Democrats on the Senate Finance Committee released a new report Tuesday, “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions,” in conjunction with a hearing on “Fairness in Taxation.”

The report details a number of strategies sophisticated taxpayers use to substantially lower their tax burden.

“Those without access to fancy tax planning tools shouldn’t feel like the tax system is rigged against them,” said Senate Finance Committee Ranking Member Ron Wyden, D-Ore., in a statement.  “For people having a hard time or just making their way as best they can, it must feel like the other guy’s climb up the economic ladder easier than theirs. The U.S. tax code needs to be fixed to help more Americans succeed and build a stronger economy.”

Wyden pointed out that while the vast majority of taxpayers can neither defer paying taxes nor minimize the amounts they do pay, and generally have to ride the ups and downs of the market on their investments, certain taxpayers tailor their investments to lock in gains (or losses), manipulate the timing of any taxes paid and minimize the amount of tax that does get paid. This creates serious tax wins for those who know how to use these tax avoidance strategies, and it is all perfectly legal. 

Wyden’s report highlights six major avoidance strategies used by many taxpayers to cut the taxes they owe dramatically (through access to sophisticated tax planning), often paying effective rates lower than those who earn a regular paycheck. It also offers policy and regulatory recommendations by Wyden’s staff on what should be done to remedy the situation and reduce the tax avoidance by tens of billions of dollars over the next decade while making the tax code more fair and efficient.

The six major strategies identified include:
1.    Using collars to avoid paying capital gains taxes
2.    Using wash sales to time the recognition of capital income
3.    Using derivatives to convert ordinary income to capital gains or convert capital losses to ordinary losses
4.    Using derivatives to avoid constructive ownership rules for partnership interests
5.    Using basket options to convert short-term gains into long-term gains
6.    Avoiding income taxes by deferring compensation

Senate Finance Committee chairman Orrin Hatch, R-Utah, weighed in on the prospoects for tax reform during his opening statement at the hearing. “If our tax reform efforts are going to be successful, it is essential that the final – hopefully bipartisan— product is viewed as fair,” he said.  “If the American people do not believe a tax reform proposal is fair, it’s hard to see, politically, how it could be enacted. Quite simply, fairness, in the context of the tax code, means that similarly situated taxpayers should be treated similarly. The tax code should not pick winners and losers. It should, instead, be crafted to allow people to prosper with as little interference from the government as possible.  Since the 1986 reforms, our tax code has become riddled with credits, deductions, exclusions and exemptions, many of which serve to benefit certain taxpayers at the expense of others.  A fairer tax code would be one that eliminates many of these tax expenditures, allowing us to broaden the base and lower the overall tax rates. 

“Fairness also means that, to the extent reasonably possible, Americans should make some contributions for the benefits they receive from the government,” Hatch added. “Clearly, we need to make exceptions for the truly needy.  Indeed, our tax code should be progressive enough to acknowledge individual taxpayers’ ability to pay.  But, the current situation—where nearly half the country is effectively shielded from the cost of funding the federal government—deserves some attention in tax reform. There is no denying that some of our fellow citizens—particularly those with lower incomes—have been left behind. Though we’ve seen some upticks in economic growth, many are not experiencing a positive impact on their own situations. This is a concern to all of us.”

Register or login for access to this item and much more

All Accounting Today content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access