of National Taxpayers Union, offered the following statement ahead of GOP's policy retreat, where tax reform is expected to be the topic of in-depth discussions:

"The next four years represents an opportunity to reduce -- not increase taxes on capital gains. Over the past eight years, the top rate increased from 15 percent to 23.8 percent, and the top integrated rate currently sits at 56.3 percent compared to the OECD/BRIC average of 40.3 percent. 

While it appears unlikely that incoming lawmakers and the administration will increase rates outright, they should also be sure not to incrementally move the needle toward higher capital gains taxes in other ways, like boosting taxes on carried interest capital gains.

Carried interest capital gains income is earned through a net gain within a partnership formed between individuals with capital and an expert investor. They are indistinguishable from any other type of capital and so they are paid at the same capital gains tax rates. 

While supporters of higher taxes on carried interest capital gains say it takes aim at 'hedge fund guys,' it would also hurt pension funds, charities, and colleges that depend on these investment partnerships as part of their savings goals. In addition, small businesses would find themselves increasingly shut out from investment money available to them from these partnerships.

Rather than supporting proposals that lead to higher capital gains tax rates, the incoming Congress and administration should look toward lower rates. One model to follow is contained in the House GOP blueprint, which reduces the top rate on capital gains to 16.5 percent."

ATR is a nonpartisan taxpayer advocacy group, and sponsors the Taxpayer Protection Pledge. NTU is a pro-taxpayer lobbying organization working for lower, simpler taxes and economic freedom at all levels.

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ATR Statement in Support of Rep. Mulvaney for OMB Director

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Posted by Alexander Hendrie on Monday, January 23rd, 2017, 3:05 PM PERMALINK

ATR President Grover Norquist today sent a letter of support for Congressman Mick Mulvaney (R-S.C.) for the position of Director of the Office of Management and Budget. Read the letter here or below. 

Dear Chairman Enzi & Ranking Member Sanders,

I write in support of Congressman Mick Mulvaney for the position of Director of the Office of Management and Budget. Throughout his time in Congress, Rep. Mulvaney has displayed a commitment to addressing Washington’s rampant overspending problem and reforming the bloated federal bureaucracy. Senators should have no hesitation supporting his nomination to lead OMB and should swiftly approve him to this position.

The federal budget is on an unsustainable trajectory that must be addressed. In coming decades, spending and debt are projected to rapidly increase to historically high levels. The Director of OMB will play an integral part in reining in the out-of-control federal government and Rep. Mulvaney has proven he is willing to make the tough choices that will undoubtedly be required to reverse the looming fiscal crisis.

As an advocate of bringing the Department of Defense under full audit, Rep. Mulvaney has shown a willingness to look for waste and abuse wherever it may be.

As a signer of the Taxpayer Protection Pledge – a commitment made to his constituents to oppose any and all new tax increases – Rep. Mulvaney has shown he understands the need to reduce spending and the deficit without burdening American families and businesses with higher taxes.

Congressman Mick Mulvaney is the right choice to lead OMB at a time when the federal budget is in desperate need of restraint. I urge you and your colleagues to swiftly approve his nomination as Director of OMB.

Onward,

Grover Norquist

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ATR Supports Congressman Tom Price for HHS Secretary

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Posted by Alexander Hendrie on Monday, January 23rd, 2017, 1:52 PM PERMALINK

ATR President Grover Norquist today sent a letter of support for Congressman Tom Price (R-Ga.) for the position of Secretary of the Department of Health and Human Services. Read the full letter here or below. 

Dear Chairman Hatch & Ranking Member Wyden:

I write in support of Congressman Tom Price for the position of Secretary of the Department of Health and Human Services. Throughout his career in public office, Dr. Price has proven to be an advocate for pro-growth, fiscally responsible reforms, a champion of patient-centered, free market healthcare, and a supporter of ending Washington dysfunction and gridlock. All Senators should vote to confirm Rep. Price as to lead HHS.

As Chairman of the House Budget Committee, Dr. Price has released fiscally responsible proposals that address Washington’s overspending problem and reduce the deficit without burdening American families and businesses with higher taxes.

