By Dr. James M. Dahle, WCI Founder

Today's post is all about tax policy and potential reform. It has two purposes. The first is to teach you what the current tax policies are and how you can use them to your advantage. The second is to ponder potential tax policy changes that have been proposed to combat the problem of more rapid wealth accumulation by the wealthy, especially generational wealth accumulation. Whether you agree that is a problem is a political question, but most agree that it is or will become an issue at a certain point. We will assume for today's post that it is an issue.


Taxes and White Coat Investors

The largest expense of most white coat investors is their income tax bill. It is not unusual for a working high-income professional to pay 20%, 25%, 30%, or more of their income each year in income tax. Due to numerous historically unintended consequences, doctors and similar professionals find themselves paying more in income tax as a percentage of spendable income (i.e. money you can spend, not what the IRS defines as taxable income) than anyone else—including both those who are less wealthy and those who are more wealthy. They're on the top of the “tax bubble,” where tax rates on spendable income are the highest.

Let's start with those on the lower end of the economic scale. Mitt Romney was famously excoriated for (accurately) pointing out that 47% of American “taxpayers” don't actually pay any income tax. The progressiveness of the tax code combined with tax credits, such as the child tax credit and earned income credit, meant that low earners and a big chunk of the middle class got back every dime withheld from their paychecks (or even more as some credits are refundable) as a tax refund each year. These folks on the lower end do pay the less progressive payroll taxes, food taxes, and gasoline taxes, of course, and these make up a larger percentage of their income than for those in the middle or upper end of the scale. Even those of us who feel like everyone should pay something in income tax ($100 a year minimum income tax?) so they have some skin in the game recognize that that money won't really move the needle when it comes to funding the government. Plus, it's pretty hard to envy the lower class.

Things are a little different on the upper end of the economic scale. These folks take advantage of the fact that income taxes only apply to income, and they do not apply to all income equally. There are a number of very reasonable policies when it comes to taxation, but when you combine them all (and understand and take advantage of them all), it can result in wealthy people having surprisingly low incomes and, thus, low income tax bills. Famous examples include Jeff Bezos paying no taxes in 2007, Elon Musk paying no taxes in 2018, and Donald Trump paying nothing in federal income tax from 2011-2014 and 2020 (and less than many white coat investors in numerous other years). It has been said, “To a great degree, the income tax is essentially voluntary for the nation's richest people,” and there is a lot of truth to that statement.

If you want to reduce your greatest expense and build wealth, you need to get off the tax bubble as soon as possible. Going off the left side of the bubble probably isn't a great idea (it will reduce your taxes but probably won't do much for your wealth). However, going off the right side of the bubble will do both. The next section will teach you how to “go off the right side.”


Tax Policies and Their Unintended Consequences

In the rest of this post, we're going to be talking about tax policies. Many of them are actually pretty good tax policies. The problem occurs when they are taken to extremes and used in combination with each other. Then, you end up with wealthy people who pay no taxes because they have no taxable income. However, each of these policies/techniques can be used by YOU to reduce your tax bill, too. So, lots to learn from each one of them. In this section, we'll go over 15 mostly good tax policies, their unintended consequences, and how to use them to reduce your tax bill. In the last section of the post, we'll talk about proposed reforms to these tax policies and whether they'd actually work to combat the problem of excessive wealth accumulation by the wealthy.


#1 Unrealized Gains Are Not Taxed

Here's the biggest one. It's a great policy because most people simply don't have the money to pay taxes on something until they sell it. Imagine if you had to pay taxes as your house appreciated. Say it goes up in value 20% in one year, from $1 million to $1.2 million. Now you owe capital gains taxes on $200,000. That might be $60,000 depending on your state. Hope you budgeted for that. But wait . . . what happens when the value falls $200,000 in a year? Do you get a $60,000 deduction? How will the government fund itself in those years like 2022 when the housing market and the stock market fell in value? How is the value decided anyway? Does it get appraised every year? Who pays for that appraisal? Changing this one would be really hard, but that hasn't kept people who haven't really thought it through from proposing to do so.

