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  • Glenn Sonnenberg

Musings from the Bunker 8/31/20

Good morning!

The next administration will have its hands full in addressing the rising unemployment and the longer term economic effects of the pandemic. It will also have to address the wealth inequities in our country, the need for health security, and the mess that is our tax code. The tax code embodies many of our country’s priorities. Some provisions seek equity, some seek to improve behaviors toward those most desired by the state and some are just the result of excellent and aggressive lobbying of special interest groups. Few think the tax code isn’t sorely in need of reform.

It was been observed that the U.S. tax code is not unlike a boat that has been out to sea for a long time. Every once in a while—the person suggested every ten years—Congress has to pull the boat out of the water and scrape off all the barnacles. If that metaphor is instructive at all, we are 34 years since the last major revision to rid ourselves of the barnacles and we are sorely in need of reform. No one is asking me, but if they did, I would suggest the next administration put together a rethinking of the tax code that reduces loopholes, simplifies the myriad types of taxes, acknowledges Social Security wasn’t meant for the wealthy, taxes more things that currently escape tax, and reflects a fairer allocation of the cost of maintaining our government.

Special thanks to my long term business partner, Chip Sellers, with whom I have been discussing ideas like these for the last 25 years. I can’t say which of us came up with which of these ideas first. Suffice it to say that this is what we have been debating the effects of tax policy for over a decade. Yes, I know…we both should get a life…

First, a caveat: I’m not an economist and I haven’t “run the numbers” on the many theories below. And this is not a monograph, so I’m not going into a great deal of depth (plus, if this isn’t readable in five minutes or less, you won’t keep reading these Musings!). But these suggestions should all make sense and I think in the end would prove revenue positive, fairer and easier to implement.



This is the easy stuff. Tax breaks to various industries and the ability of U.S. companies to move profits to other, cheaper, tax jurisdictions should end. Tax subsidies and other subsidies to farmers, oil companies and others should be reset to zero. This should be particularly appealing to the “pure capitalists” who think we should be relying upon the free market’s invisible hand. Yet many of these same people who tout the infallibility of markets are employing a host of lobbyists to protect the one or two loopholes that benefit them personally.

• The provision that allows “carried interest” (the amount general partners in hedge funds, real estate limited partnerships, and many investment vehicles get paid) to be taxed at capital gains rates should be eliminated. Why in the world should this particular type of labor be subject to a lower tax rate than other forms of labor? It’s unconscionable and indefensible.

• Tax-deferred exchanges of real estate assets provide deferral of taxes on sales of assets that can last forever. Time to tax these transactions when they occur. Why, exactly, should people be able to trade in and out of assets freely, accumulating wealth the entire time, without paying taxes until some date far in the future?

• Why do we provide a mortgage interest deduction yet provide no similar tax break for renting? Why does the government prefer home ownership, notwithstanding all the problems associated with home ownership (including the “trap” of mortgages that render mobility toward jobs in other jurisdictions more difficult)? Phasing this down was a good start. Now it’s time to eliminate it.

• It’s time to get rid of the many subsidies. And while we’re at it, we should rethink the corporate giveaways to subsidize growing (and not growing) crops. We should be encouraging the growth of water-stingy crops and discouraging thirstier crops (like almonds).



Europe has it and it works. HERE’S HOW IT COULD WORK IN AMERICA:

• Tax every economic transaction at the federal level. Exempt food, pharmaceuticals and other items that are necessities and would be regressive in their application.

• Get rid of the social security tax and Medicare tax. Let’s acknowledge that social security is not a fund. Plus the Medicare and Social Security “funds” are regressive by their very nature. They would be funded through the VAT.

• Because of the VAT (and the elimination of the step up in basis discussed below), the wealthy will be taxed in ways that can be clearly anticipated and calculated. Hopefully this gets rid of the talk of wealth tax (which hasn’t worked where it’s previously been deployed and would be near-impossible here).

• By utilizing a VAT rather than social security and Medicare taxes, this will have the ancillary (and important) effect of making American labor more competitive with foreign labor, since both the employer and the employee will be relieved of these extra burdens on the cost of employment. Everyone who complains that jobs are going overseas should be embracing this change!



