Dear President Trump,

I applaud many of the provisions of the proposed House and Senate tax proposals, but, as discussed below, the reduction or elimination of important deductions will result in unfair tax increases for too many taxpayers and may adversely effect the solvency of high tax states and the growth of the US economy. I fear that the current proposals, if  modified and passed into law, may cause almost as much harm as good to our economy. You can encourage Congress to find better ways to raise offsetting revenue than by eliminating important deductions. This letter will suggest changes to improve the tax proposals by eliminating current loopholes that let many of our most successful individuals avoid paying hundreds of billions of taxes during their lifetimes. I know it is late in the process and that time is of the essence, but I expect there will be almost immediate approval of  the suggested changes. I believe that if the proposed changes are adopted at your suggestion they will be recognized as the major accomplishment of your presidency by making the tax code fairer and enable you to achieve your goals of greatly accelerating the growth of the economy and helping the middle class.

1. THE PROPOSED LIMITATION OR ELIMINATION OF THE HOME INTEREST AND PROPERTY TAX DEDUCTION. I consider the elimination or reduction of deductions for home mortgage interest and property taxes to be the most unjustifiable change. By allowing depreciation of rental properties and not private homes, the tax code currently favors renting over home ownership. The proposed changes compound the unfairness. Prior to the collapse in home values caused in large part by improvident or fraudulent lending practices, owning a home was a major source of wealth accumulation by the middle class as one’s home mortgage was repaid over time and the home value rose due to inflation. Young families today are beginning to rediscover the wonderful benefits of home ownership and the economy has benefitted. The reduction of the tax benefits for home ownership will make it much more difficult financially to purchase and meet the monthly costs of owning a home. It will also significantly reduce the equity value of current homeowners and cause great harm to the home building, maintenance and improvement industries and lead to reduced funding for public school education. It will result in the loss of millions of middle class jobs. We must find a better way to pay for the tax reductions contained in the current proposals even if it means raising the corporate rate to 21% or 22%. Property taxes and interest on mortgages up to at least $1,000,000 should remain deductible.

2. RAISING THE ESTATE TAX CREDIT OR ELIMINATING THE ESTATE TAX. Raising the Estate Tax Credit as proposed or even to eliminate the Federal Estate Tax on estates of spouses with aggregate estates of up to $25 million or $50 million is a good idea to protect family businesses and farmers. But, eliminating the Federal Estate Tax is likely to be political suicide for Republicans. You will be endlessly criticized for giving an enormous and unjustifiable benefit to our richest taxpayers, including you. The richest people in our country are among the most under-taxed. Their aggregate income and wealth that is growing by hundreds of billions of dollars per year is in the form of unrealized capital gains that are not taxed for valid reasons. Our wealthiest people, many of whom will probably be worth well over $100 billion at the time of their death, also avoid federal gift or estate taxation by making large charitable gifts or by creating charitable foundations. We should either deny the charitable deduction for estates or otherwise taxable gifts or provide for a capital gains tax to be payable at death or at designated dates (such as every three or  five years after the change is passed) or by individuals at the time they make charitable gifts of appreciated property. We could provide for such tax to be payable in kind or over a period of years. The assets paid to the government in kind could be non voting while held by the government and be redeemable or sold over time. The rate of tax should be open for discussion, but the amount of the tax should be very significant and allow for most of the deductions being targeted for elimination to be retained. Just think of the US government as one of the largest shareholders of Berkshire Hathaway, Microsoft or Amazon. I do not think Warren Buffett, Bill Gates or Jeff Bezos will object. Tax deductible contributions will be reduced, but mainly be reducing the size of charitable gifts by an amount equal to the current tax underpayments. Eliminating the estate tax might also reduce charitable gifts.

3. REDUCING THE TAX ON PASS-THROUGH ENTITIES. This is also a questionable change favoring the rich. C Corporations pay a tax on net income (after deducting salaries paid that are taxed at individual tax rates) and stockholders pay a SECOND tax on dividends paid. Pass through entities avoid double taxation and they do not need the added benefit of lesser rates. If a C Corporation is more favorable, a Subchapter S Corporation or LLC can convert to a C Corporation.

4. TAXING THE CARRIED INTEREST. After years of discussion your wall street advisers left taxing of the carried interest out of the tax proposal. The amount recovered may not be great, but closing a loop-hole is important for tax fairness. It should have been included with appropriate relief for illiquid positions, such as permitting payment of the tax over time or in kind.

5. THE ELIMINATION OF THE SALT DEDUCTIONS. States with high income tax rates are already losing high income taxpayers to no income tax states. Some of them currently face insolvency. The elimination of SALT deductions causes a sudden change that is unfair to people who relied on the SALT deductions and bought homes and created business in high tax states. As discussed above, most, if not all, of the lost revenues from the rate reductions could be recovered by fairly taxing the unrealized gains of the super-rich and by properly taxing carried interests and pass-through entities. Limiting the SALT deductions to an amount such as 5% of taxable income may be needed to offset a portion of the proposed reduced tax revenues, and such limit should be phased in if possible and the middle class exemptions should be enlarged.

6. ENCOURAGE WAGE INCREASES BY OFFERING A FIRST YEAR TAX CREDIT FOR WAGE INCREASES OF LOWER PAID EMPLOYEES. We are permitting corporations to bring back trillions of dollars of funds parked overseas. Some of it will be spent on capital investments, but most of it will be used for dividends and stock buy-backs unless we encourage middle class wage increases. We could generate much higher GDP growth by giving employers a first year tax credit for wage increases to employees except for the top 10% of wage earners. Such credit would be lost if the wage increases were not continued during the next year. Including such a tax credit may prove to be revenue positive over ten years since it will grow the economy and increase individual incomes.

Sincerely,

Stephen Feinberg