How can you take advantage? Simply by buying the stuff that appreciates. We're talking about your home, stocks (preferably via index funds), rental properties or similar but more passive real estate investments, small businesses, and maybe even a few speculative investments. Adopt a buy-and-hold philosophy.


#2 Lower Qualified Dividend Tax Rates

The lower tax rate on qualified dividends encourages people to invest. It also encourages them to invest for the long run since you have to own a stock for at least 60 days for the dividend to be qualified. Most of them already paid a lot of tax on it when they made the money originally; now, they can pay a lower tax rate as it grows. However, this results in lots of very wealthy people having a lower tax rate than their secretaries. Many people pay 0% on their dividends, and most pay 15% or less.

How you can take advantage of this one? Buy and hold stock index funds. Make sure when you're tax-loss harvesting that you own a fund for at least 60 days around the ex-div date.


#3 Lower Long-Term Capital Gain Tax Rates

Having lower long-term capital gains tax rates encourages people to invest and to do so for the long term since gains don't become long-term until you've owned them for a year. Again, just like with qualified dividend tax rates, why should someone pay their full tax rate twice on this money, particularly when a significant part of the gain is just due to inflation? It already sucks to be taxed on gains that aren't even real; it would really suck to be taxed at your full ordinary income tax rates for it. Just like with the lower qualified dividend rates, this one allows wealthy people to just realize a few gains to spend. In fact, if their basis is high, they may not even pay taxes at all on most of the money they spend since it's just basis.

To take advantage of this one, make sure you own your investments for at least a year before selling them for a gain.


#4 Losses Offset Income

When you lose money, you can use those losses to offset your income. There are rules and limitations on this, but even if you can't use a loss in a given year, you can generally carry them forward indefinitely. Anyone can use $3,000 in passive losses per year against active income, but it takes a special situation to use more than that against active income. These situations include the short-term rental loophole, Real Estate Professional Status (REPS), renting a building to your practice, and just making less than most doctors make. Surely if you have to pay taxes on your realized gains, you should get a deduction for your realized losses. What's good for the goose is good for the gander. So, what's the issue? Well, see President Trump's tax returns for details. Paying $0-$750 a year on an eight-figure income just doesn't feel right to most people, even if the tax code allows it.

How can you take advantage of this? Tax-loss harvest. If you make a bad investment, keep good records. Keep track of the basis on your investments, including additions to basis for your home (like big renovations). Use depreciation losses appropriately. At least you could offset most or all of your real estate income with it for many years.


#5 S Corp Distributions Not Subject to Payroll Taxes

You can incorporate your business (or form an LLC and elect to be taxed as an S Corporation) and then split your income between wages and profits. The profits won't be subject to payroll taxes like Medicare. This is a good policy because business income can be more like investment income than wage income. Not having to pay payroll taxes on profits encourages people to start, maintain, and grow businesses and to create jobs for others. The downside comes when people are earning a similar amount of money as they would as an employee and then using the fact that S Corps aren't very frequently audited to reduce their payroll taxes substantially, causing inappropriate underfunding of our social programs. While an S Corp is limited to no more than 100 shareholders, there is no income limit so even the very wealthy can use this one to reduce their taxes a bit.

What can you do about this? Well, you can incorporate your business and rename a big chunk of what used to be fully taxable sole proprietorship/partnership/LLC profit as S Corp profit.


#6 199A Deduction

The 199A deduction was supposed to put S Corps (along with sole proprietorships, partnerships, and LLCs) on an equal footing with C Corps when they got their big corporate tax cut in 2018 with the Tax Cuts and Jobs Act. It essentially makes 20% of pass-through entity profits income tax-free (although the other 80% is taxable at full income rates, not the lower dividend rates.) It's a complicated deduction, and many high-income professionals make too much to qualify for it. However, for those of us with qualifying businesses, it is often our largest deduction. I'm sure plenty of very wealthy business owners are getting this deduction while hard-working docs, attorneys, and financial advisors don't qualify. Doesn't feel very fair that way. It's one of the most anti-doctor tax laws I know of. Unlike most of these others, this one doesn't even feel like an unintended consequence of the law.

