Transcript The Business Enterprise Income Tax

May 2005
The Business Enterprise
Income Tax
President’s Advisory Panel on Federal Tax Reform
Edward D. Kleinbard
Cleary Gottlieb Steen & Hamilton LLP
The Business Enterprise Income Tax
 The Business Enterprise Income Tax (BEIT) reforms the income
tax rules that apply to operating or investing in a business.
 The BEIT’s tax base is income, not consumption.
 Current law would apply to activities not related to operating or investing
in a business enterprise, such as employment income.
 The BEIT is designed to reduce greatly the role of tax
considerations in business thinking.
 The BEIT does so by replacing current law’s multiple elective tax
regimes with a single set of tax rules for each stage of a business
enterprise’s life cycle:
 Choosing the form of a business enterprise;
 Capitalizing the enterprise;
 Selling or acquiring business assets or entire business enterprises.
2
Overview of BEIT
 The BEIT has four components:
1. Taxation of all businesses at the entity level.
 Partnerships and even sole proprietorships are taxable entities.
 Similar in this one respect to Hall-Rabushka and 1992 Treasury
Comprehensive Business Income Tax (CBIT) proposals.
2. True consolidation principles for affiliated enterprises.
 Separate tax attributes of consolidated subsidiaries no longer are
tracked.
 Instead, affiliated entities are treated as part of one single business
enterprise.
3
Overview of BEIT (cont’d)
3. Repeal of all ‘tax-free’ organization and reorganization rules.
 All transfers of business assets (or entry into a consolidated return)
are taxable asset transactions.
 Tax rates on such sales are revised to be ‘tax neutral.’
4. A uniform cost of capital allowance (COCA) to measure a
business enterprise’s tax deductions for any form of financial
capital (e.g., debt, equity, options) that it issues to investors.
 Analogous income inclusion rules for holders of financial capital
instruments.
 COCA replaces interest deductions. COCA does not replace
depreciation deductions.
 Result is quasi-corporate integration.
4
One Tax System for All Business Enterprises
 All business enterprises are taxed at the entity level.
 Rules are similar to current taxation of corporations (other than
acquisitions and the COCA regime).
 Recognizes that our largest pools of business capital (public
corporations) already are taxed as entities.
 A sole proprietor thus is taxed both as an investor and as a separate
business entity.
 Proprietorships today must segregate business from personal
expenditures, so recordkeeping issues are not insurmountable.
 Taxing business entities – rather than the owners of those
entities – reduces complexity and increases consistency.
 Different rules for collective investment vehicles (mutual
funds).
5
True Consolidation Principles
 Current law’s corporate consolidated return rules are
stupefyingly complex.
 These rules do not consolidate companies in the everyday or
accounting sense of the word.
 Instead, the rules track separate tax attributes of every affiliate.
 The BEIT provides a true consolidation regime.
 All business enterprises (whatever the form) held through a common
chain of ownership are treated as part of a single business
enterprise (like financial accounting).
 Minority investors in subsidiaries are treated as investors in the
common enterprise.
 New ownership thresholds for consolidation look to all of an
enterprise’s long-term capital, not just stock.
6
Tax-Neutral Acquisition Rules
 All tax-free organization or reorganization rules are repealed.

The true consolidation model effectively requires the elimination of
current law’s stock/asset acquisition electivity.
 Any acquisition of a business asset or a controlling interest in a
business enterprise is treated as a taxable asset sale/acquisition.
 Thresholds for business enterprise transfers are the same as the tax
consolidation rules.
 ‘Business assets’ comprise assets subject to depreciation, so inventory
and financial instruments are taxed separately (as ordinary income and
under the COCA regime, respectively).
 Gain/loss taxed at ‘tax-neutral’ rates.
 Seller’s tax rate = PV of tax value of buyer’s asset basis step-up /
step-down.
 So different rates apply for different depreciation classes.
7
Tax-Neutral Acquisition Rules (cont’d)
 Result economically is similar to making every acquisition a
carryover basis asset-level transaction.
 But eliminates loss duplication trades.
 Eliminates exceptions to realization principles.
 Eliminates administrative issues of tracing basis back through former
owners.
8
COCA – Overview
 Replaces current law’s differing treatment of interest and
dividends with a uniform annual cost of capital allowance to
issuers, and a correlative income inclusion for investors.
 Implements two different agendas:
 A quasi-integration regime.
 One set of rules in place of current law’s enormous and internally
inconsistent infrastructure for taxing different financial instruments.
 Comprehensive in scope.
 Applies (with minor modifications) to derivatives & cash investments.

