Tax Debate Avoids Key Issues: Midgets Obama and Romney Wont Address

Tax Debate Avoids Key Issues: Midgets Obama and Romney Wont Address

This should be a short post, because my comprehensive view on tax reform is found here.  The summary is that the problem is not tax rates.  The problem is the definition of income.  Just as in ancient times, people would make themselves look poor when the taxman came, so do the wealthy do today.  “Income? I hardly earn any income.”

And that is because of loopholes in the tax code for social engineering purposes, but even more for the ability to defer taxation of what should be income.  My view is that we should all be taxed like traders, with no opportunity to defer taxation.  No tax deferral for IRAs, HSAs, 401(k)s, DB pensions, insurance, annuities, endowments, stock (even private stock will have to report transactions).   As asset prices rise, you would get taxed.  No deferral.

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You might think this is an ugly system, and it is, though Zillow would have one amazing business when the government uses it to tax increases in housing values, with a true-up at the eventual sale.  They might even find new business by creating pricing grids for other sets of illiquid assets.

The idea is that taxation should follow value creation, which is income, even if it is not cash income.  Gone would be the days where one has an appreciating asset, and borrows against it, and pays no tax.  All increases in value would be taxed, and assets where the increase can’t be measured would assume a 15% annual return for taxation purposes, with a true-up at the sale of the asset.

Deferred tax liabilities would be made payable in a few years, and deferred tax assets would receive payment in the same period.  Deferred gains in stock would be immediately taxable.  Hello, Mr. Buffett, you want the rich to pay taxes, here is your bill.

This would include an elimination of all deductions, corporate and individual.  And, I would beef up the IRS to enforce this.  Once the concept of income gets simple and immediate, enforcement gets easier.  The IRS could focus on one question: how much are they prospering?  Tax in proportion to that.

A proposal like this could rapidly balance the budget without raising tax rates.  Now none of the midgets running for President would adopt such an idea — it offends both the left and the right.  But it would raise taxes on the rich, unlike what anotherwise bright guy like Buffett proposes.  Rates aren’t the question, the question is the definition of income.

And until we focus on the definition of income, we will continue to drift as a nation, at least until a crisis hits that reveals our weakness.

By David Merkel CFA of Alephblog

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.