What can you do about it? Well, aside from carefully managing your income around the phaseouts of this deduction, you can start a non-doctor business that qualifies for it. Better do it fast, though. This one is scheduled to disappear after 2025.

tax reform


#7 Retirement Accounts Grow Tax-Protected

Here's one that I hope most white coat investors are already taking advantage of. When you invest inside retirement accounts, your money grows without being taxed along the way. This happens with tax-deferred and tax-free accounts. Even after-tax contributions into retirement accounts and annuities get this benefit. It's good tax policy because it encourages people to save for retirement. There is a similar benefit to using Health Savings Accounts (HSAs) and 529 college savings accounts. The unintended consequences? Those with the largest tax-protected accounts often don't need the money at all. The RMD age keeps rising. Roth conversions can be used to avoid them even more. The wealthiest are just using these things to pass more and more money to their heirs, not to pay for their retirement. And if they can pull off a Peter Thiel and get a $5 billion Roth IRA, the Treasury doesn't even get to benefit from the qualified dividend taxes on that money. That means tax rates have to be higher on everyone.

What can you do to also benefit from this one? Four things. First, max out your retirement (and other tax-protected) accounts (in 2023, that means putting in $22,500 into a 401(k), 403(b), or 457(b)). Second, do Roth conversions. Third, spend taxable money first.  Fourth, invest the money aggressively for maximum growth.


#8 Depreciation

Depreciation is a deduction for business owners that recognizes that stuff wears out. Equipment and buildings just don't last forever. Business owners, particularly real estate business owners, can offset a lot of their income with this deduction. The problem is it is often too generous. It allows the equipment or building to be depreciated over a certain number of years, and often, the item isn't even worn out at the end of that period. Sometimes, the depreciation can all be taken in the first year, providing a serious time-value of money on those tax savings. And when depreciation is recaptured, it is recaptured at a maximum of 25%. It's probably good tax policy to allow for depreciation in some way. But let's be honest, it's way too generous, especially bonus depreciation. Real estate moguls may have eight figures of spendable income each year and not have to pay a dime of taxes on it. And why in the world would it be recaptured at anything less than what it was originally depreciated at? The rules have to be so complex that lots of people can unlock even more depreciation with a cost segregation study.

What can you do about it? Well, you can leave medicine and become a real estate mogul. I'll even teach you how to do it. Heck, you could even just get your spouse to do it, and you wouldn't have to leave your profession at all. A less extreme approach might be to invest some of your taxable money into a few rental properties or passive real estate and get yourself some of that depreciation too. It's not going to wipe out your taxes completely, but it'll help.


#9 Lower Corporate Income Tax Rates

Lower C Corp income tax rates are good tax policy for two reasons. First, it encourages the creation of businesses. Businesses create useful products and services and create jobs. This is a good thing. Second, businesses aren't actually people. They don't really pay taxes if you think about it. They pass that tax on to someone else to pay. Sometimes it can be passed on to the customer. But more commonly, it is simply passed on to the business owner. It shows up in the form of lower returns. An increase in corporate tax rates is really a tax on your 401(k), Roth IRA, or taxable account—not a tax on that evil corporation. Progressives don't mind that, because they figure the wealthy are more likely to have a big 401(k), Roth IRA, or taxable account. But only the uneducated think that you can tax a corporation without taking money from someone else. The downside of a lower corporate income tax rate is that those who own businesses pay less in tax. Since the wealthy are far more likely to own businesses (either on their own or in the form of stock), low corporate tax rates help them to build wealth more than those who do not own businesses.

What can you do to take advantage of this? Invest in businesses. Incorporate yours and buy stocks.