Revenue neutral, if so desired. Key drivers are:
 Statutory formula for setting the annual allowance.
 Treatment of tax-exempt and foreign investors.
9
COCA – Issuer’s Perspective
 A business enterprise (financial institutions excepted) deducts
an annual allowance for the financial capital invested in it.

Rate set by statute, e.g., at a fixed % above 1-year Treasuries.

Rate is uniform, regardless of the form of capital raised by an enterprise (e.g.,
debt or equity).
 No further deduction (income) to issuer if actual payments to
investors exceed (are below) the annual COCA rate.

Similarly, no gain or loss to issuer on retiring a financial capital investment.
 COCA rate is applied to issuer’s total capital to determine the
issuer’s annual COCA deduction.

By definition, total capital = total tax basis of assets.

So total asset basis x COCA rate = COCA deduction.

COCA deduction is in addition to, not in place of, asset depreciation.

COCA and depreciation are related, as depreciation reduces asset basis.
COCA thus mitigates distortions from expensing/accelerated depreciation.
10
COCA – Investor’s Perspective
 ‘Minimum Inclusion’ – taxed as ordinary income.
 Annual amount = the investor’s tax basis in investments in business
enterprises x COCA rate.
 Investor includes Minimum Inclusion as income each year,
irrespective of cash distributions from issuer.
 Distributions from issuer then treated first as tax-free return of
accrued Minimum Inclusions.
 Unpaid Minimum Inclusions added to investment basis (like zero
coupon bonds today).
 Minimum Inclusion is not tied directly to issuer’s COCA deduction, so
holders do not require any issuer-specific information reporting.

