Senate Finance Committee Ranking Member Ron Wyden, D-Ore., unveiled Wednesday a proposal that he said would fix the broken U.S. tax code and require millionaires and billionaires to pay their fair share by equalizing the tax treatment of wages and wealth.
Revenue generated from this proposal—an estimated $1.5 to $2 trillion over 10 years—would be used to protect the Social Security guarantee. Without additional funding, Social Security would pay 80 percent of benefits after 2035.
Wyden said in a news release that his proposal reforms the taxation of capital gains for the top 0.3 percent of taxpayers by equalizing tax rates for wage and capital income and minimizing the benefit of deferring taxes.
Specifically, it would:
- Tax capital gains income at the same rates as wage income.
- Require tax be paid each year on gains from tradable assets like stocks.
- Minimize the benefit of deferring tax on gains from the sale or transfer of non-tradable assets like real estate investments.
"There are two tax codes in the United States: one for workers who pay taxes out of every paycheck and the other for high fliers who use games and tricks to avoid their taxes. They pay what they want, when they want and sometimes nothing at all. Two tax codes allow billionaires to use largely untaxed wealth to build more wealth while working families struggle to save after paying the mortgage, buying groceries or making their student loan payments." Wyden said.
"My proposal would create one tax code by equalizing the tax treatment of wages and wealth. We would equalize both what the wealthy pay and when they pay it. Simply requiring the most fortunate Americans to pay taxes on income generated by their wealth—just like cops, nurses and factory workers—would generate enough revenue to protect Social Security for decades to come. Social Security has been robbed of more than $1 trillion over the past 30 years due to growing income inequality, and creating a fair tax code would combat that trend."
Summary of Proposal
Equalization of Capital and Wage Tax Rates
- The proposal would tax wage and capital income at the same rates. Middle-class taxpayers would not pay more in taxes than they do now. For example, a credit or exemption could ensure middle-class taxpayers do not pay higher tax rates on limited capital income.
Anti-Deferral Accounting System
- Taxpayers with more than $1 million in annual income and/or more than $10 million in assets for three consecutive years are covered by the proposal. Applicable taxpayers would be covered until they fail to meet the income or asset threshold for three consecutive tax years.
- Personal residences up to $2 million, retirement accounts up to $3 million and family farms up to $5 million are not counted when determining whether a taxpayer meets the asset threshold. Value above these thresholds will be counted toward the asset threshold. For example, if a taxpayer owns a $3 million dollar home, the first $2 million of value is exempt and $1 million is counted toward the asset threshold.
- Applicable taxpayers must pay tax on the gain or take a deduction for losses on tradeable assets like publically-traded stocks, bonds, derivatives and securities held at the end of each tax year. Losses would be subject to limitations to prevent abuse.
- Tax due on gain realized from non-tradeable property such as real estate, business interests or collectibles will be calculated at sale or transfer through a lookback charge. The lookback charge would tax accrued gain and minimize the benefit of deferring tax. Senator Wyden is evaluating several possible methods of calculating a lookback charge, including an interest charge on deferred tax, a yield-based tax to eliminate the benefits of deferral or a surtax based on an asset's holding period.
Exemptions for Personal Homes, Family Farms and Retirement Accounts:
- Gains from the sale of primary or secondary residences would not be subject to the lookback rule until the combined property value of the residences reaches $2 million. Additional gain would be subject to the lookback rule. A similar exception will apply for the first $5 million in family farm value. Savings in tax-preferred savings accounts, such as IRAs and 401k plans, would not be subject to anti-deferral accounting and would be taxed in the same way as under current law.
Statements of Support
Neera Tanden, President, the Center for American Progress Action Fund: "Our tax code has a different set of rules for working Americans and for the super wealthy. Teachers, nurses, factory workers, and other workers are taxed on every paycheck at ordinary rates. But the wealthiest Americans enjoy preferential tax rates on income derived from wealth, and they can defer and often avoid capital gains taxes altogether. Senator Wyden's proposal goes to the heart of the issue with a bold solution, which would reduce inequality and raise revenue that can be used to spark greater opportunity for families and communities in every corner of the country."
Lily Batchelder, Robert C. Kopple Family Professor of Taxation, NYU School of Law: "Each year, the wealthiest Americans report only about half of their capital income on their tax return because of something called the realization rule. Sometimes this income is taxed many years later, sometimes not at all. Often it is taxed at lower rates than the middle class pays. Workers don't get to delay paying taxes on their wages, and they don't get preferential rates for the income they earn from working. Senator Wyden's bold proposal would address these inequities, and could raise a large amount of revenue that could be devoted to leveling the playing field."
