T axing We alth in an Unc e r tain Wor ld Da nie l He me l - PowerPoint PPT Presentation

T axing We alth in an Unc e r tain Wor ld Da nie l He me l Unive rsity o f Chic a g o L a w Sc ho o l Na tio na l T a x Asso c ia tio n 49 th Annua l Spring Sympo sium Ma y 17, 2019

We alth T axation Ob je c tive s 1. Re duc e hig h-e nd we a lth ine q ua lity  na rro w/ e limina te r – g g a p 2. Ra ise re ve nue fo r pro visio n o f pub lic g o o ds/ so c ia l insura nc e

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 1. Annua l we a lth ta x 2. Ma rk-to -ma rke t inc o me ta x 3. Re tro spe c tive c a pita l g a ins ta x

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 1. Annual we alth tax

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 1. Annual we alth tax  Assume r = 5%

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 1. Annual we alth tax  Assume r = 5%  L e vy tax of 1% of ne t wor th on Jan. 1, 2019

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 1. Annual we alth tax  Assume r = 5%  L e vy tax of 1% of ne t wor th on Jan. 1, 2019  Star ting we alth: $100  We alth on Jan. 1, 2019: $99  We alth on De c . 31, 2019: $99 x 1.05 = $103.95  We alth on Jan. 1, 2020: $103.95 x 0.99 ≈ $102.91  We alth on De c . 31, 2020: $102.91 x 1.05 ≈ $108.06

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 2. Mar k- to- mar ke t inc ome tax  Levy tax of 21% on ∆net worth

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 2. Mar k- to- mar ke t inc ome tax  Levy tax of 21% on ∆net worth  Star ting we alth: $100  We alth on De c . 31, 2019: $100 x 1.05 x (1 – 0.21) = $103.95  We alth on De c . 31, 2020: $103.95 x 1.05 x (1 – 0.21) ≈ $108.06

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 3. Re tr ospe c tive c apital gains tax

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 3. Re tr ospe c tive c apital gains tax  Ste p 1 : De te rmine amount r e alize d at time of sale ( A s ) a nd holding pe r iod ( s )  Ste p 2 : Assume g ro wth a t ra te o f r o ve r ho lding pe rio d  Ste p 3 : L e vy ta x suc h tha t individua l is a s we ll o ff a s she wo uld ha ve b e e n if she ha d sta rte d with ) s a nd pa id ma rk-to -ma rke t ta x we a lth o f A s / (1 + r o f t e a c h ye a r

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 3. Re tr ospe c tive c apital gains tax s = (1-((1+r(1-t))/ (1+r)) s )A s mula: T  F or

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 3. Re tr ospe c tive c apital gains tax s = (1-((1+r(1-t))/ (1+r)) s )A s mula: T  F or  What happe ns to a taxpaye r who pur c hase s $100 asse t on Jan. 1, 2019 and winds up with asse t wor th $100 x 1.05 2 = $110.25 on De c . 31, 2020?

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 3. Re tr ospe c tive c apital gains tax s = (1-((1+.05(1-.21))/ (1+.05)) 2 )110.25 mula: T  F or  What happe ns to a taxpaye r who pur c hase s $100 asse t on Jan. 1, 2019 and winds up with asse t wor th $100 x 1.05 2 = $110.25 on De c . 31, 2020?

We alth T axation Ne a r-E q uiva le nt Alte rna tive s 3. Re tr ospe c tive c apital gains tax s = (1-((1+.05(1-.21))/ (1+.05)) 2 )110.25 mula: T  F or  What happe ns to a taxpaye r who pur c hase s $100 asse t on Jan. 1, 2019 and winds up with asse t wor th $100 x 1.05 2 = $110.25 on De c . 31, 2020? s ≈ $2.19  T  We alth on De c . 31, 2020 = $110.25 – $2.19 = $108.06

We alth T axation No ne q uiva le nc e s

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur  T a xe d mo re he a vily unde r a ma rk-to -ma rke t inc o me ta x tha n unde r a n a nnua l we a lth ta x o r a re tro spe c tive c a pita l g a ins ta x

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur  T a xe d mo re he a vily unde r a ma rk-to -ma rke t inc o me ta x tha n unde r a n a nnua l we a lth ta x o r a re tro spe c tive c a pita l g a ins ta x  Nor mative implic ations?

