I don't think you're describing an obstacle to change, you're describing the mechanism of change avoidance. Compare: "Gosh, every time we try to tax the wolves, it ends up hurting the sheep as well. Why can't our 100% wolf, 0% sheep Congress get this right? I guess it's just a hard problem!"
The solution is not to give up, the solution is to actually tax the rich more. Also, your examples are awful: paying taxes on the sale of your house is extremely rare, and the reason your hypothetical person who makes $500k in a good year pays such a high tax burden is because we tax income more heavily than capital gains, i.e. the exact opposite of a "tax targeting the ultra rich".
The problem isn't that it hurts the sheep as well, it's that it hurts the sheep almost entirely. Raising capital gains would be a decent idea that forces the rich to pay more. Basically zero support for it. Closing loopholes helps too, not what we're seeing in tax policy discussions which focus on rates instead.
Raising the top rate on income when most of the ultra-rich's money comes from investment isn't making sense. There is also little interest in creating ultra-high tax brackets. I agree in principle with someone earning $5 million/year paying a higher percentage than someone earning $1 million/year. Many countries the top rate starts at $120,000ish in local currency.
Taxes on the sale of a primary home is not as rare as you think. It may be a twice in a lifetime event for many people but if it costs you a fortune each time people are discouraged from buying starter homes and then upgrading as their family grows. Make this too expensive and people even choose to have fewer children rather than get a bigger house. People may also choose to avoid the real estate market early to wait for a realistic home and risk getting priced out entirely. Admittedly, capital gains taxes are less punitive than land transfer taxes in this regard but it's still a factor. A capped to $500K of capital gains on a primary residence of tax avoidance is useful for middle and upper middle class Americans. It's not a measure designed predominantly for the rich unless your definition of rich is so broad that it includes any property owner. We've seen what happens when you create markets where people can't move and it looks a lot like San Francisco. That's not something I'd want policies to try and replicate.
Wealth taxes are extremely well-supported, despite the media as an industry [and politicians] being owned by people strongly motivated to campaign against it all costs, e.g.:
There are two studies cited. One on the repeals is by "Institut de l'Entreprise" which seems to be a wealthy people's think tank [1] and the other is about why the wealth tax wasn't introduced in the UK [2]. I'm not convinced by the evidence here.
It's true that a number of European countries that previously had wealth taxes no longer do. However, European countries only collect taxes on residents. If you wanted to avoid wealth taxes you could simply move to another country (and the bar to doing so is very low in the EU...), whereas the IRS collects taxes on US citizens regardless of where they live. So the situations are not totally analogous and it's not clear that a wealth tax in the United States would also fail.
The "idea" of wealth tax is liked, the reality is that is has never been implemented successfully. Everywhere it has been tried, it has been rolled back.
> Raising capital gains would be a decent idea that forces the rich to pay more. Basically zero support for it.
Zero support among whom, the wolves or the sheep? Taxing the rich more is generally popular[0] and this would accomplish that; it would seem like that's support.
> Taxes on the sale of a primary home is not as rare as you think.
I would need to see a source on this; I can't imagine a scenario in which any middle-class person pays any tax on their home at all, unless they live in an extreme-outlier of a neighborhood or find gold in their backyard.
> I would need to see a source on this; I can't imagine a scenario in which any middle-class person pays any tax on their home at all, unless they live in an extreme-outlier of a neighborhood or find gold in their backyard.
Could you elaborate on why they wouldn't pay tax on their home?
> The act permanently exempted from taxation the capital gains on the sale of a personal residence of up to $500,000 for married couples filing jointly and $250,000 for singles. This exemption applies to residences the taxpayer(s) lived in for at least two years over the last five. Taxpayers can only claim the exemption once every two years.
As I interpret the text, the middle-class homeowner will have to live in a home for two out of five years before they can claim an exemption. This matches the experience of my father, who sold his home after about four years and had to pay federal tax on the profit.
Is there something I'm missing or interpreting incorrectly?
You are misinterpreting that part; you can claim the exemption in a house you've lived in for two years. "Two years out of the last five" means you can live in the house for two years, then move out of it (presumably because you bought another house) and rent it for up to three years, and then sell it and still claim the exemption. Even after that, you can sell it and still not pay taxes on it if you use the proceeds to purchase a different investment property (this is the "1031 exchange" that's been mentioned several times).
I don't see how our interpretations differ. You showed that there are ways for middle-class homeowners to pay the tax. Sell the house after less than five years and don't use the proceeds to purchase another house. That scenario seems to happen often enough from what I see, and it appears that the IRS will be collecting money in those cases.
> You showed that there are ways for middle-class homeowners to pay the tax...
