High Income Individuals

Finance: Examining How the Tax Code Affects High-Income Individuals and Tax Planning Strategies, November 9, 2023

How do the wealthy game the system? Let me count the ways:

• Borrowing from accumulated shares at favorable terms for additional acquisitions or to fund new enterprises and to fund lavish personal spending.
• Using Life Insurance so that heirs avoid taxation of intergenerational wealth.
• Using duty free zones to hide investment assets, such as art for investment.
• Using gifts, inheritance and donations to avoid capital gains taxation.
• The ability to offset financial losses to reduce the taxation of wages and salaries.
• Tax Cuts whenever a Republican is in the White House and controls one or both chambers.
• Leveraging these tax cuts into ownership of the national debt, which is the leverage that allows capitalism to go off the rails into speculation.

For the first four bullets, see our tax reform plan in the first attachment for more detail.

The solution to the first two bullets is to enact a (credit) invoice value added tax, as well as an asset value added tax.  We propose that subsidies to families be paid through an employer-paid subtraction VAT, so that they may be distributed with wages or alternatively with other government benefits under the Social Security Act, including Unemployment Insurance.

The invoice VAT will hit every dollar spent, including when goods, services and assets are purchased abroad and brought home. Duty Free zone exemptions on paying such taxes must be abolished above $100. Consumption taxes cannot be avoided by taking funds out of investments or insurance policies, including that portion of the subtraction VAT that is channeled to workers and their families.

The next to bullets are fixed by repealing capital gains taxes entirely and replacing them with an asset value added tax. There should only be one rate for asset VAT, which should be set at the rate for long-term capital gains. This would also be the rate for every short term transaction. This would technically be a tax cut, which will force Republicans to support it or be called out by Mr. Norquist.

At initial public offering, option exercise and the first sale after inheritance, gift or donation, the sale would logically be marked to market. If a family keeps the stock or company, there will be no tax until someone else buys it. 

The second tax cut would be to expand the ESOP tax exemption to all sales of public stock, rather than just private stock. Maximizing employee-ownership will bring a new level of motivation and excellence to the economy.

There is no hiding from a value added tax taken at each transaction. Any increased value added would be paid immediately rather than being part of a portfolio which allows offsets from business losses to reduce taxes on wages and salaries.

While requiring the taking of capital gains at death is emotionally satisfying, it has no chance of passage, especially if this breaks up family businesses. While we are in favor of breaking up such fortunes as a general principle, it simply cannot be done until inherited firms or shares in public companies are sold. Zero-rating ESOP sales fulfills the promise of wealth redistribution to workers. Simply forcing the sale of assets keeps them in the capitalist sector, doing nothing for the working class.

Personal income tax filing on wage and dividend income for middle income households will be replaced with a subtraction value added tax surtax for income above the ceiling for FICA employee contributions, which will be graduated from a 6.5% rate to a 26% rate for income over $425,000.  Again, without capital gains taxation, there is no way to offset dividend and salary income. Using an employer collected surtax with capital gains taxes exported to the asset VAT makes it possible to end filing for all but the top 1% of households.

At $500,000, an individual surtax ranging between 6.5% and 26% would fund net interest payments, debt reduction and paying down the Social Security Trust Fund. For this reason, these payments will be made to the Bureau of the Public Debt. The Asset VAT will be collected by the SEC. 

The subtraction VAT, any carbon added tax and the Invoice VAT, which you can call a Fair Tax will be collected by the states (who will also do any auditing on tax collection issues).  It is an offer that Republican members cannot refuse. 

The 2017 personal income tax changes should not be made permanent or extended, as has been proposed. This will reward savings and speculation, rather than providing an incentive to invest in plant and equipment. The latter responds to greater levels of consumption by households funded by both the public and private sectors, including Social Security recipients. For a more detailed treatment of why this is the case, see the second attachment - which was drafted in 2017 in opposition to the Trump-Ryan-Brady tax cuts. The third attachment explains why any Fiscal Commission should use repeal of these tax cuts as its baseline assumption.

The last attachment, which is an excerpt from my book, Settling (and Squaring) Accounts: Who Owns the National Debt? Who Owes It? It shows who really benefits from deficit spending. It is time for the Republicans to wipe their crocodile tears on this issue.

Attachment: Tax Reform

Attachment: TCJA

Attachment: Fiscal Commission

Attachment: Debt Ownership as Class Warfare Video