A tax break that could
be the biggest in America is essentially hidden from view. The break on
stock market losses flies under the radar, unseen and uncounted,
shifting up to 39.6 percent (the top marginal rate) of investment losses
onto the U.S. Treasury.
And nobody suggests that this tax break should be reined in. For that
matter, nobody pays it any attention at all.
Let’s see how the break operates, and how it’s totally overlooked. Then
let’s give it the scrutiny it deserves—especially with Congress
signaling that it might be getting serious about tax reform.
Stock market losses turn into tax breaks when the losses are written off
against gains on tax returns. This costs the Treasury revenue, and
effectively shifts part of the cost onto other taxpayers. All tax breaks
do likewise, but this one has bells and whistles besides.
Each year, in addition to unlimited, direct write-offs, losses up to
$3,000 can be deducted from ordinary income. Then there’s the cherry on
top: any losses that still haven’t been written off can be carried
forward indefinitely.
They are, and the total is staggering. The Internal Revenue Service
recently estimated capital loss carryovers on 2012 returns at $581
billion ($369 billion long term, $212 billion short term). The Treasury
will be picking up part of that $581 billion. Year after year, it picks
up part of those $3,000 deductions. With every Wall Street loss, in
every regular, non-retirement account, it loses more revenue somewhere
down the road.
Yet Treasury shortfalls from market losses aren’t even listed on a
definitive ranking of tax breaks compiled by the bi-partisan Joint
Committee on Taxation. When lawmakers target these breaks (or tax
expenditures, as they’re sometimes called), they tend to focus on the
supposed biggest: employer-provided health insurance ($143 billion in
2014), tax-deferred retirement plans ($109 billion), and preferential
rates on capital gains and dividends ($91 billion). In truth the
unlimited write-off of capital losses could top them all—but the pieces
have never been added up and compared to other breaks. Capital losses
reported to the IRS include non-market losses too, muddying any possible
comparison.
All that aside, it’s time for President Obama and Congress to reform
this long-ignored drain on the Treasury.
The president’s 2013 budget proposed capping two other tax breaks,
mortgage interest and charitable contributions, at 28 percent; he could
propose the same for stock market losses. Limits on the losses that can
be written off by individual taxpayers could be phased in. Time limits
could be laid down. The yearly $3,000 deduction could be ended. There’s a
case for allowing stock market losses to be written off against gains;
there’s no good reason, though, to allow the write-off against ordinary
income.
Could Wall Street survive without a tax break to help ease the pain of
losses? It’s hard to imagine. All the same, with economic inequality at
Gilded Age levels, Congress could at least throttle back on one of the
policies that drive inequality higher.
For Wall Street itself, the tax break on stock market losses is simply a
fact of life. It’s always been touted, especially during tax season.
Financial advisors continually urge investors to lower their tax bills
by “harvesting” tax losses. It’s a telling use of the word
“harvesting”—in this case, harvesting what could well be the biggest tax
break of all.
Gerald E. Scorse helped pass a bill that tightens the rules for
reporting capital gains. He is a member of Responsible Wealth, an
advocacy group for economic fairness. He can be reached at:
gscorse@rcn.com. Read other articles by Gerald.
Source: Dissident Voice, 10 April 2015
Read more at: http://wakeupfromyourslumber.com/wall-streets-stealth-tax-break/
Sunday, April 12, 2015
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