#10 Step Up in Basis at Death

When a person dies, the tax basis on the inherited assets is reset to their value on the date of death. This allows the heirs to immediately sell inherited assets and not have to pay tax on the proceeds. It is good policy for several reasons. First, it allows heirs to not have to search for old records to establish basis. If that were required and they couldn't find the records, they might have to pay taxes on money that has already been taxed. Second, it allows heirs to avoid having to sell small but illiquid, family-0wned businesses and farms at fire sale prices just to pay a huge tax bill. The problem with this policy is that wealthy people who didn't sell their assets during their lives can now pass on all their wealth to their heirs without anybody ever paying tax on that increase in wealth.

What can you do to take advantage of this? Don't sell anything you don't absolutely have to sell. And when you do have to sell shares, sell the ones with the highest basis. Consider borrowing against assets rather than selling them as the interest paid may be less than the tax bill.


#11 Estate Tax Exemption and Estate Planning Techniques

The estate tax is designed to prevent dynastic wealth. However, an estate tax introduces a lot of issues, not the least of which is that everyone hates “death taxes.” Most estate taxes exempt a certain amount of wealth from being taxed. Under the federal income tax code, this exemption prevents the vast majority of estates from being taxed. Leaving your old Camry to your nephew isn't going to cause a dynastic wealth problem, so an estate tax exemption is pretty good tax policy. There are a number of estate planning techniques that allow people to use that estate tax exemption to the greatest benefit. For example, one can use the exemption to put assets likely to appreciate into an irrevocable trust. Then, all of the appreciation occurs outside the estate and, thus, it's not subject to the estate tax. No matter what the rules are, there will always be an army of accountants, attorneys, and financial advisors to help minimize the tax blow that they would cause. The problem with the exemption and all of these estate planning techniques is that the wealthy are passing along hundreds of millions, instead of just $10 million-$20 million without the IRS taking a huge cut to reduce the incidence of dynastic wealth.

What can you do about this? Recognize if your estate may be above the estate tax exemption [in 2023, that's $12.92 million per person]. If so, see an estate planning attorney in your state and start doing what you can to reduce the tax bill associated with it.


#12 Tax-Free Loans

It is a feature that our tax system is an income tax system, not a spendable money system. It taxes income. It does not tax loans. Loans are after-tax money. They are spent without paying taxes, and they are paid back only with money that has also already been taxed. This is a good tax policy. Can you imagine borrowing $400,000 to purchase a house and then having to turn around and pay $150,000 in taxes on it? You would then have to go borrow another $150,000, and then pay $50,000 on that. And then what? Would you get a tax deduction for money used to pay back the loan? The unintended consequence of this policy is that it permits the wealthy to borrow, spend, and die. This is the incredibly powerful technique of combining the fact that loans are tax-free with the step up in basis at death. Rather than selling their assets and paying tax, they simply borrow against those assets, spend the loan money, and eventually receive a step up in basis at death.

Sure, the wealthy will have to pay interest (which has not been much in the last decade or so), but that may be much less than the tax cost. Plus, the interest does not go to fund essential public functions. Sometimes, family members lend money to each other (or between a family member and a family business or trust) rather than pay gift/estate taxes by giving a gift. While interest must be paid at a certain minimum, government-mandated rate, it can be at a much lower rate than the borrower might obtain from an unrelated lender (the government rates do not take into account creditworthiness, debt-to-income ratios, or need).

How can you take advantage of this? Simply by recognizing the possibility that interest can be cheaper than taxes, especially over short time periods with mortgages, home equity loans, margin loans, and family loans. Don’t sell low-basis shares late in life; borrow against them instead. Borrow against a decades-old permanent life policy instead of surrendering it to get spending money. If you have an estate tax problem, recognize that loans between entities can maximize the value of an estate tax exemption and minimize the estate tax due.