Tax policy best would be served if all holders, including taxexempts, included Minimum Inclusion amounts as taxable
income.
11
COCA – Investor’s Perspective (cont’d)
 ‘Excess Distributions’ – taxed at low rate (10-15%).
 Amount = gain on sale of financial capital instrument or issuer
distributions in excess of prior accrued Minimum Inclusions.
 Excess Distributions would be tax-free to tax-exempts.
 Tax roughly compensates for any remaining issuer-level
preferences, and is justifiable on traditional ability to pay grounds.
 Low rate not available for gains from collectibles, etc.
 Losses – reverse prior income inclusions.
 First, deductible at Excess Distribution rates, to extent of prior
Excess Distributions.
 Then, deductible at Minimum Inclusion rates, to extent of prior
Minimum Inclusions (whether or not paid).
 Remaining principal loss deductible at Excess Distribution rates.
 Capital loss limitations can be replaced with rules to tax-effect the
amount of Excess Distribution loss deductible vs. ordinary income.
12
COCA – Impact
 For issuers, the COCA system removes tax considerations in
choosing an optimal capital structure.
 An issuer obtains the same COCA deductions regardless of the form of
financial capital instruments it issues.
 Current law’s incentives to over-leverage and to package equity-based
returns as debt thus are eliminated.
 Assuming that interest rates do not fully adjust for the new regime,
immediate winners likely are companies with little or no debt (limited
interest deductions today) and higher quality credits (whose cash costs
for financial capital are low relative to a nationwide blended COCA rate).
 Immediate losers likely are highly leveraged companies and the
weakest credits.
 Over time, capital structures will adapt, because current tax law
distortions will have been eliminated.
13
COCA – Impact (cont’d)
 For investors, the COCA system rationalizes the taxation of
economic investment income and eliminates tax distortions.
 The COCA system distinguishes in a logical and consistent manner
between ordinary (time value of money) returns (Minimum Inclusions)
and extraordinary (capital gain) returns (Excess Distributions).
 Including a current time value return on all financial instruments
reduces the opportunities for indefinite deferral – and its distortive
effects of understating income and ‘locking-in’ investments.
 The replacement of capital loss limitations with (tax-effected) full
utilization of losses eliminates a substantial economic distortion that
today limits the attractiveness of risky investments.
 Investors benefit from quasi-integration; for investments in profitable
issuers, full integration is achieved to the extent of Minimum Inclusions.
14
BEIT– Transition Issues
 For first three proposals (uniform entity-level tax, true
consolidation principles, revised asset/business acquisition
regime), new rules would apply immediately.
 These rules do not work under a phase-in model.
 Some consolidated groups would lose advantage of higher stock basis
than asset basis for consolidated subsidiaries, but simplicity and efficiency
of new regime compensate.
 For COCA, a phase-in rule is essential.
 Companies will need time to adapt their capital structures.
 5 – 10 year period in which interest deduction scales down and COCA
ramps up.
15
Appendix
COCA – Additional Material
COCA – Example
Opening of Year 1 Tax
Assumptions
Balance Sheet
Assets
 COCA Rate = 5%
 No cash return on portfolio investment
Liabilities and Equity
Cash
100
Short-term liabilities
100
Portfolio Investment
200
Long-term debt
200
 Operating business earns
$130 EBITDA
Greasy Machinery
500
Funky contingent
payment securities
200
 Cash payments to holders of
all liabilities and equity = $46
Preferred stock
100
Common stock
400
Land
200
1,000
1,000
18
A-1
 Tax depreciation on machinery = $50
 For simplicity, COCA calculations
done once annually, using opening
balance sheet
COCA – Example (cont’d)
 Year 1 Results
Opening of Year 2 Tax
Balance Sheet
 Income
Net income from operations
Deemed returns on portfolio
investment
Total Gross Income
130
Assets
10
140
Cash
170
Short-term liabilities
100
Portfolio Investment
210
Long-term debt
200
Greasy Machinery
450
Funky contingent
payment securities
200
Preferred stock
100
Common stock
430
 Deductions
COCA deduction
Depreciation
Total deductions
Taxable income
Tax @ 35%
50
50
100
40
14
Land
Liabilities and Equity
200
1,030
1,030
 Cash Flow
Net income from operations
Less cash coupons on
liabilities and equity
Less taxes
Net Cash Flow
130
Notes
– Year 2 COCA = $51.50
(46)
(14)
70
– Issuer does not need to accrete any amount to
liabilities for prior year’s COCA expense, because no
gain or loss on retirement of any liability or equity.
19
A-2
COCA – Holder Example
(Assume constant 5% COCA rate)
1. Holder invests $1,000 in a security.
2. First 3 years, no cash coupons, but Minimum Inclusion = $158.
– Basis therefore = $1,158
3. End of Year 3, cash distribution of $500.
– $158 = tax-free return of accrued but unpaid Minimum Inclusions (Basis => $1,000)
– $342 = Excess Distribution (taxable at reduced rates)
4. Hold another 2 years, no cash coupons, but Minimum Inclusion = $103
– Basis therefore = $1,103
5. a) Sell for $1,303: $200 Excess Distribution.
b) Sell for $1,000: ($103) loss, deductible at Excess Distribution rates.
c) Sell for $403: ($700) total loss.
– $342 at Excess Distribution rates
– $261 at Minimum Inclusion rates
– Remaining $97 at Excess Distribution rates
20
A-3
COCA – Issuer’s Perspective (Additional Material)
 Financial institutions are not taxed under COCA.
 Money is their stock-in-trade, and the rough justice of COCA would
materially distort the income of such highly leveraged institutions.
 Optimal alternative for financial institutions is to mark to market all
assets and liabilities; second best is to preserve current law rules as
a special carve-out to COCA.
 Special rules apply to financial derivatives, but the overall
