Although you might never know it from listening to the pundits, America isn't broke. We have plenty of money to pay for government programs—we've just gradually lost our ability to collect it. Here are 10 ways, most of them long favored by liberal economists, that politicians could avoid the fiscal cliff's $1.2 trillion in trigger cuts. While these ideas alone won't immediately eliminate the budget deficit, they will, combined with expected growth, point the nation towards a sustainable fiscal path.
Stop giving investors a sweetheart deal
Additional revenue: $533 billion over 10 years
Low tax rates on capital gains are the main reason that billionaire investment guru Warren Buffett pays a smaller percentage of his income in taxes than his secretary does. In 2003, Congress capped the rate on capital gains (investment income) at 15 percent—far less than the 35 percent that people pay on their salaries. Tax hawks like to argue that raising the capital gains tax will stifle investment, but that argument isn't supported by the evidence. (Just ask Buffett.) Taxing capital gains as ordinary income—just like the IRS treats the investment gains from your 401(k)—would have the added benefit of undermining "carried interest." That, you may recall, is the ludicrous accounting trick that allows big fund managers (think Mitt Romney) to pass off their management fees as investment income, thereby avoiding the higher tax rates paid by their receptionists and janitors.
Quit subsidizing mansions and vacation homes
Additional revenue: $214.6 billion over 10 years
The popular mortgage interest deduction subsidizes home ownership but it also distorts the real estate market and favors the wealthy. That's because people are allowed to deduct interest paid on mortgage debt up to $1.1 million—which in effect means that taxpayers are helping rich Americans pay for mansions and vacation properties. Eliminating the deduction entirely would likely yield the revenue gains listed above, but also make things tougher on middle-class homeowners. For a more palatable alternative, Congress could lower that $1.1 million cap to, say, half a million bucks and limit the deduction to loans on primary residences.
End the "step up" giveaway on inherited stocks
Additional revenue: $764 billion over 10 years
Suppose your Aunt Mildred bought stock in Acme Widgets back in 1940 for $10 a share and has watched it appreciate to $100 a share. If she sells it now, she'll pay capital gains taxes on her $90-per-share profit. But if Mildred wills you the stock, you'll miraculously forego taxes on her gains. To put it in accounting terms, Mildred's $10-per-share "cost basis" will instantly "step up" to the stock price on the day you inherit it. So if she dies today, and you later sell your inherited Acme stock at $105, you only pay taxes on $5 per share. But eliminating this massive loophole would throw a wrench in the estate planning of lots of rich and powerful families, so don't get your hopes up.
Revitalize the "death tax"
Additional revenue: $432 billion over 10 years
If you're old and rich and had the choice, this would be a pretty good year to die. That's because, unless Congress extends its Bush-era cuts to the federal estate tax (foes call it the "death tax"), the levy on inheritances will to revert to its old top rate of 55 percent and the exempt, nontaxable portion will go back to $1 million per individual beneficiary, down from about $5.1 million now. Even so, thanks to special breaks for family farms, businesses, and all but the largest holdings, the estate tax has never affected many households. In 2003, before cuts to the tax began taking effect, only 1.3 percent of deaths resulted in any federal estate-tax liability.
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