Dr. Price has also made it a priority to fix Washington’s gridlock and political dysfunction. Dr. Price last year released a detailed proposal to reform the broken federal budget process by replacing the 1974 Budget Act with reforms to reassert Congressional authority over the federal budget, establish enforceable benchmarks to rein in the deficit, and reverse the bias toward unaccountable spending.

As a member of the House Ways and Means Committee, Dr. Price has advocated for conservative, pro-growth tax reform. Dr. Price is a signer of the Taxpayer Protection Pledge, a commitment he has made to his constituents to oppose any and all new tax increases.

Over the last eight years, Dr. Price has conducted important oversight over the Obama administration. Most notably, Dr. Price last year led oversight efforts over Centers for Medicare and Medicaid Innovation (CMMI), which used its broad authority to unilaterally change to healthcare policy despite opposition from doctors, patients, and lawmakers on both sides of the aisle.

In addition to oversight over Obamacare, Dr. Price has also shown leadership in proposing free market solutions. Rep. Price is the author of the “Empowering Patients First Act,” legislation that replaces Obamacare with a series of reforms that lowers costs, increases efficiency, and empowers patients and doctors across the country.

Congressman Tom Price has a proven record fighting for lower taxes, responsible spending, free market healthcare, and an accountable federal government. Senators should have no hesitation supporting his nomination to lead HHS and should swiftly approve him to this position.

Onward,

Grover Norquist 

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Amendments to Obamacare Repeal Resolution Aim to Delay and Distract

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Posted by Alexander Hendrie on Wednesday, January 11th, 2017, 8:36 AM PERMALINK

Possible Prescription Drug Importation Amendments Are Not the Solution to Reducing Prices

The Senate is expected to soon vote on S.Con.Res.3, a budget resolution providing for repeal of Obamacare. This “repeal resolution” is step one in undoing the legacy of broken promises under the Barack Obama presidency which have led to higher healthcare costs, cancelled plans, lost doctors, and more than one trillion ($1,000,000,000,000) in tax increases which hit American families and small businesses.

This is a huge win for taxpayers, and should be supported by all Senators. During consideration of the repeal resolution, it is expected that Senators will also offer a number of amendments during consideration of the repeal resolution with the aim of distracting and delaying the process. One example of this is a series of introduced amendments that call for the importation of market distorting price controls on prescription medicines.

Members of the Senate should vote “no” on any importation amendments – and many of the other amendments expected to be offered during consideration of the repeal resolution. The purpose of this budget resolution is to allow for an expedited process to repeal Obamacare through budget reconciliation. More time wasted on amendments threatens the entire process of repealing Obamacare.

Importation schemes are not the solution to lower prices or a more efficient healthcare system. Instead, they would disrupt the system of medical innovation and increase long-term costs through the domino effect of fewer life-saving and life-preserving medicines. These amendments are simply an attempt by some Senators to play political games by proposing a seemingly free market way to reduce prescription drug prices.

The truth is, allowing importation of prescription medicines is not pro-free trade. Almost every other country in the world has excessive price controls on medical innovation. Prices are not determined by the free market but by politicians offering voters seemingly cheap medicines. In turn, allowing importation of a drug also means for the importation of the price controls.

This is the opposite of free trade. Free trade means transparent prices with no tariffs, barriers, or price controls. The U.S. is one of the few countries that allow drug prices to be (mostly) set by the free market, and is also a leader in medical innovation. Reversing this trend by allowing ill-thought out importation policies will hurt American innovators which pour billions of dollars each year into creating new innovative medicines that result in substantial long-term savings for our healthcare system.

The Senate will soon vote on a repeal resolution that will lead to a giant tax cut for American families and small businesses. This is a huge win.

Members should not dilute or threaten this win by passing amendments that slow or endanger the process, especially those that promote dangerous, anti-free market policies like importation of price controls on prescription medicines.

