The difference between good and bad tax reform

The difference between good and bad tax reform
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Tax reform done correctly can be very beneficial for the United States and the American people. To be constructive, tax reform should endeavor to promote fairness, efficiency and simplicity. Further, the tax system needs to generate enough revenue to meet the government's requirements. 

Some tax reform measures can do more harm than good. I remain a firm critic of many parts of the Tax Cuts and Jobs Act (TCJA). It remains a poster child for a poorly conceived, incredibly complex (even for a tax act) partisan legislation enacted without due deliberation, that has and will continue to exacerbate the national debt and further drive good jobs and income offshore.

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It also punished many residents of blue states like New York, New Jersey and California by capping the itemized deduction for all state taxes to $10,000. This sizably increased the federal income taxes paid by many residents of states with high income and/or property taxes.

While a corporate rate reduction was necessary, the 21-percent rate provided for by the TCJA went too far. Three new tax reform proposals, one from Sen. Ron WydenRonald (Ron) Lee WydenIRS audit rate down in fiscal 2018 Oregon man sentenced after threatening to chop off Dem senator's tongue House to vote on retirement bill next week MORE (D-Ore.) and two from Sen. Elizabeth WarrenElizabeth Ann WarrenThe Memo: Trump faces steep climb to reelection Feehery: A whole new season of 'Game of Thrones' Overnight Energy: Warren wants Dems to hold climate-focused debate | Klobuchar joins candidates rejecting fossil fuel money | 2020 contender Bennet offers climate plan MORE (D-Mass.) were recently announced that are intended, in part, to address wealth inequality.

While I have enormous respect for Sen. Wyden and Sen. Warren and recognize the problem of wealth inequality, two of the concepts would make for unsound tax policy.

Wyden has suggested that investment gains be placed on a mark-to-market system (where one is taxed on appreciation even absent sale) and be taxed at ordinary income rates.

The Internal Revenue Code currently includes a very limited mark-to-market approach for securities dealers and securities traders who agree to elect this treatment, as well as for certain financial products known as section 1256 contracts. 

Warren has a proposal to impose a wealth tax on "ultra-millionaires" at an annual rate of 2 percent for those whose net worth is greater than $50 million, and 3 percent on net worth greater than $1 billion.

Finally, Sen. Warren has recently put forth the idea that corporations, which report to shareholders global net income of over $100 million, pay a 7-percent minimum tax on global net reported income over this amount.  While the first two plans should be rejected, the latter is certainly deserving of consideration.

If an investor buys stock in what is known as a "C" corporation (all publicly traded corporations are "C" corporations) and the shares appreciate but are not sold, requiring he/she pay tax on this unrealized gain would fail a fundamental tenet of U.S. tax policy, which is to not impose tax on those who do not have the wherewithal to pay the tax from the deemed profit because it is simply unfair.

Removing long-term capital gain incentives would further add acid to the wound. While there is something arguably unjust with Warren Buffet paying tax at a marginal rate lower than his secretary because of the tax incentives for capital gains and qualified dividends, this is not the solution.

Neither is creating a very hard-to-administer new tax on wealth in an environment where the Internal Revenue Service does not have the resources to administer the current tax laws. Perhaps starting with eliminating many estate tax loopholes, as Andrew Ross Sorkin recently suggested in the New York Times, would be a better approach.

Warren's other proposal is known as "The Real Corporate Profits Tax." lt would be based on publicly reported book income. This may be an appropriate fix to some of the TCJA corporate largess and a step, albeit minor, in the right direction regarding addressing an out-of-control national debt. 

The TCJA reduced the federal corporate tax rate precipitously from a top rate of 35 percent to 21 percent, eliminated the corporate minimum tax and exempted much foreign-source dividend income of U.S. multinational corporations from tax.

Paying a relatively small tax on worldwide income where a corporation has reported $100 million-plus in profits to its shareholders is consistent with the notion of fairness, which is critical element of a good tax system.   

Philip G. Cohen is an associate professor of taxation at Pace University's Lubin School of Business. He is the former vice president of tax & general tax counsel for Unilever United States, Inc.