It’s said that there are two things you can’t avoid, death and taxes. But while death is the non-negotiable part of life, taxes are constantly subject to negotiation. President Trump and the GOP have proposed and may well pass a sweeping tax revision bill. They are doing so in great haste to prove that in its first year, the Trump administration passed some significant legislation beyond just undoing as much of the Obama administration’s as possible. I’m satisfied he didn’t blow up the world, and I’m hoping that between here and the end of his term that remains his singular achievement.
From where I sit, with regard to the proposed legislation as I understand it (I haven’t read all 500+ pages, either) there are gains and losses among the proposed changes. My gut tells me I will probably end up in the same place. That would not be a surprising outcome and I think it explains many people’s passivity about this bill. Perhaps it’s just cynicism, but my experience suggests that if taxes go down in one place they tend to counterbalance up in another. If Federal taxes actually manage to go down, state and local taxes, and sneaky excise taxes of many varieties, will likely go up. The government is going to get their money, one way or the other! I don’t actually mind paying taxes if I am getting something in return and, we should remind ourselves, in this country you get a heck of a lot even as we complain about not getting enough. But it is annoying to feel like you are paying more than your “fair share”. My question as I consider tax reform is, what’s the goal? If it’s really fairness, there would be a number of big changes made.
At this point in my life, I am a relatively high earner with a respectable net worth but by no means am I among the very wealthy. On one hand, I win with the GOP bill because the proposed federal tax bracket changes would seem to lower my marginal rate, but I lose because (assuming I stay in New York), I’ll give up a big chunk of my property tax deduction and the ability to deduct the very high NY State and local taxes. Very wealthy people usually have their “tax domicile” in a tax free or low tax state and given that they own multiple homes can get away with this without any lifestyle change. In fact, very wealthy people can employ tax specialists to avoid paying taxes altogether, just as our President has bragged about accomplishing. Hey, Donald…can we all pay NO TAXES, too? (He will never show his tax returns, of course; except, perhaps, under subpoena.) It seems fair to eliminate the deduction for state and local income taxes on the basis that it appears to subsidize high tax states at the expense of lower tax ones, but this is not accurate. High tax states are also where the majority of income earners live, well just people in general, and they send more money to the Federal government than they get back in benefits. From a Federal standpoint, even with the deduction, big states subsidize the small ones. Besides, to impose a Federal tax on money we never really had (having given it to the state and local governments) doesn’t seem fair at all.
In fact, fairness would go a step further with a Cost of Living adjustment to the marginal tax rates, but I don’t hear anyone talking about this. We all know that it costs a lot more to live in some places than others. New York, Los Angeles, Miami, Boston, San Francisco among other metro areas can be a multiple of other places in terms of costs across a broad spectrum, not just taxes. As a result, a $100,000 income in Charlotte, for instance, can buy you a comfortable home and a nice lifestyle generally but would have you scraping by in high cost areas, most likely living pay check to pay check. Yet you are taxed by the Federal government just the same as your Carolina cousin. People can, of course, move to a lower cost area but is that the goal of tax policy, to force people to move for affordability? And if everyone did so, would there be jobs waiting for them? As it is, most New York, Chicago, California etc. retirees have to leave the homes they’ve lived in for a lifetime to maintain their lifestyle. Hardly seems fair.
We should scrap the home mortgage interest deduction, which was originally instituted to drive home ownership…and maybe more specifically the home building industry…in the post WWII generation when a growing middle class aspired to own a home and the government saw a social benefit to helping the process along. I imagine it was also put in place to get people used to taking on the big debt of a home loan – “don’t worry, it’s deductible!” It was really a government spending program, a subsidy, to this end. The GI Bill, which my dad took advantage of, was another subsidy spending program that helped educate his generation. Both, it should be said, worked out very well for this country. I am in favor of subsidizing education even though I got no assistance paying for my own children’s college educations and my parents none for mine – however, both my mom and dad benefited from government educational support, both achieved PhDs, and this is exactly why no further subsidy was required for the next two generations! Pretty cool, right? Let’s not forget the benefit of helping other children along, but let’s make sure they apply themselves the way my parents did. Education is the root strength of any person or any society. But is it fair to subsidize the home owner today at the expense of a renter, particularly when more people are either choosing renting as a lifestyle decision or can’t come up with the down payment for a home? And is this deduction fair to people like me who have managed over 30 years or so to pay off our home and thus no longer can take advantage of it; seems another case of “no good deed goes unpunished.” Lower the overall rates for both home owners and renters and let people choose where they want to live. That seems fair to me.