 

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ATR Urges Passage of S.Con.Res.3, The Obamacare Repeal Resolution


Posted by Alexander Hendrie on Monday, January 9th, 2017, 7:00 AM PERMALINK

Passage of Repeal Resolution is First Stage in Passing A Trillion Dollar Tax Cut

Congress is expected to soon vote on S.Con. Res. 3, a budget resolution providing for repeal of Obamacare. The “repeal resolution” is step one in undoing the legacy of broken promises under the Barack Obama presidency which have led to higher healthcare costs, cancelled plans, lost doctors, and more than $1 trillion in tax increases which hit millions of middle class families.

All members of the House and Senate should vote “yes” on the repeal resolution. The record of Obamacare is one of broken promises and failed policies. Poll after poll has shown the law is unpopular with the American people. Republicans campaigned on repealing Obamacare and this resolution will allow them to fulfill that promise.

Members of the Senate should also vote “no” on the numerous amendments expected to be offered during consideration of the repeal resolution. The purpose of this budget resolution is to allow for an expedited process to repeal Obamacare through budget reconciliation. These amendments will slow down the process and are largely an attempt for members to play political games.  

Passing the repeal resolution will allow members of Congress to pass the first of many tax cuts over the next four years by repealing the more than $1 trillion in higher taxes over a decade. Obamacare’s tax hikes directly hit middle class families, in violation of President Obama’s “firm pledge” not to raise any tax on any family earning less than $250,000 per year. Passing the repeal resolution will allow members of Congress the opportunity to pass the first of many tax cuts over the next four years by repealing these taxes.

The Obamacare law imposed taxes on Health Savings Accounts and Flexible Spending Accounts and imposed an income tax increase on Americans with high medical bills. Obamacare levied a new tax on health insurance, a tax on medical devices, a tax on employer provided care, a steep “indoor tanning tax” and even a tax for not buying “qualifying” government-mandated insurance.

[Full List of Obamacare’s One Trillion Dollars in Tax Hikes]

Passing the repeal resolution will also allow Congress to undo a long list of wasteful subsidies including the risk corridor and reinsurance programs as well as the Prevention and Public Health slush fund. Each of these programs and agencies have seen billions in taxpayer dollars wasted on partisan activities at a time when the federal government already spends far too much.

Support for S.Con. Res. 3 is the first step toward enacting a conservative, patient-centered, fiscally responsible healthcare system and eliminating the broken promises, wasteful spending, and higher taxes of the Obama years. 

 

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Lawmakers Must Repeal Obamacare’s Health Insurance Tax

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Posted by Alexander Hendrie on Tuesday, January 3rd, 2017, 7:00 AM PERMALINK

President-elect Donald J. Trump, House Speaker Paul Ryan (R-Wis.) and Senate Majority Leader Mitch McConnell (R-Ky.) have all promised repeal of Obamacare will come in early 2017. As part of this commitment made to the American people, they must repeal the Obamacare tax on health insurance and all of Obamacare’s one trillion in higher taxes.

Obamacare contains numerous taxes that directly impact middle class families including taxes on Health Savings Accounts and Flexible Spending Accounts, an income tax increase on high medical bills, and even a tax for failing to buy “qualifying” health insurance – as defined by the federal government.

In addition, Obamacare directly increases the cost of healthcare through the health insurance tax. This tax is projected to cost taxpayers – particularly those in the middle class – $130 billion over the next decade. 

The total revenue this tax collects is set annually by Treasury and is then divided amongst insurers relative to the premiums they collect each year. While it was suspended in 2017, the tax will total $14.3 billion in 2018 and will increase in subsequent years.  Those effects will start to be felt in the next several weeks as businesses start to renew coverage that will extend into 2018.

While the negative impacts of the Obamacare health insurance tax are partially obscured from taxpayers, it undoubtedly hurts the economy and disproportionately impacts middle class families and small businesses. If lawmakers are serious about upholding their commitment to eliminating Obamacare, they must repeal the health insurance tax together with the nearly 20 other Obamacare taxes early in 2017.

Obamacare’s Health Insurance Tax is Bad Policy

Ideal tax policy should meet several criteria. One goal should be for taxes to be applied with a broad base so as not to pick winners and losers. This allows economic decisions to be made with the fewest distortions present which in turn promotes the efficient allocation of capital and creation of jobs.