#13 Life Insurance Benefits Are Tax-Free

Speaking of life insurance, death benefits are tax-free. This is good tax policy. Imagine someone who earns $100,000 per year whose father dies, leaving behind a $1 million policy. Now, this person who may be in the 12% or 22% bracket is going to be paying 33% and even 37% on most of that inheritance. It becomes impossible to guarantee the ability to leave behind a certain amount of money. Life insurance is generally purchased with post-tax dollars, so it seems fair that the benefits should also be post-tax. However, tax-free death benefits allow the wealthy to better pass on generational wealth. Cash-value life insurance growth is tax-deferred, and once the insured dies, all that growth is never taxed by the income tax system. If placed into an irrevocable trust, it isn’t taxed by the estate tax system either.

How can you take advantage of this? You probably need some term life insurance anyway, so you might as well buy that knowing that your heirs will actually get what you leave (assuming your total estate, including life insurance, is below the estate tax limit anyway). You may also consider cash-value life insurance, especially in conjunction with an irrevocable trust for some of the money you wish to pass to your heirs. Recognize that over long periods of time, the low returns of a typical cash-value policy may be a much larger factor than the tax-free treatment of the policy.


#14 Life Insurance Principal Comes Out First

Another tax benefit of cash-value life insurance occurs with a partial withdrawal. When you sell some of your mutual fund shares or part of a piece of real estate, the sale is pro-rated. Some of what comes out is basis and some is gain. When you surrender an annuity, it gets Last In First Out (LIFO) treatment, i.e. the gains come out first so your initial withdrawals are fully taxable at your ordinary income tax rates. However, life insurance gets First In First Out (FIFO) treatment. This is similar to a Roth IRA before age 59 1/2 in that basis/principal comes out first. A partial withdrawal of an amount less than the total premiums paid (even that portion of the premiums that went to the cost of insurance and expenses, commissions, and profit of the insurance company) comes out tax-free. I’m not actually convinced this one is good tax policy. I have no idea why life insurance should be treated differently than an annuity. I suspect it is due to lobbying by the insurance industry. The wealthy can use this to get spending money that is not taxed at all.

What can you do about this? Well, you can buy a big cash-value life insurance policy just like the wealthy can and spend your basis from it first.


#15 Carried Interest

Carried interest allows hedge fund managers, syndicators, and others to pay taxes on the earnings for their daily work at long-term capital gains tax rates instead of ordinary income tax rates. Some might argue that carried interest rewards those who create/save businesses and the associated jobs, but most view this as an unfair loophole that's on the perpetual chopping block because it allows many wealthy people to avoid income taxes—even on their earned income.

What can you do about it? Ditch your profession and open a hedge fund or become a syndicator.

More information here:

How to Achieve the Zero Tax Bracket in Retirement?


What Can Be Done About the Unfairness?

Most of these tax policies are actually good policies. They just have unforeseen consequences. In isolation, each of these consequences isn’t too bad, but when combined, it can result in a terribly unfair situation with the wealthy becoming wealthier during their lives and even from generation to generation. This isn’t even good for the wealthy, as it eventually results in revolution and devastation and the confiscation of their wealth. Some limits need to be put on it. Many suggestions have been made over the years, but some are more likely to work than others. Now, let’s discuss the most common proposals and their merits.

More information here:

Does Contributing to 401(k) Reduce Taxable Income?


The Bad Ideas

Let's start with the lousy reform ideas that have been proposed.


#1 Why a Wealth Tax Is a Bad Idea

A popular idea lately has been to tax the wealthy on their wealth rather than their income. Done poorly (which it probably would be), this is fraught with peril as the wealthy just transfer money from assets that count as wealth to assets that do not count as wealth. But even done well, it is inherently unfair to take something that someone else has, especially when they’ve already paid income taxes to get it. Private property law is one of the reasons the world’s most developed countries have boosted prosperity for all of their citizens so much over the last few centuries. Get rid of that, and it hurts the rich and the poor. This would also be a massively costly way to tax. We already spend so much time and money complying with the income tax, imagine having to get all of your assets appraised each year to determine your wealth tax bill. While it obviously has to be done for those with an estate tax problem, having to do it once in your life is dramatically less costly than doing it every year. This one is probably not a good idea to reduce the wealth inequality/generational wealth problem.