The aspect of our current tax code that I think is perhaps the most unfair is the “marriage penalty”. My wife works because she wants to contribute to our household income and she enjoys working. Because she chose to stay home and raise our kids, she gave up a career opportunity and reentered the workplace only when our kids were in college. She doesn’t earn anywhere near the income level I do, or that she might have had she pursued a career other than motherhood (the hardest job anyone could take and unpaid!), but she is taxed at our combined rate. It’s discouraging to not make a lot of money in spite of working hard in the first place, but then to be taxed as if you do seems crazy. And a single person sitting next to her doing the same job is not subject to the higher “married” tax rate. Not fair at all, and in our two-income society this should be a focus of any plan to “help the middle class”. Or do we want to encourage people to stay unmarried (the tax code does this now and to a serious degree)? I can’t recall Trump or anyone on the GOP talking about this, can you? In fact, I don’t recall any Democrats bringing it up either.
Another unfair tax that hits the middle class hard – well depending on where you live, anyway, since as I noted above a “high” income in one area is a middle-class income in another – is the Alternative Minimum Tax. This clever concept was put in place in 1969, the last time the Jets were in the Super Bowl but I don’t think there’s a connection, when a $200,000 income really made you rich ($200,000 in 1969 is equivalent to $1.3MM today) with the idea that clever tax strategies or non-wage income might get some people out of paying their fair share, so above that threshold you would be subject an additional “minimum” tax . Today that takes thousands of dollars out of the family budgets of many truly middle class families who do not have substantial non-wage income. The AMT, as I understand it, is scheduled to go away under the new tax plan. I say that’s fair. The Obama administration actually took a stab at fairness in this regard in 2012 and indexed the AMT to inflation. My wife and I still pay it, however, on top of the rest of our taxes, and although we’re doing ok we’re far from rich. Not fair!
Is a cut in the marginal corporate tax rate fair? I agree that the United States needs to be as competitive as possible in our “flat world” (hold on, it really is round…that’s just an expression!) Our marginal rate is the highest among major industrialized nations and our global businesses do keep off-shore profits in other countries as a result, investing those profits in those offshore business units rather than bringing it home; which, one can argue, makes our country globally more competitive even if we end up employing Irish or Indian workers as part of the bargain. It is true that some companies game this disparity (as a defense against the high US corporate taxes) so that more costs stay in the US and more profits stay abroad, so that’s a problem that is potentially detrimental to American workers. Keeping in mind that the marginal corporate tax isn’t the one most companies pay, which I understand actually averages less than the 20% proposed by Trump because of various write-offs, I agree that corporate tax should be in line with other similar markets. Whether this will translate to more investment or simply better returns for shareholders is a big open question but at bottom is rightfully the decision of the companies’ management not the government. People have floated the idea that the repatriation of off-shore profits at a new, lower rate should be tied to a domestic reinvestment scheme of some sort but I think this would just be for political optics; money brought back used for “investment” would just offset money earned domestically that wouldn’t go to investment and that would be taxed at the new lower rate. Lower the corporate tax rate, simplify the tax code and let businesses focus more on business. Most business environments are very competitive and smart businesses recognize that people are their most valuable asset. While some significant benefit will flow to ownership much will flow to workers, too, as companies expand.