On this measurement, the Obamacare health insurance tax fails. Not only is it levied in the form of a discriminatory excise tax on one product, the health insurance tax falls only on fully insured plans and thus exempts large corporations and labor unions who are almost universally self-insured.

Tax policy should also be transparent so that taxpayers – and voters – are fully aware and able to make educated decisions on the cost and size of government. If a certain tax is obscured from the view of taxpayers, it is far easier for politicians to raise that tax without any accountability.

On transparency, the health insurance tax fails too. Because the costs of the health insurance tax are baked into  health insurance premiums the negative impacts of the tax are obscured.

The Costs of the Tax are Passed on to the Middle Class, Seniors and the Poor

Despite its indirect nature, the costs of the health insurance tax are inevitably passed on to small businesses that provide healthcare to their employees, and middle class families through higher premiums. In addition, the tax impacts the care received by seniors through Medicare advantage coverage and low-income Americans that rely on Medicaid managed care.

According to the American Action Forum, the Obamacare health insurance tax will increase premiums by up to $5,000 over a decade and will directly impact 1.7 million small businesses, 11 million households that purchase through the individual insurance market and 23 million households covered through their jobs.

The Health Insurance Tax Hurts the Economy and Suppresses Job Creation

Typically, small businesses purchase insurance through the small group insurance market, while larger employers have the scale to provide healthcare through self-insured plans, which are excluded from this tax. 

Because it falls disproportionately on small businesses, the health insurance tax hits a key driver of American growth and jobs.

Small businesses account for half of all jobs in the US and two-thirds of new jobs in recent decades so this tax will mean businesses across the country can spend less investing in new equipment, hiring new workers, or providing higher wages.

One estimate, conducted by the National Federation for Independent Businesses estimates the tax could cost up to 286,000 in new jobs and reduce small businesses sales by $33 billion through 2023.

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ATR Statement on Puerto Rico Economic Growth Report


Posted by Alexander Hendrie on Wednesday, December 21st, 2016, 7:49 PM PERMALINK

The Congressional Task Force on Economic Growth in Puerto Rico yesterday released its recommendations to lawmakers. Most importantly, the report acknowledged the need to implement tax policy that encourages and strengthens investment, jobs, and economic growth.

While legislation passed earlier this year by Congress addressed the short-term debt crisis of Puerto Rico, more needs to be done over the long term to ensure the island can recover and thrive. Moving forward, any solution to Puerto Rico's economic woes must include permanent, pro-growth tax policies that encourage competition and investment as acknowledged in the report. 

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Repealing Obamacare is A Giant Middle Class Tax Cut

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Posted by Alexander Hendrie on Monday, December 12th, 2016, 11:47 AM PERMALINK

Congressional Republicans have vowed that one of their first acts next year will be to send legislation repealing Obamacare to the desk of President-elect Donald Trump.

Doing so will not only repeal a failed law that has resulted in skyrocketing premiums, cancelled healthcare plans, and billions in new, wasteful spending, it will also provide a giant tax cut to middle class Americans.

Obamacare imposed roughly one trillion in higher taxes over ten years that directly or indirectly hit middle class families and businesses.

Repealing these taxes will provide much needed relief to the paychecks of families across the country.

Repealing Obamacare will also undo Barack Obama’s broken promise not to sign “any form of tax increase” on any American making less than $250,000.

Individual Mandate Non-Compliance Tax ($43.3 billion tax hike between 2016-2025) 

Anyone not buying “qualifying” health insurance – as defined by President Obama’s Department of Health and Human Services -- must pay an income surtax to the IRS. In 2014, close to 7.5 million households paid this tax. Most make less than $250,000. The Obama administration uses the Orwellian phrase “shared responsibility payment” to describe this tax.   

Starting this year, the tax was a minimum of $695 for individuals, while families of four had to pay a minimum of $2,085.

 

Households w/ 1 Adult

 

Households w/ 2 Adults

Households w/ 2 Adults & 2 children

 

2.5% AGI/$695

 

2.5% AGI/$1390

2.5% AGI/$2085

A recent analysis by the Congressional Budget Office (CBO) found that repealing this tax would decrease spending by $311 billion over ten years.

