President Ronald Reagan was the guiding light during a Senate Committee on Finance hearing on Fairness in Taxation.
“If our tax reform efforts are going to be successful, it is essential that the final – hopefully bipartisan – product is viewed as fair, said Senate Finance Committee Chairman Orrin Hatch, R-Utah, during his opening statement Tuesday morning. “If the American people do not believe a tax reform proposal is fair, it’s hard to see, politically, how it could be enacted.”
Hatch stressed that the last successful comprehensive tax reform effort took place during the Reagan era – nearly three decades ago.
“During that effort, President Reagan emphasized three principles for tax reform: efficiency, fairness and simplicity,” he said. “I’ve made no secret that I believe these same principles – along with a handful of others – should guide our current reform efforts.”
Last week the Finance Committee had a hearing on efficiency and growth. And Hatch said a hearing on simplicity will be coming in the future. Tuesday’s hearing focused solely on the tax reform goal of fairness.
Senate Finance Committee Ranking Member Ron Wyden, D-Ore., also called on President Reagan as a shining example for tax reform.
“[L]et’s try to meet the standard of fairness President Reagan set,” Wyden said in his prepared statement. “I want to hone in on two important things the ’86 act did, both of which should happen again. First, it gave fair treatment to wage earners, instead of punishing them by taxing their income at higher rates than others. And second, it cracked down on tax cheats who pry open loopholes and skirt their responsibilities.”
In conjunction with Tuesday’s hearing, Wyden released a report that listed a number of strategies used by sophisticated taxpayers to substantially lower their tax burden.
“Sophisticated taxpayers are able to hire lawyers and accountants to take advantage of these dodges, but hearing about these loopholes must make middle-class taxpayers want to pull their hair out,” Wyden said.
Wyden’s report, “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions,” highlights six major avoidance strategies used by many taxpayers to cut the taxes they owe dramatically.
The six tax avoidance strategies were identified for the report by the nonpartisan staff of the Joint Committee on Taxation and outside independent experts, relying on memoranda, examples and descriptions.
1. Using collars to avoid paying capital gains taxes
“Taxpayers who own appreciated stocks may lock in the gain by using a ‘collar’ that involves purchasing simultaneous options to buy and sell the stock at set prices to hedge against any stock price fluctuation,” according to Wyden’s report.
In this way, taxpayers are able to lock in a capital gain while bearing little economic risk for a change in value in the security and without constructively selling it. If there is no constructive sale then no capital gains taxes are owed.
2. Using wash sales to time the recognition of capital income
Under the current treatment of capital gains, such gains are only taxed when realized.