theme is the same.
 See below, this Appendix.
 Sole proprietor is both an issuer (a business enterprise) and
an investor (the owner of that enterprise).
 Result effectively is the same as paying interest to oneself.
 Special small-business rule permits the consolidation of enterpriselevel COCA deductions against investor-level income inclusion.
21
A-4
COCA – Issuer’s Perspective (Additional cont’d)
 Issuers that hold portfolio investments in other enterprises:
 Are treated as investors in respect of that investment.
 But hold an asset (the portfolio investment) with a tax basis, which
in turn gives rise to a COCA allowance.
22
A-5
COCA – Investor’s Perspective (Additional Material)
 Mark-to-Market.
 Dealers in financial instruments taxed (at ordinary rates) on mark-tomarket basis.
 Mark-to-market elections generally available to other holders
(mitigates effect of excess Minimum Inclusions vs. cash receipts, at
cost of accelerating Excess Distribution tax).
 Special rule for basis recovery from self-amortizing instruments.
 In all other cases, distributions are presumed to be income.
 Administrative Issues.
 No information required from issuer or prior holders (issuer’s COCA
allowance does not drive investors’ Minimum Inclusions).
 Holders will need to track their own prior Minimum Inclusions and
Excess Distributions to calculate future years’ income or loss.
 Financial intermediaries could be required to report that information
for investors in public companies (like 1099s today).
23
A-6
COCA – Derivatives
 First Priority: Tax hedge accounting principles.
 Based on current law (e.g. Reg §1.1275-6).
 Presumption that financial derivatives of a business enterprise that is a
non-dealer/non-professional trader are balance sheet hedges, and as
a result gain/loss is ignored (i.e., subsumed into general COCA
regime, where cash coupons on financial capital instruments are
ignored).
 Taxpayer may affirmatively elect out.
 Second Priority: Mark-to-market.
 Generally, mandatory regime for dealers/professional traders.
 Dealers/traders may elect tax hedge accounting treatment for their
liability hedges.
24
A-7
COCA – Derivatives (cont’d)
 Third Priority: Asset/Liability Model.
 Treat all upfront, periodic and interim payments as (nondeductible)
investments in the contract.
 Apply COCA Minimum Inclusion/Deduction rules to resulting net ‘Derivative
Asset’ or to increase in asset basis corresponding to ‘Derivative Liability.’
 Amount, and direction, of Derivative Asset/Liability fluctuates from year to
year, with no consequence other than Minimum Inclusions on any net
investment (and COCA deductions on assets).
 At maturity/termination, ‘settle up’ by recognizing gain/loss.
 Maturity/termination gain taxed at Excess Distribution rates.
 Maturity/termination loss taxed identically to general COCA regime for
holders (i.e., first deductible at Minimum Inclusion rates to extent of prior
Minimum Inclusions, then Excess Distribution rates).
 Result is identical to general COCA rules for gain, or for loss on Derivative
Assets, but different for Derivative Liabilities (because gain/loss recognized).
 Consequence is that a bright line test is still required to distinguish
derivatives from financial capital investments.
25
A-8
COCA – Derivatives Example
(Assume COCA rate = 5%)
 X pays $50 to Y for 3-year option on S&P 500.
 X has Minimum Inclusions over 3-year life = $8 (rounded).
 So X’s basis at maturity = $58.
 Y receives COCA deductions on cash proceeds – i.e., on assets, not
directly on Derivative Liability.
 At maturity, contract pays either:
 $88 – X recognizes $30 in Excess Distribution gain; Y recognizes $38
(not $30) in loss deductible at Excess Distribution rates.
 $0 – X recognizes $8 loss deductible at Minimum Inclusion rates, $50
loss deductible at Excess Distribution rates; Y recognizes $50 gain
(not $58), taxable at Excess Distribution rates.
26
A-9
Tax-Exempt Investors
& International Applications
COCA – Tax-Exempt Holders
 Exempting tax-exempts from tax on Minimum Inclusion amounts
effectively makes a portion of business income tax-exempt.
 Tax-exempts cannot directly engage in unrelated businesses, so why
should they be able to do so indirectly (by holding financial capital
instruments)?
 Issue compounded by consideration of foreign portfolio investors
(below); answers for one naturally drive the other.
 Compromises are possible as a technical matter, even if
undesirable as a policy matter.
 Tax at reduced rates?
 Distinguish among different classes of tax-exempts?
– Pension plans, etc. are primarily investment vehicles in ways that
charities arguably are not.
28
A-10
COCA – Foreign Portfolio Investors in U.S. Securities
 Unavoidable tension between COCA system (which can tax income
before distributions) and withholding tax collection mechanisms
(which rely on cash distributions).
 Problem exists today for original issue discount (in cases where
‘portfolio interest’ exception does not apply).
 Catch-up withholding on cash distributions is easier than withholding on
secondary market sales.
 Proposal: General withholding tax with extensive tax treaty relief.
 Require broker reporting and withholding on proceeds as general case.
 Provide extensive relief for residents of tax treaty partners, where
income in fact is taxed locally.
 Consider limitations on treaty relief where ‘at risk’ holding period is not
satisfied (to limit gaming through Delta 1 OTC derivatives).
29
A-11
COCA – U.S. Portfolio Investors in Foreign Securities
 General rule – COCA applies.
 COCA regime should apply here as it does to investments in domestic
business enterprises.
 Foreign tax credit rules will require tweaking to match withholding tax
credits with prior/subsequent income inclusions.
 Use tax treaty relief for treaty partner residents as negotiating tool
to obtain broader relief from treaty partner withholding taxes.
30
A-12
BEIT – Foreign Direct Investment
 Current law is schizophrenic.


