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Brookings Institution Panel on Mark-to-Market

Brookings Institution

“Taxing Capital Income: Mark-to-Market and Other Approaches”

Friday, November 15, 2019

 

Key Topics & Takeaways

  • Congresswoman Jan Schakowsky (D-Ill.) announced that she, along with Congresswoman Alexandria Ocasio-Cortez (D-N.Y.), will soon release a revised version of her Fairness in Taxation Act that would substantially increase taxes on capital gains and raise the individual tax rate on the highest incomes to 59 percent.

 

Keynote Speaker

Rep. Jan Schakowsky (D-Ill.)

In her keynote address, Schakowsky provided an overview as to why she believes the time is right for a more ‘equitable’ tax regime that raises taxes on the wealthiest in society. She cited increasing income inequality and an increasing willingness among those in politics to tax the rich as reasons for this opportunity. She stated that she, along with Congresswoman Alexandria Ocasio-Cortez (D-N.Y.), will soon be offering a revised version of her Fairness in Taxation Act. She outlined that this revised legislation will increase taxes on capital gains and so that all investment income, including long-term capital gains and qualified dividends, will be taxed at the ordinary income tax rate. She added that this legislation would increase the top individual tax rate in the U.S. to 59 percent on the highest incomes.   She stated that this legislation will tax capital gains annually, not just when the appreciated asset is sold. She also noted that this legislation would only result in taxes on future capital gains, therefore, she said that there needs to be a transition tax of some form that taxes the ‘trillions of capital gains left untouched’ by her legislation. She continued that this legislation would also tax gains at the time of inheritance and estimated that this legislation could raise $2 trillion in revenue although she is looking forward to receiving more exact estimates soon. She concluded by emphasizing the need to get official legislation in place, even if such legislation has no chance of being signed into law in the current congressional environment.

Panel 1

  • William Gale, Co-Director, Urban-Brookings Tax Policy Center
  • Jane Gravelle, Senior Specialist for Economic Policy, Congressional Research Service
  • Karl Russo, Director at National Economics and Statistics Groups, PwC
  • Eric Toder, Co-Director, Urban-Brookings Tax Policy Center

The first panel outlined what mark-to-market entails and examined the economic implications of creating such a tax regime. After summarizing what capital gains actually are how they are currently taxed, the discussion shifted to mark-to-market specifically. The panelists agreed that there are a variety of challenges when it comes to mark-to-market such as the possibility of increased volatility, the complexity of determining who is exempted, the treatment of different asset types (marketable vs non-marketable assets) as well as the design of a ‘look-back’ charge to minimize the benefits of deferral. In recognizing these challenges, Russo noted that when you exempt any class of assets in a tax regime, you immediately create incentives for folks to move their wealth into that asset class. Russo stated that we have limited examples of mark-to-market already present in our tax system, such as the mark-to-market tax that currently applies to securities dealers as well as selective commodities dealers and traders, that should be examined when discussing expanding mark-to-market. Gravelle stated while mark-to-market is capable of becoming extremely complex, she believes that it is an easier system compared to a wealth tax due to the administrative complications that accompany the need to produce valuations of wealth year to year. The panel agreed that as with all tax policy, you must balance the desire to effectively tax your targeted population, in this case the wealthiest individuals, with increased complexity and administrative costs. While Gravelle said that annual revenue from a mark-to-market system could reach $180 billion at ordinary tax rates, Russo cautioned against this estimate, specifically criticizing the Gabriel Zucman analysis cited in Sens. Elizabeth Warren’s (D-Mass.) and Bernie Sanders’ (I-Vt.) plans as he believes that it does not accurately measure wealth at the top. In response to a question about the macroeconomic impacts of mark-to-market, Gravelle stated that she anticipates a very small impact because while this may decrease private savings, it is increasing government savings at the same time. Russo added that if you change the rate of tax on capital, there will inevitably be some impact on capital supply. In conclusion, Toder said that while he commends Sen. Ron Wyden (D-Ore.) for releasing his mark-to-market proposal, he does not understand how to make such a complex plan actually work in practice.

Panel 2

  • Steven Rosenthal, Senior Fellow, Urban-Brookings Tax Policy Center
  • Lily Batchelder, Robert C. Kopple Family Professor of Law, New York University School of Law
  • Lucy Farr, Partner, Davis Polk & Wardwell LLP
  • Michael Schler, Of Counsel, Cravath, Swaine & Moore LLP

 

The second panel examined the legal and design implications of constructing and implementing a mark-to-market system. Batchelder outlined her view of what is wrong with the current tax code including the Gingrich-Edwards loophole, loopholes in the net investment tax, the pass-through deductive, the ability to report probable labor income as business income and the ability to defer realizing capital gains. She stated how the wealthy make use of these tax planning strategies to lower their taxes and that these strategies are simply not available to median-income Americans. She then outlined the benefits of a mark-to-market system, specifically noting that such a system would increase the revenue maximizing rate, allow taxation of capital gains at ordinary rates and reduce the incentive to defer realizing capital gains. Farr noted how the Wyden mark-to-market proposal is both broad and narrow at the same time. She said that it is broader in the sense that applies to all different types of assets in different ways and narrower in the sense that it only applies to applicable taxpayers, carving out exemptions for individuals via an income tax and an asset tax. Schler built upon her point to reiterate how difficult such a complex system would be to implement and run effectively.

For more information on this event, please click here.