TAX REFORM PROPOSALS – DIVIDEND AND CAPITAL GAINS.

 

Here are my thoughts on reform of the tax treatment of dividends and capital gains.
 
There should no longer be a special lower tax rate on “qualified” dividends and long-term capital gain.  ALL income would be taxed at “ordinary income” rates.  Corporations should be allowed to claim a “dividends paid” deduction on the corporate return, reducing the corporation’s taxable income, so there would no longer be a double-taxation of dividends. 
 
As for long-term capital gain, it would be “déjà vu all over again”.  Back when I first started out in “the business” in the early 1970s Schedule D allowed for a 50% deduction for net long-term capital gain – only half of such gains were included in taxable income reported on the Form 1040.  If the combination of net short-term and net long-term capital transactions on Schedule D showed a gain you would deduct 50% of the smaller of the total net gain or the net long-term gain to come up with the amount to carryforward to the Form 1040.  I would return to this policy and, instead of taxing net long-term gain at a lower rate, provide for a 50% deduction claimed on Part 2 of the Schedule D.  So, if your tax rate was 10% the actual tax you would pay on net long-term capital gains would be 5%, or 12% if you were in the 24% bracket.   
 
I have always had issues with limiting the current deduction for net capital losses to $3,000.  Business losses are allowed a full current deduction, so why not investment losses.  However, I expect I would keep this limitation, but I would index the $3,000 for inflation.
 
What I would do is allow for excess net capital losses to be carried back at least one and perhaps three years.  Currently if you have $10,000 in net capital losses in 2022 you can deduct $3,000 against other income on the 2022 Form 1040 and carry forward the remaining $7,000 to apply against 2023 gains, again subject to the annual $3,000 limit.  If the $7,000 is not all used up in 2023 the excess is carried forward to 2024, and so on.  But the excess loss cannot be carried back.  I would allow taxpayers the option to first carry back the $7,000 to 2021, or 2019, to apply against any net gains reported on the 2021, or 2019, Form 1040.
 
I first proposed this idea in a letter to George W Bush back in 2002 when the initial Bush tax cuts were being formulated.  During the late 1990s and into 2000, when the stock market was flourishing, many taxpayers realized, and were taxed on, large capital gains, including excessive capital gain distributions from mutual funds. In most cases these capital gains were reinvested in the market and in additional mutual fund shares.  In 2001 and 2002 the bear market provided these same investors with substantial capital losses. It seemed to me at the time only fair that they be allowed to carry back the losses to apply against the earlier gains of the bull market and get a refund of the taxes paid on these gains.
 
Back then I had 1040 clients, a married couple, who had $200,000+ in net capital gains, much of it short-term, in one calendar year, followed the next calendar year by $200,000+ in losses.  So, in reality they did not have any net income.  However, the $200,000 was taxed, most at ordinary income rates, when earned, but only $3,000 in losses was deducted per year in subsequent years.  Unless the taxpayers had another huge gain in a subsequent year, it would take forever to fully use up the $200,000+ in net capital losses.  The client is still carrying forward the remnants of this $200,000+ loss.           
 
As an aside – here is the response I received to my letter to Dubya –
 
"Dear Mr. Flach:
 
On behalf of President Bush, I thank you for your letter. The President appreciates hearing your view and concerns.
 
President Bust remains confident in the faith and resolve of our Nation, and he is confronting our country's challenges with focus, clarity, and courage. As the President has said, this is a time of great consequence, and he is working for a prosperity that is broadly shared, strengthening domestic programs vital to our country, and answering every danger that threatens the American people.
 
To accomplish these goals, President Bush welcomes suggestions from all Americans. Thank you again for sharing your ideas.
 
Sincerely,
Desiree Thompson
Special Assistant to the President and Director of Presidential Correspondence"  
 
So, what do you think?
 
TTFN