Mark-to-Market: A Terrible Idea from the Oregon Center for Public Policy

The liberal Oregon Center for Public Policy (OCPP), in its never-ending quest to soak the well-off, is advocating a big change in how capital gains are taxed. 

The problem is the idea is misguided, unworkable and would hit Oregon’s middle class as well.

And if If you think the federal tax code is complex and labyrinthine now, you ain’t seen nothin yet if mark-to-market is put in place.

In the name of addressing income inequality, OCPP is proposing that capital gains on assets be paid annually rather than when the assets are sold, as under current law. In other words, if the value of your assets such as stocks, bonds, real estate, a business, or even a work of art. goes up, you would owe taxes on the increase, even if you didn’t sell anything. The proposed approach is called “mark-to-market”.

“Oregon currently has several tax breaks favoring capital gains income that collectively cost the state more than $1 billion per budget period,” the OCPP says in a just posted issue brief. “Lawmakers should reject any proposal to further cut taxes on capital gains income and reign in tax breaks that benefit capital gains income.”

The current system “allows the wealthy to amass vast fortunes,” OCPP argues. “Because such assets are highly concentrated in the hands of the rich, the income produced by the sale of those assets flow to the top,” the issue brief says. 

One major problem with the mark-to-market proposal is that, despite OCPP’s attempt to position it as a tax-the-rich idea, it would affect all investors.

OCPP’s proposal would also be a nightmare to implement, particularly because it would require taxpayers to value assets annually. 

Changes in stock prices of publicly traded companies are usually easy to determine. Figuring the changing value of many other assets can be a lot tougher.

“Ownership of private businesses, artwork…and other luxuries, among other assets, are difficult to appraise,” according to the National Taxpayers Union Foundation. “These assets may have limited markets for them, or no markets at all, making valuation a guessing game. In such a scenario, naturally the incentive for a taxpayer will be to minimize the value of such assets while the incentive for revenue officials will be to maximize the value, setting up a highly-adversarial relationship that could lead to administrative difficulties from lack of independently-verifiable comparisons.”

OCPP’s proposal could also artificially drive down market prices. Savvy stock market investors, knowing their taxes will be impacted by their portfolio’s value at the end of each year, will be inclined to sell assets, driving down stock prices to minimize tax liability. 

In an October 28, 2021 paper, the Congressional Research Service said another concern about mark-to-market is liquidity. Some high-income individuals may have no problem coming up with the necessary cash. Others, particularly middle-income taxpayers, might have a hard time doing so. 

As S-Corporation Association of America put it, “…unrealized gains are not income.  You can’t spend them.  If you could, they’d be realized gains.  And while the (Washington) Post and other observers are fond of talking up the ability of billionaires to borrow, most S corporation owners don’t have unlimited borrowing capacity.  Depending on how leveraged their business is, they might have no capacity at all.”

Or as the National Taxpayers Union Foundation has opined, “Just because an investor’s underlying assets appreciate in a given year does not mean that the investor has sufficient cash to pay any tax liability.”

In short, OCPP’s mark-to-market proposal is a half-baked idea. It deserves a quick demise.

ADDENDUM:

On Jan. 17, 2023, the Washington Post reported that a group of legislators in statehouses across the country has coordinated to introduce bills simultaneously in seven states later this week, with the same goal of raising taxes on the rich.

“The point here is to make sure we do at the state level what is not being done at the federal level,” said Gustavo Rivera (D), a New York state senator who is part of the seven-state group.

The state legislators said they would like to try such ideas as a test case for future national policy while acting collectively to minimize the threat of people moving to a nearby lower-tax state. Sponsors told The Washington Post that they will introduce their bills on Thursday, January 19, in California, Connecticut, Hawaii, Illinois, Maryland, New York and Washington.,

Skeptics of wealth taxes say the idea might be even worse on a state level than a national level, since the rich can easily move to another state, the Post reported.

“High net-worth individuals are fairly mobile, and it is much easier to change residency to another state than it is to leave the country,” said Jared Walczak, who works on state tax policy at the right-leaning Tax Foundation.

