Happened to see this on Kaye Thomas's Fairmark
site today and wanted to pass it along:
"...both President Obama and Dave Camp, the Republican Chair of the
House Ways and Means Committee have proposed to repeal share
identification, the rule that permits investors to choose which
shares they?re selling when disposing of part of their holdings. They
would replace it with a rule that is far more complicated and
produces arbitrary, inaccurate results."
This started a year ago but I don't think it has gotten much traction
really. The alternative W&M proposed, average cost, is actually more
complicated to keep track of.
Let's face it, specific ID isn't something that can be defended
rationally...it's one of thousands of arbitrary rules about computing
what taxable income is. Average cost does make logical sense, but it's a
record-keeping nightmare and could probably be gamed by opening multiple
accounts. Unless they wrote a long complex rule to trap the gaming,
expanding the tax code by that much more for little benefit.
I hope that the concept of inflation-adjusted cost basis is being kicked
around in committee. It would better define "income" from the sale of
assets. If you pay $100 for something and sell it many years later for
$100 (with both of those being in "current dollars") you haven't really
earned anything. Ditto if you inherit something that cost $100
(inflation-adjusted) and is now worth $100. So with inflation-adjusted
basis, it would be palatable to repeal the long-term capital gains rate,
and the step-up of basis at death.
If inflation and interest rates are both 3%, in real terms I have zero income, but I am taxed on nominal income. If capital gains taxes are adjusted for inflation, I don't see why interest and dividends should not be also. Extending this logic, the deductions for interest on mortgages and (for corporations) interest on debt should be reduced. I'd rather have such a low rate of inflation that the complexity of inflation indexing is not worth the cost.
That's a good point, but a distinction is that interest and dividend
income is paid out continuously, available for spending immediately, and
taxed year-to-year in current dollars. There's a stronger argument that
it's truly "income" in the sense of "newly-created cash for me, to buy
Plus, inflation should be priced in already - with the market only
paying for real returns, on average, over time (net of tax, too). If
inflation is high, interest rates should be high too - and dividends
should increase. Current zero-or-or less real rates are an historical
anomaly. Or put another way, the discount rates that set the acceptable
level of yield have to me always reflected an inflation component.
Here's a bit more (from Kaye, in a comment thread):
They're different. The Camp proposal, which should be
available on the website of the Ways and Means
Committee, would require use of the averaging rule that
is currently available for mutual fund shares. The
version in the Obama budget proposal is far worse. It
would require averaging only for long-term shares, and
it would also require averaging across accounts. If you
want to read about that one, you can go to the website
of the Joint Committee on Taxation and pull up their
recent analysis of the tax provisions in the budget
The ABA Tax Section has come out with commentary on the
Camp proposal in which the relevant committee couldn't
agree on whether identification should continue to be
permitted but arguing against the averaging
requirement. I'm astounded that anyone who thinks
seriously about the issue could believe it makes sense
to do away with identification, which is necessary for
neutrality of investment choice and fairness of tax
results. The idea that identification provides the
taxpayer with an improper advantage is the product of
Abolishing specific ID would encourage people who want its benefits to invest in a multitude of funds tracking almost the same objective. You could put some money in an S&P ETF, another tranche in a mutual fund tracking the SPX, another in a fund tracking the Russell 1000 etc. When you needed to sell you'd sell the fund with the smallest percentage gain since purchase. Abolishing specific ID might not raise more revenue from large, sophisticated investors.