Setting aside the likely unending lawsuits around its implementation, I believe the better argument is that a wealth tax is unconstitutional (probably as a taking but certainly as a disproportionate taxation prohibited by Article I, Section 9). Why fight this battle? Plus, there are a few other reasons it’s problematic:

• Presumably there has to be an assessment of value on all assets each year. This places a considerable burden on taxpayers. It’s hard enough to do it upon death. A wealth tax will create a cottage industry on asset valuation.

• Some assets have value that is nearly impossible to ascertain. Take, for instance, art or what a commentator (I forgot whom) pointed out. What is the value of Rihanna’s library of songs? Value it today? Value it 20 years from now and discount it back?

• It will be easy to manipulate. Value is often in the eye of the beholder and it will be subject to subjectivity.

• It will be a nightmare to try to enforce. We don’t have enough IRS agents to review the relatively simple tax code we currently have, which measures income and deductions. Now they’ll have to be able to police valuations of innumerable assets. Good luck with that.



Besides the bloated bureaucracy and the complication of the programs, they are paternalistic and demeaning. Just pay people a single check based upon their marital status, children, and other sources of income. I’d implement a modification of the Andrew Yang plan for universal income. Pay every adult American $x per year. Start phasing it out (but not dollar-for-dollar, which would reduce the incentive to seek employment) after $50K per year and eliminate it above $100K per year. The numbers are just suggestions—again, I’m not “running the numbers.” Also, let’s acknowledge that Social Security is there to help those who have less; while originally envisioned as a “fund” of past earnings, it is an unnecessary and costly government benefit for the wealthy if it doesn’t phase out at some point.

Under this plan, social security and Medicare (and, for that matter, basic health care) will be funded from the VAT.



The stepped-up basis on death makes little sense. Get rid of it and require the sale of assets in order to pay the tax on gain of assets held by the estate at death. Let’s remember that this isn’t just a tax deferral but an actual waiver of taxes on gains. The step up in basis is a government-granted windfall to the children of the wealthy owners of appreciated assets. It’s unconscionable. Eliminating this inequity has the benefit of the government realizing the revenue on long-held assets, rather than providing a windfall to heirs.

There is a specious argument that says that if we don’t provide the step up, heirs will be forced to sell off assets. So what? Taxes should be paid. Society probably will benefit in other ways from these sales (including through transfer taxes and property tax reassessment). In addition, whatever lost sales people may claim because capital gains taxes more closely approximate ordinary income rates will be made up for by these “forced” transfers.

If we tax asset gains on death, this also should reduce the agitation for a higher estate tax.



I’ve saved the best—and most controversial—for last. But why not tax capital gains at ordinary income rates? What is the policy justification? People will invest in assets whether or not they may have a tax benefit upon sale. And the optics of taxing capital at a lower rate than labor feels morally unjustifiable. If you’re not comfortable with creating parity with ordinary income, we at least should tax it at the rate far closer to the ordinary income rate.



Buried in our tax code are “tax expenditures,” which are ways the government pays for something without an appropriation but, rather, through excluding certain income from taxation and from certain tax deductibility. It’s very complex and, if one were a conspiracy theorist, seems designed to obfuscate and confuse…

Special thanks to Bob Rasmussen, professor at USC Law School, for reading this and sharing his thoughts (and pointing me toward the memo on tax expenditures). We both agree and disagree—but mostly agree! Bob, your counsel, as always and on all matters, is wise and much appreciated. Your students are lucky to have you.

There’s more to do, no doubt, but there’s a start…



11.22.63—Even non-Stephen King fans will love this take on time travel back to the time of the Kennedy assassination. Inventive, thought provoking and suspenseful.

Quantum Leap—Watched this series with our kids when they were younger. This series, starring Scott Bakula and Dean Stockwell, covered both frivolous and important events that send Dr. Samuel Becket across time. Each episode he inhabits the body of a new person and has to “right a wrong” in history. Some of the more interesting were inhabiting the bodies of a woman, of a Black civil rights demonstrator, and even Lee Harvey Oswald. Completely unbelievable but thoroughly entertaining. The kids and I watched the whole thing and then watched it again.

Doctor Who—If you haven’t discovered the Whovian universe, you should. The good doctor, a “Time Lord,” runs through time and space. And when he is close to “dying” he merely regenerates a new body (how convenient) and keeps going. David Tennant was the best doctor, but Matt Smith wasn’t too bad either…

Best regards,


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