In addition, he says, assessing the value of a person’s wealth would be challenging for state bureaucrats and sometimes lead to unfair results, as in the case of Silicon Valley founders, whose companies may have huge valuations on paper that are hard to assess or tax in a straightforward way.

“Just because a company might sell for hundreds of millions of dollars in the future doesn’t mean that its current owners have any significant wealth,” Walczak said. The on-paper net worth of billionaires fluctuates drastically as companies’ stock prices or valuations rise and fall, making it hard to figure out how much they should pay if taxed on that wealth, he added.

In four states, lawmakers say they will float versions of a tax on wealthy people’s holdings, or so-called “mark-to-market” taxes on their unrealized capital gains. But other states will pitch more conventional tax proposals.

America’s Rising Inequality Threatens National Stability

I wandered through Nordstom’s downtown Portland store the other day.

Take a look at some of the shoes I came across:

OK, but what’s so special about all these shoes? Even single one of them, including the sneakers, costs $850 or more. The Black Libelli Booties (top right) are $1795. The Fendigraphy white leather slides (bottom) are $1100.

And, by the way, big spenders looking for socks to wear with their $1000 sneakers can buy a pair of black-and-white Bottega Veneta “ghost pattern” crew socks at Nordstrom for $420. That’s right, $420.

If that’s just a bit too much, the striver can also get a pair of Balenciaga Logo Cotton Blend Socks at Nordstrom for $210 a pair or a pair of Off-White Arrow Cotton Blend Crew Socks for $120.

“The logic is, if you’re paying $1,000 for a pair of shoes, what’s $200 more?” Jian DeLeon, the men’s fashion director at Nordstrom, told the Wall Street Journal. “Lavish socks are “something you don’t need, but it’s the ultimate expression of luxury.” When you pair fancy shoes and socks, he said, it shows you’re going the “extra mile.”

It’s hard not to wonder who is buying this exorbitantly priced stuff and what it says about our economy.

Per capita income in the Portland Metro Area is just $40,138 and median household income is only $77,511.

The annual income of 31% of households is $50,000 or less. Another 31% of households have annual incomes of $50,000 – $100,000. It is probably reasonable to assume that the members of this 62% of households in the Portland Metro Area are not the ones buying $895 and over pairs of shoes.

That leaves 38% of Metro Area households earning $100,000 a year and more.

Household income

ColumnPortland-Vancouver-Hillsboro, OR-WAOregonUnited States
Under $50K31.2%±0.5%299,055±4,61338.1%±0.4%626,425±6,571.739.1%±0.1%47,785,414±58,302.5
$50K – $100K30.8%±0.5%295,189±4,384.331.4%±0.3%516,210±5,646.930%±0.1%36,648,022±63,450.6
$100K – $200K28.1%±0.4%268,728±4,128.523.2%±0.3%381,343±4,795.522.7%±0.1%27,817,092±73,446.1
Over $200K9.9%±0.2%95,005±2,1407.2%±0.2%118,601±2,8408.3%±0%10,103,691±51,548

I assume the buyers of high-priced items like the shoes above come from that segment of the population. But are enough of them so blasé about overall economic conditions to be drawn into buying extravagant goods?

The answer seems to be yes.

The middle class, once the economic stratum of a clear majority of American adults, has steadily contracted in the past five decades, according to a new Pew Research Center analysis of government data. The share of adults who live in middle-class households fell from 61% in 1971 to 50% in 2021. Although household incomes have risen substantially since 1970, those of middle-class households have not climbed nearly as much as those of upper-income households. 

On Sept. 27, 2022, the Congressional Budget Office issued a study of trends in the distribution of family wealth between 1989 and 2019. In that period, total real wealth held by families tripled from $38 trillion to $115 trillion.

But the distribution of that growth was uneven.

Money moved toward the families in the top 10%, and especially in the top 1%, shifting from families with less income and education toward those with more wealth and education. In the 30 years examined, the share of wealth belonging to families in the top 10% increased from 63% in 1989 to 72% in 2019, from $24.3 trillion to $82.4 trillion (an increase of 240%). The share of total wealth held by families in the top 1% increased from 27% to 34% in the same period. In 2019, families in the bottom half of the economy held only 2% of the national wealth, and those in the bottom quarter owed about $11,000 more than they owned. 

