The problem with “the problem” many pundits are having with Donald Trump’s taxes, or non-taxes, is that they are talking about a tax on “income.” And living off “income” does not fit with those who do not live off “income,” but rather live off assets, explains Francis Menton in Manhattan Contrarian. What is considered “income” is relatively easy to figure out. You work for a year; you get paid in cash for a year. That’s your income for that year, of which you are required to pay the stated proportion of it in taxes.
But many people who are neither rich nor wealthy do not live off income. They live off assets. In one example, Many retirees (“tens of millions”) “live wholly or largely off assets accumulated during a lifetime of savings.” Many businesses are another group that realizes revenue by dealing in assets. “Real estate businesspeople are a large category of those who live by extracting revenue from assets.”
It would be relatively easy to revise the tax code to make it less complicated as it relates to wage and salary income, as Ted Cruz proposed during his campaign. “But, if you want to have a regime that deems some part of revenue derived from assets to be “income,” there is nothing you can do to make it simple. It will always be inherently arbitrary. And because it is arbitrary, it will be subject to gaming.”
Here’s an obvious illustration of the problem. Say Warren Buffett owns $10 billion of Berkshire Hathaway stock and its value goes up in a year by $1 billion to $11 billion. Does Buffett owe income tax on the billion dollar increment? This is in fact how Buffett makes most of his money. The answer under our tax system is that increase in value of assets, unless they are sold, is not a taxable event; so Buffett owes nothing on the incremental billion. And when Buffett writes op-eds about how high a tax rate his secretary pays compared to his own, he completely leaves out that most of his “income” is defined by the tax code as “non-income” and not subject to tax. Does that sound fair to you? So, should we make it such that increase in the value of assets is taxable each year?
“Good luck with that,” writes Mr. Menton.
The rule is that losses can be offset against gains. Meaning that since taxes are due only on sale, it makes sense to sell the assets that have losses and sit on the ones with gains. No one would voluntarily incur a tax when he or she has a choice not to. For further explanation read more from the Manhattan Contrarian here.