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur  Nor mative implic ations?  Vie w 1: Arg ume nt in fa vo r o f a ma rk-to -ma rke t inc o me ta x b e c a use : a ) hig h-e nd la b o r ine q ua lity is sig nific a nt c o ntrib uto r to o ve ra ll ine q ua lity b ) unde rta xa tio n o f e ntre pre ne uria l la b o r le a ds to a llo c a tive ine ffic ie nc ie s

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur  Nor mative implic ations?  Vie w 2: Arg ume nt in fa vo r o f a nnua l we a lth ta x o r re tro spe c tive c a pita l g a ins ta x b e c a use : a ) hig h-e nd la b o r ine q ua lity is le ss o b je c tio na b le tha n we a lth ine q ua litie s tha t a c c umula te o ve r g e ne ra tio ns b ) unde rta xa tio n o f a b no rma l re turns re wa rds po sitive e xte rna litie s fro m e ntre pre ne uria l la b o r (Jo ne s, 2019)

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur  Nor mative implic ations?  Vie w 3: Ne ithe r a n a rg ume nt in fa vo r o f ma rk- to -ma rke t inc o me ta x no r a n a rg ume nt in fa vo r o f a nnua l we a lth ta x o r re tro spe c tive c a pita l g a ins ta x b e c a use we ha ve lo ts o f o the r to o ls to ta x a b no rma l re turns (e .g ., c o nsumptio n ta x)

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur  Nor mative implic ations?  Vie w 3: Ne ithe r a n a rg ume nt in fa vo r o f ma rk- to -ma rke t inc o me ta x no r a n a rg ume nt in fa vo r o f a nnua l we a lth ta x o r re tro spe c tive c a pita l g a ins ta x b e c a use we ha ve lo ts o f o the r to o ls to ta x a b no rma l re turns (e .g ., c o nsumptio n ta x)  Note : Also po ssib le to inte g ra te ta x o n a b no rma l re turns into re tro spe c tive c a pita l g a ins ta x (Aue rb a c h & Bra dfo rd, 2004)

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk  Domar and Musgr ave (1944): I nc o me ta x with full lo ss o ffse ts impo se s no b urde n o n priva te risk- ta king if ta xpa ye rs c a n b o rro w a t risk-fre e ra te a nd risky a sse ts a re unlimite d in supply

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk  Kaplow (1994): Ab se nt a djustme nts, we a lth a nd inc o me ta xe s will diffe r in the ir implic a tio ns fo r the g o ve rnme nt’ s inve stme nt po rtfo lio

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk  Nor mative implic ations?

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk  Nor mative implic ations?  Vie w 1: Risk shift fro m priva te to pub lic se c to rs is de sira b le fo r mic ro e c o no mic (insura nc e ) a nd ma c ro e c o no mic (c o unte rc yc lic a l) re a so ns

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk  Nor mative implic ations?  Vie w 2: Go ve rnme nt c a n re pro duc e sa me risk a llo c a tio n unde r a n a nnua l we a lth ta x o r a ma rk-to -ma rke t inc o me ta x thro ug h: a ) e xplic it insura nc e b ) a sse t purc ha se s/ fina nc ia l de riva tive s

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk 3. Maximum r ate

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk 3. Maximum r ate  E q uiva le nc e ho lds o nly if t we a lth < r

30-Ye a r T re a sury Yie ld ( Nominal )

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk 3. Maximum r ate  Nor mative implic ations?

We alth T axation No ne q uiva le nc e s ns (e .g ., e ntre pre ne uria l la b o r) 1. Abnor mal r e tur 2. Alloc ation of r isk 3. Maximum r ate  Nor mative implic ations?  Annua l we a lth ta x >>> 2% c a nno t b e re plic a te d via ma rk-to -ma rke t inc o me ta x o r re tro spe c tive c a pita l g a ins ta x (witho ut he lp fro m the F e d)

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