David Kamin, Professor of Law, New York University School of Law: "The way we tax many of those with the highest incomes is fundamentally broken. Too often, the income from their wealth doesn't get taxed at all and even when it does, it's at a low rate. Senator Wyden's proposal would target exactly these problems and make sure that many of those who enjoy have some of the highest incomes in the country have that income reflected on their tax form, just like most Americans.
Greg Leiserson, Director of Tax Policy and Chief Economist, Washington Center for Equitable Growth: "At present, the tax code allows investors to choose when, how, and even whether to pay tax on their investment income. Senator Wyden's proposal to require wealthy investors to account for their income when it is earned and pay tax accordingly would sharply reduce tax avoidance among the wealthy, delivering a fairer and more efficient tax system. In doing so, it would also be an important step in countering the well-documented rise in wealth inequality in the United States."
Indivar Dutta-Gupta, Co-Executive Director, Georgetown Center on Poverty and Inequality: "In a time of virtually unprecedented economic inequality, heightened along racial and gender lines, our collective response must include a more progressive federal tax code. Structural reforms like a well-designed mark-to-market, accrual accounting, or anti-deferral system can help ensure that the wealthy pay their fair share, raise much-needed revenue, make the tax code more efficient, and advance the economic, social, and political imperative for addressing income, wealth, racial, and gender inequities. Other policymakers should pay attention to this path-breaking proposal."
Alan Essig, Executive Director, Institute on Taxation and Economic Policy: "The term ‘anti-deferral accounting' probably means little to most Americans now, but the idea, proposed by Senator Wyden today, has the potential to transform our nation's tax system. Working Americans pay taxes on their income every year. But for very wealthy families, a great deal of income is asset appreciation, and the nation's tax rules allow them to defer paying taxes on this income for decades, often entirely avoiding tax.
"Deferring taxes on asset appreciation allows the wealthy few to accumulate increasingly vast fortunes while incomes stagnate for many working people. Sen. Wyden's proposal could, depending on the final details, end the benefits of this deferral, ensuring that wealthy people are taxed on all their income just like everyone else.
"Senator Wyden's key insight is that we cannot continue to have one set of rules requiring working people to pay taxes on all their income each year, and a separate, special set of rules allowing the wealthy to pay taxes on only a portion of their income.
"There are still many details of anti-deferral accounting to be worked out, and we look forward to being part of that conversation."
Ari Glogower, Assistant Professor of Law, the Ohio State University Moritz College of Law: "Modern technologies and financial innovation offer new possibilities for the taxation of capital income, not just new tax avoidance opportunities for the wealthy. This proposal charts a path towards a more fair and efficient tax system and advances a conversation that is long overdue."
Frank Clemente, Executive Director, Americans for Tax Fairness: "Senator Wyden's proposal to require the wealthy to pay tax on their investment income annually just as workers do on their wages would help make our tax system much fairer. The wealthy can accumulate vast investment earnings for as long as they want to without paying a dime in tax as long as they don't sell the assets, while working people pay income tax annually on their wages. It's time to end this rigged arrangement that favors wealth over work by making sure the wealthy pay taxes annually as they profit from their investment earnings and pay the same tax rate on their investment income as workers pay on their wages."
Stephen Prince, Vice Chair, Patriotic Millionaires: "Our tax code has given special treatment to wealthy investors for decades, consistently at the expense of all non-wealthy working Americans. The current capital gains tax system is deeply inadequate, inherently regressive, and in dire need of a transformative change. But just raising the rate isn't enough.
There are too many ways for the wealthy to game the system, since they are the ones who paid for the lobbyists that have helped write them, and until those loopholes are addressed, tax fairness is going to remain a distant dream. That's why Senator Wyden's white paper on anti-deferral accounting is so important—this is a key step towards making the wealthy pay their fair share just like every other working taxpayer. The rich shouldn't receive special tax treatment just because we are rich. Period!"
Nancy Altman, President of Social Security Works: "Social Security Works applauds Senator Ron Wyden for his Treat Wealth Like Wages Act. He ensures that all Social Security benefits can be paid in full and on time for the next 75 years and beyond, and he does so by making our income tax system fairer. America's working families are extremely fortunate to have his leadership and vision."
Note: Statements from individuals affiliated with universities provided in their personal capacity.