I said... "on their home". If you move out of it and rent it out, it's not your home anymore, it's an investment property, which is taxed differently, as it should be. Regular people (not real estate investors or landlords, people who just own one home at a time) almost never pay taxes on a home purchase[1].
Thank you. That wasn't clear to me. I interpreted it as you needed to have it for five years and live in it two out of those five. Makes me wonder why my father had to pay tax when he sold his house. But then this is just by memory, he doesn't have his 1040 anymore.
Arguably capital gains should be paid earlier so it’s a sunk cost. Being able to put it off is market-distorting. It’s hard to come up with a fair way to do it though.
Maybe a requirement to save money in advance based on market price, like payroll deductions? Then once you actually sell, you might even get a bit of a refund, encouraging turnover. But that would affect people with cash-flow problems the most.
And the biggest problem is that many people don’t want to sell and will resent any attempt to encourage it. Because encouraging turnover is equivalent to penalizing people who stay.
There is no “natural” way to do this, anything can be considered a market distortion depending on your point of view.
For large residential buildings in California, I’ve heard that apartment owners will essentially swap buildings for some kind of tax advantage. (I forgot what it was, though.)
I think being able to put off capital gains on assets like homes and start-up stock is necessary for the tax system to not do awful things like force people to sell a home because it becomes too valuable or bankrupt someone who has stock options in a company that reaches a high valuation but has untraceable stock.
The land tax advocates would say that people who own valuable real estate should sell, they are hoarding valuable property.
My scheme (which I’m not too serious about) would not force bankruptcy in the stock options scenario because you could give up some stock options to get your money back. Or possibly get a very low interest loan since it would be fully collateralized by the forced savings.
> For large residential buildings in California, I’ve heard that apartment owners will essentially swap buildings for some kind of tax advantage.
You might be thinking of the federal-level 1031 exchange [1]. California’s particularly distortive Prop. 13-based market has led to a separate Prop. 60 tax base exchange mechanism that might also fit what you saw [2].
The problem with selling your home isn't the income tax on the gains. That would be new money you have. The problem is that the closing costs are very high and that you have to pay yearly property taxes on it whether or not you are selling it.
In NYS, you would lose 2% for selling a home in transfer tax (of the value not the gain); and then if you are financing another home 1.25% of the mortgage value. So right there you've lit 3% of the two transactions on fire. That doesn't even count the non-government fees like commissions, attorneys (for you and the bank), title insurance, etc. that eat quickly eat up many thousands of dollars.
Income tax on the gains tends to be bigger than these if you hold on to a property a while in a hot market. 20% of 400,000 is much bigger than 2% of 1,000,000 if you buy at 600,000 and sell at a million for example.
I think the only thing that would solve almost all the issues is taxing the movement of money in all forms at a small rate. there have been some thoughts on it by people smarter than I but the gist is you tax money every time it moves at a tiny percentage rate. the rate is so small that for the commoners are not affected much but the people that trade money or move money off shore or buy up large commodities would be the ones that pay the most. I'm sure there are some downsides to it but there are many upsides too.
I would say in general that you want to motivate money to move as much as possible - and the problem with excessive wealth is that the money is not moving.
In an ideal world, I would tax money only when it is static.
No. The solution is for government to spend LESS. There is no amount of tax that can out earn Congress’ appetite for pork, kickbacks, and voter bribery through wealth transfer.
The only reason we are told to see the illiquid wealth of billionaires as a problem is the lie that Congress can spend that money better.
If a person makes $500k in a good year, they will get hit with higher taxes, but they're probably going to invest a lot in order to hedge against not so good years. Taxing their capital gains is a double whammy.
Just imagine Income Tax + Sales Tax... get taxed on what you earn, then taxed again when you go to spend it!
This is a clever way to reduce purchasing power without making it seem as bad, ie. nobody really considers the tax on a new car purchase until they're signing the final paperwork... or even on a new T-Shirt. Depending where yo live, this sales tax is non-trivial too, sometimes up to 10%+.
Yes, it is trivial to add 10% (or 30% for waited restaurants) to a number. Even if people did not for small purchases, with so many people living paycheck to paycheck, surely they notice an extra $50 to $150 for a TV or $3,000 for a car.
One of Amazon and other online only retailers’ biggest advantages until 2018 was that it did not have to charge sales tax to people in states without a physical Amazon presence. That meant you saved 7% or more buying from Amazon instead of locally. Basically everyone I know used to buy online to skirt sales tax.
The solution is not to give up, the solution is to actually tax the rich more. Also, your examples are awful: paying taxes on the sale of your house is extremely rare, and the reason your hypothetical person who makes $500k in a good year pays such a high tax burden is because we tax income more heavily than capital gains, i.e. the exact opposite of a "tax targeting the ultra rich".