IPI: Solution to Capital Gains Complexity Tax Reform

2/20/2002

From: Institute for Policy Innovation, 972-874-5139

DALLAS, Feb. 20 -- Following was released today by the Institute for Policy Innovation (IPI):

According to this morning's Wall Street Journal (p.1), the complexity of reporting capital gains and losses for income tax purposes baffles even tax professionals. One CPA quoted in the article says that the rules are "incomprehensible" for the average taxpayer. Another says that "it's very, very complex . . . even for our clients who are very financially astute, these rules can be a puzzle." The article goes on to state that Congress' Joint Committee on Taxation is considering rule changes to make the infamous Schedule D simpler.

But the real source of this complexity is the way our tax code taxes income, according to the results of the Institute for Policy Innovation's (IPI) "Road Map to Tax Reform" project, just released. One conclusion from this 15-paper research project is that, while the U.S. tax code attempts to tax income, income is a notoriously difficult concept to define. In fact, there is no definition of income agreed-upon by a majority of economists. "Income" taxes therefore have been subject to constant revision and constant political manipulation.

The result is that the income tax regime, including the capital gains taxation regime, has changed every few years. Not only does this add complexity to the tax code, but it discourages investors from making long-term decisions based on a predictable tax code. "The constantly-changing capital gains tax regime is proof enough that our tax code is fundamentally flawed, and should be replaced by a simpler, fair, flatter tax code," says IPI President Tom Giovanetti.

The short-term solution for the complexity of taxing capital gains is the elimination of the capital gains tax. This move would have the additional benefit of significant economic stimulus, according to another recent study by IPI, which found that cutting or eliminating the capital gains tax would have more stimulative effect than any other possible initiative by the federal government.

The long-term solution for all tax complexity, including capital gains complexity, is tax reform that moves us toward taxing consumption rather than income. This can be done through a savings-exempt income tax, or any number of other proposals that would be far simpler and fairer than our current, "incomprehensible" system. The above-mentioned "Road Map to Tax Reform" project makes the most comprehensive case thus far for true reform of our current tax code, and is available at http://www.ipi.org