A Progressive System of
Mark-to-Market Taxation
President’s Advisory Panel on
Federal Tax Reform
May 11, 2005
David S. Miller
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Description of the Proposal

The following taxpayers would pay tax each year on any appreciation
in the value of their publicly-traded property and derivatives:
⁻
All public companies
⁻
Private companies with $50 million or more of net assets
⁻
Individuals and married couples with $1.6 million of adjusted
gross income or $5 million of publicly-traded property
•
⁻

Represents the 0.1% highest income and 0.1% wealthiest
households
These taxpayers would “mark” their publicly-traded property to
“market” values (i.e., treat them as sold and immediately
repurchased).
All other taxpayers would remain on the current “realization system.”
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Description of the Proposal

Corporations:
⁻ Mark-to-market gains taxed at current 35% rate.
⁻ Mark-to-market losses fully deductible.

Individuals:
⁻ Mark-to-market gains (and qualified dividends) taxed at 15% long-term
capital gains rate.
⁻ Interest and other ordinary income taxed at current 35% rate.
⁻ Mark-to-market losses:
• Fully deductible against prior mark-to-market gains, current qualified
dividends, and current capital gains
• May offset 43% (15% divided by 35%) of ordinary income
• May be carried forward indefinitely.
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Description of the Proposal



Significant additional revenue without raising rates or
imposing new taxes.
If in place in 2004, the Google IPO alone would have
generated over $2.2 billion of additional revenue.
The revenue generated by mark-to-market taxation would be
used to:
⁻
⁻
Repeal the alternative minimum tax
Eliminate all tax on investment income for low-income
taxpayers or expand 401(k)s for all Americans.
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Benefits of the Proposal — Simplification
•
•
Eliminates the alternative minimum tax.
Eliminates tax planning and a number of anti-abuse rules for
mark-to-market taxpayers.
⁻
“Straddle,” “short sale,” “wash sale,” “constructive
ownership” and “constructive sale” rules, and capital
loss limitations unnecessary for mark-to-market
positions.
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Benefits of the Proposal — Closes
Loopholes and Eliminates Shelters
•
•
Renders a number of the most prominent tax shelters
impotent.
For example, “tax loss generators” are impossible under a
mark-to-market system.
⁻
Tax losses arise only if the taxpayer’s securities in fact
decline in value.
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Benefits of the Proposal — Progressivity
 Uses the “incidence” of tax to achieve progressivity.
⁻
Public and large private corporations, and top 0.1%
wealthiest households subject to mark-to-market
taxation on publicly-traded property and derivatives.

⁻
The tax burden is increased for these taxpayers.
Other corporations and most individuals remain on
realization.

The tax burden remains the same for these
taxpayers.
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Benefits of the Proposal — Fairness
 Ensures that large and wealthy investors taxed similarly to wage
earners.
⁻
⁻
Wage earners cannot avoid tax on the wages they receive.
Large investors can avoid virtually all tax on their appreciated
securities by hedging their risk with derivatives and monetizing
their positions by borrowing against their hedged securities
indefinitely.

If estate tax is repealed, appreciation will never be taxed.
 Proposal eliminates this “loophole” and prevents deferral of tax for
large investors.
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Benefits of the Proposal — Eliminates
Inefficiencies and Enhances Liquidity in the
Capital Markets

Eliminates the “lock-in effect”
⁻

Eliminates the “lock-out effect”
⁻

Current law artificially discourages taxpayers from selling
their appreciated securities
Current law artificially discourages taxpayers that sell their
depreciated securities at a loss from repurchasing them
within 30 days.
Properly taxes complex financial instruments
⁻
Derivatives cannot be used to minimize tax under a mark-tomarket system.
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Benefits of the Proposal — Encourages Work
Effort, Savings and Investment



Permits middle-income Americans to retain more of their wages
by eliminating the alternative minimum tax.
Encourages savings by eliminating all tax on the investments of
low-income taxpayers or expanding the scope of 401(k) plans.
Complements the President’s “progressive indexing” proposal
for Social Security:
⁻
Enhances retirement savings for low-income
taxpayers.
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Benefits of the Proposal — Book/Tax
Conformity
•
U.S. corporations are required to mark-to-market their
securities and derivatives under GAAP.
⁻
•
Proposal taxes these corporations on the earnings they
report to their shareholders.
The United Kingdom already requires taxpayers to pay tax on
the securities and derivatives they mark-to-market under
GAAP.
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Summary
A progressive system of mark-to-market taxation achieves all of
the President’s tax reform objectives:
⁻
⁻
⁻
⁻
⁻
⁻
⁻
⁻
Simplifies.
Enhances progressivity.
Eliminates alternative minimum tax.
Retains home mortgage interest and charitable donation
deductions.
Closes loopholes and eliminates tax shelters.
Encourages saving and investment.
Revenue neutral.
Does not raise rates, deny deductions, or impose new
taxes.
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