released his Budget for Fiscal Year 2014. It contains a host of
revenue raisers relevant to taxpaying investors. This Budget is a
conglomeration of 1)
proposals discussed in recent tax
reform hearings held by Ways and Means Committee Chair Camp 2)
proposals the President has made in his previous Budgets that
Congress did not pickup and 3) and a shocker (or two).
The Budget formally put forward a number of
proposals released for comment recently in studying tax reform.
These ideas have not been formally proposed or analyzed in depth
previously. There are two Camp tax reform revenue raisers that, if
passed, can dramatically impact investors. The first change would
force taxpayers to use an average cost basis in computing their
gains and losses. Under current law, if an investor sells less
than all their shares, the taxpayer can choose which lot of shares
are to be delivered (assuming they had purchased shares at
different times and prices). The change is forecast to cost
investors over $2 billion over the next 10 years.
The second revenue
raiser from the Camp tax reform project is to tax all derivatives
as ordinary income (or loss) and mark-to-market all derivatives at
each year-end. This proposal has been seen as much too wide
ranging and difficult to implement. As an example, it is suggested
that owners of convertible bonds value the imbedded call option in
their convertible bonds and then pay tax on that amount. Attorneys
also observed that the proposals could reach to ADRs or even all
derivatives in this manner is “scored” to raise almost $19 billion
over the next 10 years so this may not go away. I wouldn’t be too
surprised though to see the tax treatment of ETNs change after all
the tussle is over. For more on the Camp proposals, refer to
Tax Reform of Financial Products?.
There was multiple
revenue raisers repeated from the President’s past Budgets.
A 30% “Buffett” tax was proposed again.
to tax carried interest as ordinary income is one idea that I
make it into law.
the Carried-Interest Debate,
discussed how changes in carried interest taxation can negatively
affect investors. If managers start taking their fees in cash
instead of as a carried interest, investors could wind up with
lots more phantom income. Past estate and gift proposals involving
the minimum time for GRATs, valuation issues and other odds and
ends thought to raise $7 billion are repeated too. A surprise was
proposing, in 2018, to
restore the estate, gift and GST tax parameters to those that were
in effect in 2009 this would raise $71 billion in the five years
The most costly revenue raiser is also a retread from old Budgets
but I think this time the environment is right for the President
to get his way in limiting the value of deductions. The President
feels that highly taxed citizens get an unfair advantage because
$1 of a deduction “saves” a highly taxed person more than it
“saves” a more lightly taxed citizen. He proposes that a $1
deduction should be worth no more than 28 cents to even the most
heavily taxed person. Since the Senate Democrats included this in
their budget blueprint, the Republicans seemed to like the idea in
the presidential campaign and because it raises $529 billion. I
think we will see a limit on deductions if there is any tax bill
The proposal to limit deductions would kill the after-tax return
on leveraged investments. If interest expense is only deductible
at a 28% rate then every dollar I pay in interest expense will
cost me 72 cents. If I then invest, and I’m lucky enough to be
right, I make a short-term gain taxed at 43.4%. I keep 56.6 cents
of every dollar when I win. Given this new arithmetic, I now have
to earn 127% of my borrowing costs just to breakeven!
Everyone was shocked by a new
proposal that would cap the amount of money you could have in your
tax-preferred retirement plan. The idea is that any tax preference
should be waived once you’ve put away “substantially more than is
needed to fund reasonable levels of retirement saving”. The White
House mentioned $205,000 a year in retirement as enough with a
capped amount of $3.4 million. Utilizing those numbers the
proposal is estimated to raise $9 billion over the next 10 years.
The irony that the issue of multi-million dollar IRAs first came
up during the Presidential campaign was quickly noted by the
Some of these proposals will go nowhere,
others will return like perennials and one or two you may have to
deal with before the year is out.