U.S. Congress goes different route in 1969 in response to rich taxpayers who paid zero tax.

[GeographyDude]

Congress went the route of the Alternate Minimum Tax (AMT), which only partially solved the problem. And more importantly, became a source of resentment for even some rather average taxpayers because it seems unfair and it adds complexity not of your own choosing.

It feeds into the right-wing talking points about taxes being both unfair and unnecessarily complicated.

What could Congress have done better?

 

[Catspoke]

I assume these people pay no taxes due to interest on homes being deductable, high local taxes being deductable, business expenses, money stashed in retirement accounts being deductable. That sort of thing. Then every few years you log a capital gain, which are taxes at a lower rate.

I think the alternative minimum tax is fair myself. But you could cap home interest deduction perhaps and then raise the minimum.

It's tricky because rich people own stuff, don't necessarily have lots of income. They can get loans to live off until the time is right to sell something at a capital gain which is a lower rate. I would make capital gains same as income too.

 

[GeographyDude]

What is the AMT?

In January 1969, Treasury Secretary Joseph W. Barr informed Congress that 155 taxpayers with incomes exceeding $200,000 had paid no federal income tax in 1966...

www.taxpolicycenter.org

“ . . The news created outrage. That year, members of Congress received more constituent letters about the 155 taxpayers than about the Vietnam War. . . ”

Holy Cow!

This was a real issue. And there seems like there could have been progressive responses which did not add to resentment. In fact, which addressed resentment.

 

[Theoretical_TJ]

The place to start is a revenue neutral 1986 style reform. Tax complexity always favors the sophisticated and those who are rich enough to hire sophisticated planners. Simpler taxes are harder and costlier to avoid and you can make them progressive through universal basic income approaches.

For the 60s the big hidey-holes were commercial real estate depreciation (pre-1986, a commercial property could be deprecated to oblivion, have operating expenses counted, and then sold afresh to reset the value to the new buyer, and passive investors got the full tax deductions as though they were operating and taking risks themselves), C-corporations (tax rates were lower for them then), and a couple of others.

 

[GeographyDude]

. . . But you could cap home interest deduction perhaps . . .

I think capping deductions and credits has a lot of potential because rich people get the same as everyone else, but not more.

However . . .

The mortgage interest deduction is perhaps the biggest sacred cow of all. Even many rich people have bought pretty much all the home they can afford and are counting on this deduction. And I think and hope that experienced Democrats in Congress would realize this.

 

[GeographyDude]

The place to start is a revenue neutral 1986 style reform. Tax complexity always favors the sophisticated and those who are rich enough to hire sophisticated planners. Simpler taxes are harder and costlier to avoid and you can make them progressive through universal basic income approaches. . .

I think the 1986 Tax Reform Act has a lot of potential. It was officials in the Reagan Administration, but also Sen. Bill Bradley (D-New Jersey) who advocated for fewer loopholes, lower rates.

And the ‘86 Act raised the Earned Income Credit (as has many of the major tax acts).

 

[GeographyDude]

For the 60s the big hidey-holes were commercial real estate depreciation (pre-1986, a commercial property could be deprecated to oblivion, have operating expenses counted, and then sold afresh to reset the value to the new buyer, and passive investors got the full tax deductions as though they were operating and taking risks themselves), C-corporations (tax rates were lower for them then), and a couple of others.

The fiction of real estate depreciation is the engine of a lot of tax shelters.

Usually, the property sells for more than it was bought for! In the rare cases it doesn’t, let the taxpayer deduct the loss at time of sale.

In fact, I’d be interested in taking this idea a step further. When a landlord puts in a new roof, let the landlord deduct the full cost that very year. This will encourage regular maintenance, or at least not be an out-and-out deterrence to such. To me, this would be a sure winner. I may be missing something. I’m willing to listen to possible downsides which would overshadow this obvious upside, even though I’m really not seeing them.