Health Insurance Tax ($130 billion tax hike between 2016-2025)

In addition to mandating the purchase of health insurance through the individual mandate tax, Obamacare directly increases the cost of insurance through the health insurance tax. The tax is projected to cost taxpayers – including those in the middle class – $130 billion over the next decade. 

The total revenue this tax collects is set annually by Treasury and is then divided amongst insurers relative to the premiums collected from certain plans each year. While it is directly levied on the industry, the costs of the Obamacare health insurance tax are inevitably passed on to small businesses that provide healthcare to their employees, middle class families through higher premiums, seniors who purchase Medicare advantage coverage, and the poor who rely on Medicaid managed care.

According to the American Action Forum, the Obamacare health insurance tax will increase premiums by up to $5,000 over a decade and will directly impact 1.7 million small businesses, 11 million households that purchase through the individual insurance market and 23 million households covered through their jobs. The tax is also economically destructive – the National Federation for Independent Businesses estimates the tax could cost up to 286,000 in new jobs and cost small businesses $33 billion in lost sales by 2023.

Medicine Cabinet Tax on HSAs and FSAs ($6.7 billion tax hike between 2016-2025)

Since 2011 millions of Americans are no longer able to purchase over-the-counter medicines using pre-tax Flexible Spending Accounts or Health Savings Accounts dollars. Examples include cold, cough, and flu medicine, menstrual cramp relief medication, allergy medicines, and dozens of other common medicine cabinet health items. This tax costs FSA and HSA users $6.7 billion over ten years.

Flexible Spending Account Tax ($32 billion tax hike between 2016-2025)

The 30 - 35 million Americans who use a pre-tax Flexible Spending Account (FSA) at work to pay for their family’s basic medical needs face an Obamacare-imposed cap of $2,500. This tax will hit Americans $32 billion over the next ten years.

Flexible Spending Account Tax ($32 billion tax hike between 2016-2025)

The 30 - 35 million Americans who use a pre-tax Flexible Spending Account (FSA) at work to pay for their family’s basic medical needs face an Obamacare-imposed cap of $2,500. This tax will hit Americans $32 billion over the next ten years.

Before Obamacare, the accounts were unlimited under federal law, though employers were allowed to set a cap. Now, parents looking to sock away extra money to pay for braces find themselves quickly hitting this new cap, meaning they have to pony up some or all of the cost with after-tax dollars. Needless to say, this tax especially impacts middle class families.

There is one group of FSA owners for whom this new cap is particularly cruel and onerous: parents of special needs children.  Families with special needs children often use FSAs to pay for special needs education. Tuition rates at special needs schools can run thousands of dollars per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education. This Obamacare tax increase limits the options available to these families.

Chronic Care Tax ($35.7 billion tax hike between 2016-2025)

This income tax increase directly targets middle class Americans with high medical bills. The tax hits 10 million households every year. Before Obamacare, Americans facing high medical expenses were allowed an income tax deduction to the extent that those expenses exceeded 7.5 percent of adjusted gross income (AGI). Obamacare now imposes a threshold of 10 percent of AGI. Therefore, Obamacare not only makes it more difficult to claim this deduction, it widens the net of taxable income. This income tax increase will cost Americans $40 billion over the next ten years.

According to the IRS, approximately 10 million families took advantage of this tax deduction each year before Obamacare. Almost all were middle class: The average taxpayer claiming this deduction earned just over $53,000 annually in 2010. ATR estimates that the average income tax increase for the average family claiming this tax benefit is about $200 - $400 per year.

“Cadillac Tax” -- Excise Tax on Comprehensive Health Insurance Plans ($87.3 million tax hike between 2016-2025)

In 2020, a new 40 percent excise tax on employer provided health insurance plans is scheduled to kick in, on plans exceeding $10,200 for individuals and $27,500 for families. According to research by the Kaiser Family Foundation, the Cadillac tax will hit 26 percent of employer provided plans and 42 percent of employer provided plans by 2028. Over time, this will decrease care and increase costs for millions of American families across the country. 

