# Presentation: 502868

## A Progressive System of Mark-to-Market Taxation

**President’s Advisory Panel on Federal Tax Reform****May 11, 2005 **** ****David S. Miller**** **

## Description of the Proposal

**The following taxpayers would pay tax each year on any appreciation in the value of their publicly-traded property and derivatives:**
**All public companies **
**Private companies with $50 million or more of net assets**
**Individuals and married couples with $1.6 million of adjusted gross income or $5 million of publicly-traded property **
**Represents the 0.1% highest income and 0.1% wealthiest households**
**These taxpayers would “mark” their publicly-traded property to “market” values (i.e., treat them as sold and immediately repurchased).**
**All other taxpayers would remain on the current “realization system.”**

## Description of the Proposal

**Corporations:**
**Mark-to-market gains taxed at current 35% rate.**
**Mark-to-market losses fully deductible.**
**Individuals:**
**Mark-to-market gains (and qualified dividends) taxed at 15% long-term capital gains rate. **
**Interest and other ordinary income taxed at current 35% rate.**
**Mark-to-market losses:**
**Fully deductible against prior mark-to-market gains, current qualified dividends, and current capital gains **
**May offset 43% (15% divided by 35%) of ordinary income**
**May be carried forward indefinitely.  **

## Description of the Proposal

**Significant additional revenue without raising rates or imposing new taxes.**
**If in place in 2004, the Google IPO alone would have generated over $2.2 billion of additional revenue.**
**The revenue generated by mark-to-market taxation would be used to: **
**Repeal the alternative minimum tax**
**Eliminate all tax on investment income for low-income taxpayers or expand 401(k)s for all Americans.**

## Benefits of the Proposal — Simplification

**Eliminates the alternative minimum tax.**
**Eliminates tax planning and a number of anti-abuse rules for mark-to-market taxpayers.**
**“****Straddle,” “short sale,” “wash sale,” “constructive ownership” and “constructive sale” rules, and capital loss limitations unnecessary for mark-to-market positions.**

## Benefits of the Proposal — Closes Loopholes and Eliminates Shelters

**Renders a number of the most prominent tax shelters impotent.  **
**For example, “tax loss generators” are impossible under a mark-to-market system.**
**Tax losses arise only if the taxpayer’s securities in fact decline in value.**

## Benefits of the Proposal — Progressivity

** ****Uses the “incidence” of tax to achieve progressivity.**
**Public and large private corporations, and top 0.1% wealthiest households subject to mark-to-market taxation on publicly-traded property and derivatives.**
**The tax burden is increased for these taxpayers.**
**Other corporations and most individuals remain on realization.**
**The tax burden remains the same for these taxpayers.**

## Benefits of the Proposal — Fairness

**Ensures that large and wealthy investors taxed similarly to wage earners.**
**Wage earners cannot avoid tax on the wages they receive.**
**Large investors can avoid virtually all tax on their appreciated securities by hedging their risk with derivatives and monetizing their positions by borrowing against their hedged securities indefinitely.**
**If estate tax is repealed, appreciation will never be taxed.**
**Proposal eliminates this “loophole” and prevents deferral of tax for large investors.**

## Benefits of the Proposal — Eliminates Inefficiencies and Enhances Liquidity in the Capital Markets

**Eliminates the “lock-in effect”**
**Current law artificially discourages taxpayers from selling their appreciated securities**
**Eliminates the “lock-out effect” **
**Current law artificially discourages taxpayers that sell their depreciated securities at a loss from repurchasing them within 30 days. **
**Properly taxes complex financial instruments**
**Derivatives cannot be used to minimize tax under a mark-to-market system.**

## Benefits of the Proposal — Encourages Work Effort, Savings and Investment

**Permits middle-income Americans to retain more of their wages by eliminating the alternative minimum tax.**
**Encourages savings by eliminating all tax on the investments of low-income taxpayers or expanding the scope of 401(k) plans.**
**Complements the President’s “progressive indexing” proposal for Social Security:**
**Enhances retirement savings for low-income taxpayers.**
**	**

## Benefits of the Proposal — Book/Tax Conformity

**U.S. corporations are required to mark-to-market their securities and derivatives under GAAP.  **
**Proposal taxes these corporations on the earnings they report to their shareholders.**
**The United Kingdom already requires taxpayers to pay tax on the securities and derivatives they mark-to-market under GAAP.**

## Summary

**A progressive system of mark-to-market taxation achieves all of the President’s tax reform objectives:**
**Simplifies.**
**Enhances progressivity.**
**Eliminates alternative minimum tax. **
**Retains home mortgage interest and charitable donation deductions.**
**Closes loopholes and eliminates tax shelters.**
**Encourages saving and investment.**
**Revenue neutral.**
**Does not raise rates, deny deductions, or impose new taxes.**