Lawrence Summers wants to target the rich, but not through a wealth tax

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Former Treasury Secretary Lawrence Summers proposed a suite of steps the U.S. government can take to raise trillions of dollars more in revenue from the rich without adopting a wealth tax.

They include higher levies on capital gains, the closure of loopholes and shelters disproportionately used by the wealthy, and stepped-up Internal Revenue Service oversight of tax returns, especially those filed by the rich.

In a paper being presented at a Brookings Institution conference on Tuesday, Harvard University economist Summers (pictured) and his co-authors argue that their “pragmatic approach” is superior to the wealth taxes championed by Democratic presidential candidates Bernie Sanders and Elizabeth Warren.

Because the proposed reforms build on the current tax code, they would be easier to administer and “more likely to be implemented successfully than riskier, untested alternatives that are vulnerable to political attacks, legislative impasse and legal challenges,” according to the paper. Summers is a paid contributor for Bloomberg Television.

Summers and his co-authors — University of Pennsylvania law and finance professor Natasha Sarin and research assistant Joe Kupferberg — said their proposals have the potential to raise more than $4 trillion over the coming decade. That would help the government pay for services for an aging society and for steps to combat inequality, while avoiding an excessive build-up in debt.

Democrats’ priorities

Democratic lawmakers are considering how to raise taxes in a way that would make it easier, technically as well as politically, for Congress to pass a measure quickly should their party win the presidency in November. That money could be used to fund the policy priorities of the Democratic candidates, such as expanding health care and child-care access, investing in renewable energy, or forgiving student-loan debt.

Some in Congress have publicly expressed concern that a number of the ideas floated by presidential contenders, such as the wealth tax, could be difficult to design or face constitutional challenges that would delay implementation.

The Sarin-Summers-Kupferberg plan includes many of the same elements embraced by presidential candidates ranging from former vice president Joe Biden to Sanders. Taxing capital-gain income at the same rate as wages, increasing audits on the wealthy and corporations and hiking levies on offshore corporate profits are fixtures of Democratic tax plans in 2020.

They would also do away with the carried interest loophole and cap tax deductions, such as mortgage interest, at 28 percent.

The proposal, though, does include two potential political red flags for key constituencies — small businesses and charities — if this were to get serious consideration in Congress.

The plan calls for the repeal of a 20 percent deduction for some pass-through businesses, a new provision in the 2017 tax law intended to give small businesses similar tax benefits to those that corporations were receiving.

Corporate rate

While the plan would raise the corporate rate slightly — to 25 percent from 21 percent — it would still be far below the 35 percent it was prior to President Donald Trump’s tax overhaul. However, small business owners would presumably see their tax benefits disappear and pay a top rate of 37 percent.

Churches, colleges and other nonprofits might balk at a change that would curb tax breaks for appreciated stock. Currently, donors can claim a write-off for the full value of the asset, and avoid any tax on the capital gain.

Summers, Sarin and Kupferberg acknowledged that it is unlikely that the wide range of changes they are proposing could be implemented quickly. They suggested that the initial focus of the reforms should be on substantially beefing up IRS resources, which they said could raise $1.2 trillion in new revenue over 10 years.

“Our belief is that the best path forward is through a combination of deterring illegal tax evasion — by investing more in an underfunded Internal Revenue Service — and reducing legal tax avoidance by broadening the tax base and closing loopholes that enable the wealthy to decrease their tax liabilities,” the authors wrote.

(Michael Bloomberg is seeking the Democratic presidential nomination. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)

Rich Miller and Laura Davison
Bloomberg News