HSA Withdrawal Tax Hike ($100 million tax hike between 2016-2025)

This provision increases the tax on non-medical early withdrawals from an HSA from 10 to 20 percent, disadvantaging them relative to IRAs and other tax-advantaged accounts, which remain at 10 percent.

Ten Percent Excise Tax on Indoor Tanning ($800 million tax hike between 2016-2025) 

The Obamacare 10 percent tanning tax has wiped out an estimated 10,000 tanning salons, many owned by women. This $800 million Obamacare tax increase was the first to go into effect (July 2010). This petty, burdensome, nanny-state tax affects both the business owner and the end user. Industry estimates show that 30 million Americans visit an indoor tanning facility in a given year, and over 50 percent of salon owners are women. There is no exception granted for those making less than $250,000 meaning it is yet another tax that violates Obama’s “firm pledge” not to raise “any form” of tax on Americans making less than this amount.

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Price Budget Reforms Are A Solution To Washington Dysfunction, Not an End to Medicare and Social Security

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Posted by Alexander Hendrie on Monday, December 12th, 2016, 9:00 AM PERMALINK

House Budget Chairman Tom Price (R-Ga.) recently unveiled a detailed proposal designed to fix the broken federal budget process. This discussion draft outlines a number of reforms that aim to reassert Congressional authority over the federal budget, establish enforceable benchmarks to rein in the deficit, and implement process reforms that reverse the bias toward unaccountable spending.

Bizarrely, the proposal has been criticized by some on the Left based on the idea that the Price plan will directly, and immediately lead to trillions of dollars of cuts to Medicare, Medicaid, and Social Security.

This is wrong. Nowhere does the Price Budget reform plan propose – or even mention – trillion in cuts to these programs.

Instead, the proposal is a much needed attempt to fix the problems of the 1974 Budget Act.

Rather than pushing these deceptive, unfounded criticisms, opponents of the Price plan should focus their efforts toward proposing their own reforms.  Ignoring the need to reform the 1974 Budget Act is an explicit endorsement of the political dysfunction, gridlock, and irresponsible spending that has become increasingly prevalent in recent decades.

The current budget system is unquestionably rigged toward unaccountable, reckless spending. It is far too easy for members of either party to play politics and derail the process of “regular order.” When this occurs, complex policy making inevitably devolves to a series of last-minute, backroom deals, and votes on thousand page bills that few – if any have read.

This is not a new trend, but has occurred consistently since the 74 Budget Act was made into law. Over the past 40 years, there have been 176 Continuing Resolutions because Congress failed to complete the budget and appropriations process.  In this time, all 12 appropriations bills have been completed just four times. Within the last 20 years, all 12 bills have been completed just once. Congress has even failed to pass a budget resolution – itself often a symbolic act  8 times in the past 15 years. With these dismal numbers, it is unsurprising that Congress is so unpopular. Clearly, major change is needed.

One criticism of the Price plan concludes that it is a way to “shield unpopular choices from voters.” In reality, the opposite is true.  Demonizing any attempt to reform the budget system by pushing deceptive lies only makes it harder for lawmakers to fix our unsustainable and growing spending problem. The longer this dysfunctional system remains the norm, the longer lawmakers will be able to shield their unpopular choices from voters.


Like-kind Exchanges Should Be Preserved as Part of Any Tax Reform Plan

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Posted by Alexander Hendrie on Tuesday, December 6th, 2016, 2:00 PM PERMALINK

Next year, tax reform will be on the agenda and Congress must consider whether to repeal, preserve, or expand many sections of the tax code. One provision that should be preserved or expanded is section 1031 “like-kind exchanges.” This section of the code compliments the goals of tax reform by allowing taxpayers important investment flexibility that encourages stronger economic growth.

Like-kind exchanges allow taxpayers to defer paying taxes on certain types of assets when they use those earnings to invest in another, similar asset. This can be done again and again, provided the transaction involves a similar type of property. It has existed in the tax code for more than 100 years and is used on assets such as real estate, machinery for farming and mining, and equipment such as trucks and cars. Because an investor doesn’t have to pay tax until they cash out, section 1031 eliminates a potential barrier to investment, which in turn promotes the more efficient allocation of capital resources.

