Billionaires and Income Tax Rates

There has recently been a major controversy about the amount of income taxes paid by the ultra-wealthy. This is based on data leaked to ProPublica. There has been something of a backlash, with many commenters (including those in agreement with the billionaires-pay-too-little spirit of the article) pointing out that income taxes are based on income, not wealth. While technically correct, these comments often miss the point--are the ultra-rich paying their fair share of income tax?

I can think of a few angles to look at when assessing this question:

• Capital Gains rate is ~half of the rate for ordinary income.
• Richer investors can borrow against investments with substantial accrued capital gains. This allows them to have their cake and eat it too, by getting present liquidity, at low interest rates, while preserving the long-term deferral.
• Tax-lot harvesting can allow investors to greatly reduce realized gains.

But most significant is deferral of capital gains. This amounts to a "loan" from the IRS, for as many years as a taxpayer holds an appreciated asset. In the dozen or so conversations I have stumbled across, none of them have examined possible modifications to the tax code that would "correct" for this phenomenon.

The term is "Lookback Taxation" of capital gains. Basically, it makes certain assumptions about the accumulation of capital gains, and when they are finally realized, it retrospectively applies taxation, to offest the benefit of deferral.