Tuesday, February 2, 2010

Letter to Andrew Tobias

The Wall Street Journal's summary of the proposed budget (page A-5) this morning notes that "Fund managers would lose the ability to claim capital-gains treatment on certain income by using "carried interest" rules."

This is wonderful!

We have discussed this before, and I hope you will lead the cheers for this proposal and see what you can do to discourage Senator Schumer from helping shoot it down again. This situation is absolutely disgraceful. President Obama should announce that he will veto any legislation that does not incorporate this reform.

Although this would be a drastic change, I wonder if we do not need to change federal tax law so that ALL (and I do mean ALL!) income is taxed at the same set of rates without regard to its source. This may be the only way to avoid gross unfairness in favor of those with the money to hire creative tax lawyers and CPAs to figure out how to exploit existing loopholes and lobbyists to implore Congress to create new ones.

If it proves impossible to get Congress to discipline itself on this matter, it might be interesting to bring a lawsuit based on the equal protection component of the due process clause of the Fifth Amendment to see if the courts will rule that discriminatory tax rates for different kinds of personal income are unconstitutional.

I am aware that the favorable treatment of capital gains helps compensate for the taxation of asset price increases caused by inflation. However a more appropriate remedy for that problem might be to index capital gains. Or if that is too unwieldy, perhaps we should just tax the inflationary gains, figure that a little injustice cannot be avoided, and hope that creating a class of wealthy and influential people with a strong interest in preventing inflation might have beneficial results for everyone.

Paul F. deLespinasse, Ph.D.
Corvallis, Oregon

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