Bill Gale talks about what is wrong with our income tax and how to make it right. He also explains what happens when death and taxes square off (spoiler alert: it doesn’t go well for the income tax). Gale describes simple measures—and some not so simple—that we can take to make our tax system work better for all of us. Find out what the “Angel of Death” tax loophole is and why it makes the tax law both unfair and inefficient. Gale also discusses how mark-to-market taxation could help us all cheat death, making the income tax more equitable while boosting economic growth. Gale’s pencil question is about the tax treatment of churches.
Bill Gale is the Arjay and Frances Miller Chair in Federal Economic Policy and a senior fellow in the Economic Studies Program at the Brookings Institution. His research focuses on tax policy, fiscal policy, pensions, and saving behavior. He is co-director of the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute.
Gale is the author of Fiscal Therapy: Curing America’s Debt Addiction and Investing in the Future (Oxford University Press, 2019). He has served as president of the National Tax Association and vice president of Brookings and director of the Economic Studies Program. He has also been an assistant professor in the Department of Economics at the University of California, Los Angeles and a senior economist for the Council of Economic Advisers under President George H.W. Bush.
Our student quote is read by Emily Eskin, from Teaneck, NJ.
Resources:
Speaker 1:
All of us should be willing to pay whatever taxes are necessary to enable efficient government to improve or expand any essential service.
Speaker 2:
You have a beautiful tax return. The nicest one I've ever seen.
Speaker 5:
Okay folks, but remember your manners. No stampeding. Walk slow like you do when you come to pay your taxes.
Steven Dean:
Hi, I'm Steven Dean. This is the Tax Maven. Here we are going to, in each episode, talk to our tax maven, who will be a person proving Archimedes' point that a single person with a lever long enough and a place to put it can change the world. The lever in this case is tax and the place to put it is here at NYU Law. I'm Steven Dean, the faculty director of the graduate tax program at NYU Law. I'm here today with Bill Gale, who is the Arjay and Frances Miller Chair in Federal Economic Policy at the Brookings Institution and in a former life, was also the senior staff economist for the president's Council of Economic Advisers, and even further back a professor at UCLA in their Department of Economics. So Bill, thank you for coming today.
Bill Gale:
Thanks for having me.
Steven Dean:
It may seem unfair to blame the angel of death for the trouble with our tax system. And as Gale explains, the real problem goes beyond any single flaw or loophole. But to understand those broader systemic challenges, it helps to focus on one feature of our tax system that not only favors the wealthy, but drives people to make inefficient choices by holding onto appreciated assets as they get older, instead of selling them, waiting for the angel of death to bring them a tax loophole.
Bill Gale:
The angel of death loophole is that when somebody holds a capital asset until they die, the heirs, the people who receive the asset don't have to pay any capital gains taxes on the capital gains that accrued during the previous person's lifetime. So they basically never get taxed. If someone buys an asset for a hundred dollars and then dies with the asset being worth a thousand, it gets given to their heirs with a basis, a tax basis of a thousand dollars. And those capital gains are never taxed. And that's a problem because it encourages people to hold on to assets far beyond when it would be economically appropriate otherwise. And it lets them defer taxes, perhaps indefinitely, and then eliminate taxes upon the death of the asset holder.
Steven Dean:
So what do you think we should do about that?
Bill Gale:
There's two, if you will, narrow capital gains proposals out there. One would be to have the person inheriting the asset keep the original basis. And that's one option. The other option is to tax the capital gain at death, that is to treat death as a constructive realization. I tend to be more hawkish about this, and so I prefer the second one. But eliminating the step up of basis would be partially effective, I think, and would be better than the existing system. It's a major loophole that could generate a significant amount of money in revenues, but also would cause people to act more efficiently and thus help the economy via that mechanism as well as the revenues. But it's part of this broader phenomenon that we do a very poor job of taxing the super rich in this country. And this is one of the main loopholes. So it could be thought of as the beginning of an attack on the tax avoidance strategies of the super rich.
Steven Dean:
The angel of death loophole does not inspire great confidence in our tax system. Fortunately, Gale also identifies clear opportunities to improve that system. Here, he briefly describes two ways policymakers could act to brighten our fiscal future. The first, known as a mark-to-market system of taxation would represent a big change. The second, making sure the IRS has the resources it needs to enforce our tax laws seems like it's just common sense.
Bill Gale:
A mark-to-market system would tax capital gains every year as they accrue. That would be in contrast to the current system where you don't pay capital gains tax until you sell the asset. And as I noted, there are a variety of ways to essentially never pay capital gains taxes in the current system. And mark-to-market would take a very strong stand against that and would aim to tax capital gains every year.
Bill Gale:
Well, the IRS has seen a fairly dramatic decline in funding over the last couple of decades and in particular, a decline in personnel and even within personnel, in particular, decline in audit personnel. And so audit rates of high income households and corporations have come down and at the same time, we've got estimated tax evasion of $500 billion a year, it's about two and a half percentage GDP. And so one way we can help close the budget deficit or reign in the debt is by more vigorously enforcing the existing tax system.
Steven Dean:
I have one more question for you Bill, and unlike the others, this one is totally unfair. And of course, if you get this question right, I want to make it worth your while. If you get it right, I'm going to give you this very nice NYU Law Graduate Tax Program pencil. This nice purple pencil is yours, if you can get next question right. So you work at the Brookings Institution. Your focus is on the state. So of course, I'm going to ask you a question about the tax treatment of churches. So let's see if you can get this one right. So the question is this, section 60-33 of the internal revenue code provides churches with a special kind of treatment. And there are three possibilities. There's either: A). an exception to the requirement with any file and annual return with the IRS; B). a special exemption from the ban on lobbying by tax exempt organizations; or C). a tax credit for amount spent on Bibles and other religious texts.
Bill Gale:
I'm going to go with C.
Steven Dean:
Oh, it was A. It was A, a special exception to the requirement to file an annual return with the IRS. This is a thing that I learned from an article by Nelson Tebbe. Non-believers, you can check it out there if you don't believe me. But I really appreciate your time Bill. Thank you for joining us here and I really appreciate the book, which I hope everyone goes out and reads. It's a very helpful project.
Bill Gale:
Great. Well, thank you very much. And I'll bone up on my knowledge of the taxation of religious institutions.
Steven Dean:
Thank you for listening to the Tax Maven. And I also want to give a very special thank you to those that helped make the podcast possible, Patrick Kelly, Joe Rivera, Greg Addison, Rebekah Carmichael, Jill Rachlin, and Anthony Pietrangelo. And thank you, Rachel Burns. The NYU Law Graduate Tax Program has been the premier place to learn about tax law for the past 75 years. So please visit us on the web, visit our graduate tax program website to see the different programs we offer both in-person and online, both for lawyers and non-lawyers. Take a look at what we offer, and I hope you consider joining us. And now we like to end each of our episodes with a quote about taxes read by one of our students. Today's quote is from Emily Eskin from Teaneck, New Jersey.
Speaker 6:
Windsor v. United States illustrates how tax law can bring discrimination clearly into focus. The tax system's choices about whom and what to tax not only reflect existing equalities or inequalities, but reinforce and perpetuate them.
Steven Dean:
Please email us at info@taxmavenpodcast.com if you have any questions or comments or suggestions. And if you are a student and want to email us a recording of your favorite tax quote, please email it there as well. Thanks for tuning in.