Larry Summers Offers Good Tax Reform

Larry SummersLarry Summers has written a remarkable and short editorial over at the Financial Times, How to Fix Costly and Unjust US Tax System. He starts by noting that all this talk of closing loopholes is stupid because it will raise very little money and it will leave us with an overly complex tax system. One thing he notes isn’t exactly surprising, but all the same, I didn’t know it, “The richest taxpayers actually make relatively little use of deductions and credits.” This is a particularly stunning statement when you consider that the richest taxpayers get enormous deductions.

You’ve probably heard about the carried interest loophole that allows, for example, hedge fund managers to claim that their salaries are capital gains and thus only taxable at the 15% rate. As I’ve written before, this loophole only costs the government about $2 billion per year. Summers says this is just the tip of the iceberg.

There are far too many provisions that favor a small minority of very fortunate taxpayers. Because these provisions effectively permit the accumulation of wealth to go substantially underreported on income and estate tax returns, they force the federal government to consider excessive increases in tax rates if it is to reach any given revenue target.

He mentioned a number of ways that the rich avoid paying the taxes that they should. But his focus in on the estate tax. He notes that each year at least $1.2 trillion is inherited, almost exclusively from the very wealthy. And yet, the federal government only gets about 1% of this in tax revenue. But on the books, the estate tax is 55%. The rich manage this trick of paying almost no estate tax with various accounting games. Summers estimates that if we fixed this, it would bring in at least $50 billion per year. And in the first ten years (because it would change behavior), it would likely bring in more than a trillion dollars.

I recommend reading Summers’ article. It is inspiring. Of course, cynical old me tends to think that the reason the rich don’t pay their fair share of taxes is that they don’t want to. And nothing in politics has changed so that the government is likely to make them. But it is good to know that there are smart people thinking about this stuff. And that they want to solve problems and not just push ever more pain and suffering onto the poor.

H/T Mark Thoma

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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