Generally speaking, very wealthy people have the vast bulk of their wealth tied up in one thing -- a single stock or ownership of a business -- that consists mostly of unrealized capital gains. In the case of Paulson, for example, some $500 million of his estimated $700 million wealth is in Goldman Sachs stock. That is because most of his pay over the years has been in the form of stock, rather than cash.
Obviously, it would be inappropriate for a treasury secretary to own such a huge amount of stock in a company that routinely does business with the Treasury on a variety of matters. So he is required to sell his Goldman stock, as well as any other stock in individual companies. Interestingly, he must also sell any Treasury securities he owns. This is a rule that applies only to him.
Assuming that almost all his wealth consists of unrealized capital gains, he would pay 15 percent in federal taxes, plus state and local taxes that are pretty high in New York. That would probably come to about $100 million in taxes without Section 1043.
To prevent someone like Paulson from having to pay a $100 million tax just to become treasury secretary, the law allows him to roll these assets over into a blind trust or a broad-based mutual fund without paying tax at this time. After he leaves government service and sells these assets, the original tax basis would be retained, so in effect he would pay the tax then. But in the meantime, he has $100 million more working for him, earning a return, which would otherwise have gone into the Treasury's general fund.
This illustrates an important point about the capital gains tax. It is really not a tax on income in any meaningful sense, but a transactions tax that is paid when people sell one asset in order to buy another. As long as the money is not being taken out for the purpose of consumption, why shouldn't all investments be treated the way Paulson is allowed to treat his divestment?
It would be a simple matter to establish rollover accounts in which all gains within the account are tax-free and only withdrawals are taxed. It would be like a Roth IRA, except with no age or income restriction. Then everyone would have the same tax benefit Paulson and other government executives have.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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