#2 Why Taxing Unrealized Gains Is a Bad Idea

As mentioned earlier, taxing unrealized gains is a terrible idea. The expense of compliance would be astronomical, and the only fair way to do it would be to provide a compensating taxable loss for unrealized losses, which would impoverish the government at just the wrong time. This might sound great in a leftist red-meat speech, but the impracticality of it is a non-starter.


#3 Why Making the Tax Code More Progressive Wouldn’t Really Work Either

While raising income tax rates on high earners may generate more money for the government, it does not do all that much to reduce the generational wealth problem since the most wealthy don’t have to generate taxable income anyway. It’s hard to make it any more progressive on the lower end, given that 47% of taxpayers aren’t paying any federal income tax as it is. You could lower their payroll taxes or even sales taxes, but those also aren’t going to do much about wealth accumulation by the already wealthy.


#4 Taxing Stock Buybacks Like Dividends Is Bad Policy

When a corporation buys back its shares, those who sell the shares have to pay taxes on any gains. Why should the corporation owners also pay taxes on that? They shouldn't. Yes, it's a lot more tax-efficient for the owners when shares are purchased back than when dividends are paid, but when the shares are eventually sold, taxes will be paid on that income. This isn't any different than a corporation not paying dividends so owners can declare their own dividends by selling shares. This is just an unintended consequence of taxing dividends. Gonna tax dividends even if they're reinvested? Don't be surprised when corporations stop paying them. This is a half step toward taxing unrealized gains. If the full step is bad policy, so is the half step.


#5 Limiting Loss Carry Forward Is Probably Not a Great Idea

I agree it's fair to use real losses against future income. But should it really be indefinite? Maybe after five or 10 years, you should start losing the ability to use some of those losses against your income. Of course, what happens to those disallowed losses? To be fair, they would have to be added back to basis, and that seems too complex to really be workable.


#6 Lowering Estate Tax Exemption Is Not a Great Idea

The estate tax exemption is currently quite generous. Through 2025, a married couple can pass along almost $26 million to their children without owing any estate tax at all. In 2026, that amount is scheduled to be halved. Many states already have lower exemptions on their estate taxes. The exemption could be lowered further. The main downside here is that it simply catches a much higher percentage of the population into the estate tax net. It really doesn’t hurt the wealthiest all that much.


The OK Ideas

Next, we'll talk about some proposed changes that have problems.


#1 Raising Corporate Income Tax Rates May Help

As noted above, I think this one is somewhat nonsensical since there really is no such thing as a corporation when it comes to paying taxes. It's just an indirect tax on the owners. But it would certainly reduce the rate of wealth accumulation by the investor class by lowering their investment returns.


#2 Getting Rid of the 199A Deduction By Itself Isn't Good Policy

The 199A deduction is a reasonable change to ensure parity between C Corps and pass-through entities. Just getting rid of the 199A deduction would be unfair to those pass-through entity businesses. Either raise corporate income taxes and get rid of the 199A deduction or leave both in place.


#3 Killing the Step Up in Basis Would Help But at a Cost

I have mixed feelings about this one. I like that, under current law, nobody has to go digging for basis records when grandma dies. But the step up in basis is also a really great way for an increase in wealth to never actually be taxed, which does seem unfair. It is also unfair that an asset contributed to an irrevocable trust (where it doesn't get the step up in basis at death or at contribution) should be treated differently than the same asset that is not put in the trust.


The Good Ideas

If your political goal is to reduce the rate of wealth accumulation by the wealthy, especially over the generations, these are the ideas that would actually work. Plus, here are a few bad tax policies that just need to go away because they were never a good idea.