Finally, there is the death part of taxes. I personally do not think that it is at all fair that there is an estate tax when taxes have been paid, or at least should have been, on this accumulated wealth throughout one’s life. It’s just a second money grab of the same income by the government. Not that I will benefit in any way from an elimination of estate taxes, but they aren’t fair so in my view they should go. Again, in practice my guess is that this is more about political optics than is actually materially relevant to the Federal budget. Smart rich people shelter their estates so that the government doesn’t get at it. If you are a tax lawyer you may not like this provision going away; for the rest of us it won’t matter much.
But, I’m afraid to say, taxes are not really about fairness. Taxes have everything to do with POLITICS and, to a significant degree, social manipulation (sometimes well intended and mostly successful, as with education, and sometimes not) and special interests; special interests are closely related to GRAFT. Wage earners are the easy targets of tax authorities because our incomes are fully exposed. Wealthy people can afford tax strategies to shelter income and many take advantage of capital gains income from investments but also take risks and keep the markets liquid in the process (brokers earning income on money that isn’t their risk capital shouldn’t get a break, however, as they do now!) Mitt Romney famously got himself into trouble, and may have lost the election, saying that 47% of the population would never vote for him because they pay no Federal taxes. He was right and he was wrong. He implied that half the population pays NO taxes; he may not have intended that, but that’s what the Democrats and left leaning press seized on. Everybody pays sales and excise taxes and these taxes (sales, gas, alcohol, cell phone, road tolls etc. etc.) are regressive in that the poor pay them at the same rate as the rich and they add up to a considerable burden. REAL tax reform, in my opinion, would have everything to do with eliminating government waste and excessive benefits for government employees (including overly generous pensions and frequently abused disability coverage – before you blame “poor people” for causing all the waste consider this), closing loop-holes, and investing tax revenue more intelligently to produce better returns, including on infrastructure and education.
Our military industrial complex has spent TRILLIONS in our misguided wars in Iraq and Afghanistan – this is no slight to the heroic men and women who served in those places just to the faulty government logic that put them into harm’s way in wars without end on the basis of fraudulent threats and without a workable plan. A relentless “to the ends of the earth” special operations force to capture or kill the 9/11 perpetrators (as the Israelis did with Nazis) would have saved 100,000s of lives, including thousands of Americans, and those trillions of dollars, and would not have contributed to the further destabilization of very unstable places. It’s hard for me to believe that if we didn’t have all the weaponry ready to go that we’d have jumped into these messes – “the awesome power of the U.S. military” as George W. (or was it Stormin’ Norman?) put it, was just too tempting. Trump suggested in his campaign and early in his administration that, in essence, the answer to military costs is to turn the United States military into a mercenary force, getting other countries to pay for our costs “defending” them. Like his wall, that’s not going to happen and, beyond a legitimate share of NATO costs, it shouldn’t! We took on the burden of being the free world’s police force after WWII and we should maintain that status, but use it far more wisely. Obama may have let Syria cross a red line to his political detriment (he shouldn’t have made the threat in the first place) but he didn’t get us enmeshed unilaterally in another bloody, endless conflict. Trump fired cruise missiles across the red line and no doubt felt good for a few days and that’s all that was accomplished. Trump is now threatening war with nuclear armed North Korea. This is insane! Once again, but on a much bigger scale, Trump is confusing having the big stick with the ability to sensibly use it. If you think 15 years of war in Afghanistan was a mistake (and if you don’t, I have no answer for you), it is child’s play compared to a war on the Korean peninsula today. The costs of such a war could be the end of mankind. No amount of taxes will fix that. American leadership on global issues is needed precisely because no one country can bear all the costs and human risks to maintain order. So far, Trump seems to have alienated just about all our allies while he’s cozied up to our adversaries. Whether he’s done so out of profound ignorance or malfeasance (really the only two explanations) I guess we’ll learn in time, but a proper leadership relationship to the global community that avoids wars while solving problems would undoubtedly be the biggest cost savings of all, fixing all of our other problems with money to spare. That’s what I think anyway, and this is my blog!