Ultimate protection from double taxation is the foreign tax credit, but interest
allocations, etc. continue to limit its utility (although 2004 Act obviously helps).
Subpart F 'anti-deferral’ (a/k/a ‘acceleration’) regime is enormously complex, and in
a state of complete disarray.
 Deferral vastly complicates IRS compliance task in transfer pricing.
 Why is deferral important to taxpayers?

Financial accounting – ‘Permanently reinvested’ earnings taxed at lower foreign rates
reduce reported financial accounting tax costs, and therefore are highly valued.

Master blender – Tax Director functions as a master distiller, rectifying foreign tax
credit problems by artfully blending reserve stocks of high-taxed and low-taxed
deferred foreign earnings to produce a perfect 35% tax-rate blend of includible
foreign income.

If financial accounting rules were different, basic U.S. business entity tax rates
reasonably low, and foreign tax credit rules less onerous, the deferral debate would
become irrelevant.
31
A-13
BEIT – Foreign Direct Investment (cont’d)
 Proposal (against the background of lower overall business
enterprise tax rates):
 Full inclusion of foreign subsidiaries’ income (via consolidation).
 Full consolidation of foreign subsidiaries (so foreign loss offsets
domestic income).
 Repeal ‘interest’ allocation (now, COCA allocation) and similar rules.
 Consider steps to harmonize FTC limitation with foreign measures of
income.
 Results:
 Vastly simpler system.
 Substantial reduction in importance of transfer pricing issues to IRS.
 Fair system that respects international norm that source country
should have priority in taxing income.
 Ultimate protection of U.S. fisc against taxpayers using foreign taxes
as credits against domestic income should be lower U.S. tax rate on
business enterprise income (compared to major trading partners).
32
A-14
Tax Policy Considerations
BEIT – Overview of Goals
 The BEIT has three objectives:
1. To simplify the income tax rules applied to operating or investing in a
business.
 Do not confuse ease of recordkeeping with true simplicity. Recordkeeping is a
nuisance, but it is not difficult. True simplicity requires consistent conceptual
clarity, to reduce ambiguity in applying the law.
2. To increase consistency of tax results by rooting out deeply embedded
structural flaws in our current system for taxing business operations and
investments. These structural flaws distort economic behavior.
3. To reduce tax avoidance/gaming opportunities.
34
A-15
BEIT – Goals: Simplifying Current Law
 Current law – Multiple elective tax regimes for economically
similar, but formally different, types of:
 Business organizations.
 Acquisitions.
 Investments.
 The BEIT – Promotes simplicity by adopting one set of rules
that applies to all forms of:
 Business enterprises (corporation, partnership, proprietorship).
 Acquisitions of businesses or business assets (incorporation,
merger, sale) through one or more companies (true consolidation).
 Financial investments in business enterprises, however
denominated (debt, equity, derivatives).
 The BEIT – Is comprehensive and unambiguous in application.
35
A-16
BEIT – Goals: Eliminating Structural Flaws
 Current law – Riddled with tax-induced distortions in economic
behavior:
 Over-reliance on the realization principle: leads to understatement of
economic income, and to ‘lock-in’ of inefficient investments.
 Inconsistent rules for taxing different forms of financial capital: lead to
arbitrage transactions based on ordinary income vs. capital gain, or
debt vs. equity.
 The BEIT – Roots out these structural flaws:
 Eliminates deferral from tax-free reorganizations and similar
transactions.
 Requires an easily-measured and universal current return to all
financial investments.
 Clearly distinguishes between ‘time value’ and ‘risky’ returns, and
applies consistent rules to each, however denominated.
 Applies one set of rules to all financial instruments, regardless of legal
labels.
36
A-17
BEIT – Goals: Reducing Tax Avoidance
 Current law – Multiple elective tax regimes for business entities
and investments lead to complex ‘optimization’ (at best) – or
abusive (at worst) – behavior.
 Of 31 IRS ‘listed’ abusive transactions, 13 are the direct result of
manipulation of the carryover basis or consolidated return rules, or
inconsistencies in the rules applicable to different types of entities.
 The BEIT – Eliminates electivity based on form, and imposes
instead a single uniform system:
 Imposes entity level tax on all forms of business organization.
 Replaces consolidated return rules with true consolidation principles.
 Replaces competing forms of taxable and ‘tax-free’ acquisitions with a
single new ‘tax-neutral’ taxable acquisition model.
37
A-18
COCA – Constitutional Issues
 Current academic consensus is that realization requirement is a
rule of convenience, not a constitutional imperative.
 COCA (through loss deductions and mark-to-market election) in
fact reaches a taxpayer’s net income over time.
 Courts regularly have rejected constitutional challenges to tax
provisions that diverged from realization precepts:





Accrual taxation generally.
Estimated taxes.
Personal holding company/subpart F deemed inclusion regimes.
Mark-to-market.
Original issue discount.
38
A-19
COCA vs. CBIT
 CBIT (proposed by 1992 Treasury) proposed a uniform COCA-like
system, with a COCA rate set permanently at zero – i.e., interest
disallowance.
 Distributions to investors (interest or dividends) generally would not be
taxed.
 To ensure that distributed amounts bore tax at the entity level, CBIT
contemplated that issuers would maintain an ‘Excludable Distributions
Account’ (rejected in 2003 debate on dividend tax rates for complexity
reasons), or a similar mechanism.
 Disadvantages of CBIT.
 Apparently preserved all of current law’s bias in favor of expensing over
capitalizing.
– Example: Enterprise X spends $100 on a perpetual machine that earns
$10/year; Enterprise Y spends $100 on deductible R&D to develop a
perpetual intangible that earns $10/year.
– COCA (but not CBIT) mitigates the difference by giving a deduction in the
former case, but not the latter.
39
A-20
COCA vs. CBIT (cont’d)
 Disadvantages of CBIT (cont’d).
 An issuer-level compensatory tax as part of the EDA mechanism
would materially have affected issuer payout policies.
 Did not address derivatives at all.
 Did not propose rules distinguishing ‘time value’ from ‘risky’ returns
generally and did not resolve capital gains taxation.
 Presumably would have been inefficient to the extent interest rates did
not fully adjust for new tax regime (like municipal bonds today).
 Advantages of CBIT.
 Indirectly imposed tax on tax-exempt institutions.
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A-21
In Praise of the Income Tax
 Income, Wealth and Consumption.





Imagine normative income and consumption taxes, in which gifts or bequests are
realization events/consumption to the donor/decedent.
Annual income = [beginning wealth] + [consumption] - [ending wealth]. So income
tax = taxing lifetime wealth (other than gifts/bequests received) once & only once.
If gifts/bequests are treated as consumption to donor/decedent, then a
consumption tax is identical to an income tax in its tax base over a lifetime, but for
time value of money considerations. Taxes are deferred on lifetime savings, but
are imposed on a higher lifetime base.
Effective and nominal tax rates diverge under the two systems, however.
A consumption tax must always have higher (and steeper) nominal rates than an
otherwise identical income tax to achieve the same progressivity and revenues
(because in an income tax model the fisc can invest earlier tax payments at a pretax rate of return).
A periodic wealth tax and an income tax are conceptually identical, but
administratively very different. A consumption tax differs only in that it exempts
the time value return to savings.
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A-22
In Praise of the Income Tax (cont’d)
 Our income tax system reflects 90 years of invested intellectual capital.




A vast number of issues and applications have been fully mapped out.
By contrast, most consumption tax proposals in the U.S. remain abstractions; if
implemented, those systems also will be complex, and require many line-drawing
exercises, but without decades of law to guide taxpayers and policymakers.
Taxpayers have intuitive understanding of broad contours of current system.
Principal acknowledged defects (e.g. inconsistent treatment of financial capital) can
be addressed – through BEIT, or similar proposals.
 The income tax’s lower nominal tax rates (for comparable revenues
and progressivity) reduce evasion incentives.

Politically-driven exceptions to a consumption tax will create greater distortions of
economic behavior, and encourage more creative avoidance tactics, as nominal
rates increase.
 ‘Efficient transitional tax’ as part of switch to consumption tax system is
a sneak attack on existing wealth.

This ‘efficient’ double taxation contained in some proposals is a large percentage of
estimated economic benefits of switching.
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A-23
In Praise of the Income Tax (cont’d)
 Tax the Rich!

(Paraphrasing Schenk, Saving the Income Tax With a Wealth Tax) Why
should deferring consumption be privileged over deferring leisure? I can work
less and save for the future purchase of a plasma TV, or I can work overtime
now (deferring leisure) and buy the TV sooner. Why is one tax-deferred and
the other currently taxed?

Current participation in funding government is a hallmark of a democratic
society; permitting the wealthy temporarily to scale back their participation
strains the social fabric and exposes the system to the risk of tax
hemorrhaging from future temporary rate cuts or exceptions.

Neither wealth nor income is a perfect measure of virtue, aptitude, industry or
thrift: Luck still determines a great deal of life’s outcomes. But wealth (and its
surrogate, income) is a very good measure of ability to pay.
43
A-24