#1 Raising Estate Tax Rates Would Really Help

Currently, the estate of even the wealthiest person in the country pays no more than 40% of its wealth in estate tax. Good planning can reduce that further. That means the child of a billionaire could still receive $600 million. It should not take too long to grow that back to a billion and beyond. In less than a decade, the portfolio has recovered, and generational wealth continues to build. There are only two reasonable arguments against this one, and neither is particularly strong. The first is that it is unfair to take money from somebody else, that it’s theft. This one is easily outweighed by the downsides of a generational financial aristocracy. The second is that it would lead the wealthy to do even more estate planning. I think this is weak because most of them are already doing as much as they can. They’re not going to do more to fight a 60% or even 80% estate tax than they’re already doing now to avoid a 40% estate tax. You could even couple this with an increase in the exemption amount to make it a bit more palatable. A nice side effect of a really high estate tax rate is that it may very well increase charitable giving. Lots of people would rather give their money to their favorite charity than the US government.


#2 Taxing Dividend Income the Same as Earned Income Would Help

There have been lots of proposals to eliminate the special lower long-term capital gains, qualified dividend, depreciation recapture, and collectible tax rates. This would certainly disincentivize investment. I think it is patently unfair in the case of long-term capital gains since much of that gain is really just inflation, but if there were an inflation adjustment that could be applied, I'd be OK with that, too. The idea clearly has some merit in the case of the other taxes. Encouraging investment is good, but who are we trying to kid? Are you really not going to invest at all because capital gets taxed at the same rate as labor? You're just going to leave it in a checking account? Give me a break.  Now, there will be unintended consequences, of course. Fewer dividends and more stock buybacks for instance. But I think that's OK.


#3 Reforming Depreciation Laws Would Really Help

Let's be honest, deprecation was too generous before they came up with all this bonus depreciation junk. A house doesn't go to zero over 27 1/2 years. Yes, depreciation encourages investment, but why should the real estate industry be given such a huge advantage over every other industry? It's ridiculous. Bonus depreciation should go away. Depreciation periods should be lengthened to what they actually are, and it should be recaptured at the same tax rates it was used at.


#4 Changing FIFO Treatment for Life Insurance Partial Surrenders Is Good Policy

I think this one is a no-brainer. It's particularly unfair to annuities with their LIFO treatment. Maybe both of them should be treated like an investment where withdrawals are pro-rated between principal and earnings.


#5 Eliminating Carried Interest Would Help, and It's Good Policy

I have yet to see a convincing argument for carried interest, so eliminating it would be good policy.


#6 Limiting Retirement Account Size Would Help

I've seen this one floated in Congress in recent years. It hasn't passed yet, but I wouldn't be surprised if it does at some point. If the point of a retirement account is to actually pay for someone's retirement, what's the point of a $10 million or a $20 million or a $100 million IRA? That's not going to be spent in retirement; it's just an estate planning tool. Putting a cap on total assets in retirement accounts would at least force the wealthy to pay some taxes as their assets grow. Like with a corporate income tax, the investments would grow slower. What should the cap be? At least $5 million. Probably something more in the $10 million-$20 million range and indexed to inflation. If your total balance in any given year is more than that, you'd have to withdraw it as an RMD and pay taxes on it.


#7 Eliminating S Corp NIIT Loophole Is Good Policy

Under current law, S Corp dividends for actively involved owners are not subject to payroll taxes like Social Security or Medicare taxes or the Net Investment Income Tax (NIIT). Changing that would be a serious bait and switch, but it's hard to argue that it is bad tax policy. The reason that S Corps didn't pay payroll taxes was because some of that income wasn't due to their active labor. But the NIIT is precisely for income that isn't due to your active labor. So perhaps that S Corp NIIT loophole should be closed. Would it really do much to reduce wealth accumulation? Probably not a lot, but it's hard to argue it isn't a loophole since PPACA was passed.


Understanding how taxes work is a key part of being financially literate as well as being a good citizen. I hope we accomplished some of that today.

What do you think? Which of these tax policies do you currently take advantage of? Do you agree with my list of useful reforms and not useful reforms? Why or why not? Comment below!