Rather than face repeal, like-kind exchanges should serve as a model for the taxation of all investments and should be retained in any overhaul of the tax code as a complementary provision to full business expensing. The provision has no place being categorized as a “pay-for” to buy lower rates and repeal would move the code toward higher taxes on investment, which in turn hurts economic growth and reduces income.

Like-Kind Exchanges Compliment the Goals of Pro-Growth Tax Reform: The tax code should encourage the efficient allocation of resources by taxing at the point of consumption. Under this system, investment would be treated neutrally (and efficiently) so that decisions would be made based on economic benefit. When measured against this goal, section 1031 is a necessary and complimentary part of a pro-growth tax system.

The House GOP “Better Way” tax reform blueprint takes many steps in moving the code toward this goal. For instance, the blueprint replaces the convoluted system of depreciation with immediate, full business expensing of all tangible assets (such as equipment) and intangible assets (such as intellectual property), but not land. This allows business owners to make decisions based on the merits of the transaction, not because of government induced tax barriers. In turn, this means a more efficient allocation of resources.

A move toward full expensing of assets will streamline business activity by allowing the efficient purchase of new assets and Section 1031 should be considered complimentary to this goal. 1031 allows less productive assets to be replaced with more productive assets, and therefore eliminates any lock-in effect that would otherwise discourage business activity. This is especially important for land assets that are excluded by the blueprint, which in many cases represents a significant portion of many properties. Because of the exclusion of land, repeal of like-kind exchanges – even with full expensing – may have the effect of impeding otherwise productive transactions.

Repealing Section 1031 is Economically Destructive: One key part of pro-growth tax reform is repealing preferential, distortive business credits and deductions – or “loopholes” as the left refers to them – in exchange for lowering marginal rates on corporations and small businesses as part of a net tax cut. The rationale is that it broadens the base of taxpayers, allows lower rates across the board than would otherwise be possible, and ensures the most efficient allocation of capital possible through the neutral treatment of businesses.

While this principle should be part of any tax plan, like-kind exchanges have no place in this conversation. 1031 grants important flexibility for a taxpayer to make the most economically efficient investment decisions in a way that benefits – not hinder economic growth and efficiency. If Section 1031 were to be repealed it would create a lock in effect that would discourage certain types of otherwise productive transactions. Conversely, this would result in less productive deployment of capital in the economy which would hurt economic growth and capital while raising little revenue.  

Because of this lock-in effect, repeal could cost the U.S. economy as much as $13.1 billion in lost GDP year after year, according to a study conducted by Ernst and Young. This GDP loss would also result in investment falling by $7 billion every year and would reduce income by an estimated $1.4 billion.

Like-Kind Exchanges should be a Model for All Capital Gains:  Ideally, all income derived as a “capital gain” should be exempt from taxation.  This tax hits income that has already been subjected to income taxes and has been reinvested to help create jobs, grow wages, and increase economic growth. Naturally, this double taxation impedes the ability to invest and foster stronger economic growth.

Capital gains taxes should be reduced – or better yet, repealed – and preserving and expanding section 1031 should be part of this effort.

Under like-kind exchange rules, you only have a gain when you decide to cash out.  The gain is the difference between the final sale amount and the original purchase, and is embedded over the years in the business. In effect, it becomes due when the business activity effectively ends.

There’s no reason this cannot work for other capital gains. If you buy a stock for $100 and sell it for $150, you should be able to plow that $150 into new stock purchases without having to pay tax along the way. 

This would also have the added effects of promoting tax simplicity and economic efficiency. Investors would no longer have to report each and every stock and mutual fund transaction on their taxes every year, simplifying tax filing for millions of Americans. It also would make all capital markets--for everything--more efficient.

Every time the government takes money out of the pool of capital investment, capital grows more slowly and we're all poorer than we otherwise would be. The key to wealth creation is to leave capital--untouched by government--free to grow for as long as possible.

Some have proposed repealing or limiting section 1031 as a way to make incremental progress towards taxing all capital gains as ordinary income. Instead of moving in this direction, we should be expanding the scope of like-kind exchanges as part of ending double taxation, promoting tax simplicity, and encouraging investment.

 

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