As the New York Times recently observed, “Higher-income households built up savings and wealth during the early stages of the pandemic as they stayed at home and their stocks, houses and other assets rose in value. Between those stockpiles and solid wage growth, many have been able to keep spending even as costs climb. But data and anecdotes suggest that lower-income households, despite the resilient job market, are struggling more profoundly with inflation.”

Even during the pandemic, when most Americans fared well financially, the rich saw most of the gain. According to the Federal Reserve, while American households overall saw about $13.5 trillion added to their wealth, the top 1% got a third of that and the top 20% 70% of it.

As the Wall Street Journal recently reported, even though the United Status is technically in a recession, and consumer confidence isn’t great, the demand for expensive luxury goods, such as handbags and jewelry, is off the charts

“Spending by Americans and Europeans is roaring, despite headlines of all-time-low consumer sentiment in the eurozone and greater caution in the U.S.,” reported the Journal. “Many luxury brands have more than doubled the size of their sales in America compared with prepandemic levels. Because of their wealthier customers, luxury brands might be more immune to the challenges other businesses now face.”

Luxury company LVMH Moët Hennessy Louis Vuitton (LVMH), whose brand stable includes Christian Dior, Louis Vuitton and Tiffany, reported a rise in sales at all its divisions in the first half of 2022. Growth was strongest in the fashion and leather goods unit, the company’s biggest, where first-half sales rose 31% year-over-year to €18.1 billion. U.S. revenues gained 24%.

U.S. credit card data from Bank of America shows that shoppers earning less than $50,000 a year are rethinking their priorities as inflation hits everyday expenses, but this has been more than offset by demand from core luxury spenders.

Then there’s the desire of some people to be noticed, to display their wealth, even if the items on display are rather bizarre or not particularly attractive. I call this the “Sure it’s ugly, but it’s expensive” syndrome.

It’s the weirdness itself that has appeal.

It’s not that people want an ugly or bizarre watch or pair of shoes. What they want is to stand out, to have their friends, neighbors and even strangers see their distinctive, peculiar, expensive accoutrements.

Oh well, at least people blowing all their money on overpriced things are keeping the people who make them employed. And that’s good, right?

Disillusionment and despair: the Trump turmoil

Donald Trump isn’t a candidate.

Donald-Trump-Caricature

He’s a stand-in for the alienation and disillusionment so many Americans feel as both the Republican and Democratic parties have failed us.

How could it be otherwise when so much seems so wrong and fakery, misdirection, and outright lies by both parties have been so pervasive?

Consider:

  • The past several decades have seen the most sustained rise in inequality in the United States since the 19th century after more than 40 years of narrowing inequality following the Great Depression. By some estimates, income and wealth inequality are near their highest levels in the past hundred years.
  • The 2009 $830 billion stimulus package, with a claimed focus on shovel-ready projects, was supposed to fix things after the Great Recession. The legacy instead – a slow growth economy. The first 23 quarters of the recovery, which officially began in June of 2009, had an annual rate of growth of just 2.1 percent.
  • The distribution of wealth in the United States is even more unequal than that of income. The wealthiest 5 percent of American households held 54 percent of all wealth reported in 1989, rose to 61 percent in 2010 and reached 63 percent in 2013.
  • 71 percent of Americans say life has gotten worse for middle-class Americans over the past 10 years.
  • Today’s fifty-somethings may be part of the first generation in American history to experience a lifetime of downward mobility, in which at every stage of adult life, they have had less income and less net wealth than did people who were their age ten years before.
  • There is now less economic mobility in the United States than in Canada or much of Europe. A child born in the bottom one-fifth of incomes in the United States has only a 4 percent chance of rising to the top one-fifth.
  • Young Americans (ages 18-34) are earning less (adjusted for inflation) than their peers in 1980 ; the college graduating class this year left with an average student debt of $35,051.
  • In 1986, President Reagan signed legislation that was supposed to fix the illegal immigration issue once and for all. Three million applied for legal status and about 2.7 million received it. Today, about 11.7 million immigrants are living in the United States illegally. So much for the fix.
  • Despite all the “mission accomplished” and “victory is at hand” assurances, America has been at war in the Middle East for the past 15 years, with little to show for it, billions of dollars down a rathole, thousands of American soldiers dead and wounded, and continuing chaos in Afghanistan, Iraq, Libya and Yemen.
  • Despite the billions the government has spent on poverty-related programs, half of children age three and younger live in poverty.
  • The White House wants to “press the reset button” on one of Washington’s biggest challenges: its increasingly troublesome relationship with Russia,” Vice President Biden, 2/7/2009; “We’re going to hit the reset button and start fresh (with Russia),” Secretary of State Hillary Clinton, 3/6/2009
  • “If you like the plan you have, you can keep it.  If you like the doctor you have, you can keep your doctor, too.” President Obama, 6/6/2009.
  • “I ended the war in Iraq, as I promised. We are transitioning out of Afghanistan. We have gone after the terrorists who actually attacked us 9/11 and decimated al Qaeda.” President Obama, 9/14/2012
  • Despite assurances from some politicians that all’s well, the Medicare program has $28.1 trillion in unfunded liabilities over the next 75 years. Together with Social Security’s $13.3 trillion shortfall, the government has accumulated entitlement spending commitments that far exceed our capacity to pay for them.
  • In the 2012 election cycle, a tiny elite of the U.S. population, just 0.40 %, made a political contribution of more than $200, providing 63.5% of all individual contributions to federal candidates, PACs and Parties, according to the Center for Responsive Politics.
  • Fewer than four hundred families are responsible for almost half the money raised in the 2016 presidential campaign to date, a concentration of political donors that is unprecedented in the modern era.

As H.L. Mencken said, “Under democracy one party always devotes its chief energies to trying to prove that the other party is unfit to rule — and both commonly succeed, and are right.”

 

Single mothers = singular troubles

It’s no secret that single motherhood is a prescription for economic insecurity for many women.

Single-mother families are nearly five times as likely to be poor than married-couple families and a majority of America’s poor children live in single mother-led households, according to the left-leaning Center for American Progress.

Lone mothers

At the other end of the political spectrum, the conservative Heritage Foundation says marriage is the greatest weapon against child poverty.

“Family disintegration, lack of education, and counterproductive welfare incentives all contribute to child poverty,” Heritage wrote recently. “Rebuilding a strong marriage culture should be at the forefront of our efforts to fight poverty.”

A New York Times story cited a number of studies that attributed the growing income gaps in American society to the changing structure of the typical family with the growing number of single parent families. The article suggested that changing marriage patterns could account for anywhere from 15-40% of growing income inequality across the country, with a surge in births outside of marriage among less educated women pushing single-parent families into the lower end of the socio-economic range.

“College-educated Americans … are increasingly likely to marry one another, compounding their growing advantages in pay,” The Times said. “Less-educated women…are growing less likely to marry at all, raising children on pinched paychecks that come in ones, not twos.”

“It is the privileged Americans who are marrying, and marrying helps them stay privileged,” said Andrew Cherlin from Johns Hopkins University.

Now there’s even more evidence connecting single-motherhood to poverty.

The Earned Income Tax Credit (EITC) is a refundable tax credit for low to moderate income working persons, particularly those with children.

The Brookings Institution, a Washington, D.C.-based centrist think tank, put together an illuminating interactive map of the share of taxpayers that claim the EITC at the county level nationwide:

Map: The Earned Income Tax Credit in Your County

Brookings then compared the EITC map with a map of single motherhood in the United States in the most recent year for which complete data is available.

Map: Percent of all households that are single female headed with children in 2010.

The principal conclusion? The map of EITC benefits by county looks a lot like a map of single motherhood.

As Brookings points out, looking at the number of parents in a household as an indicator of financial stability and opportunity, changing marriage patterns could account for anywhere from 15-40% of growing income inequality across the country.

While correlation doesn’t necessarily equal causation, the link between poverty and mothers with children growing up without a father is clearly something that ought to be part of the discussion of income inequality in the United States.