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To Reduce Taxes, We Must Abolish Our Tax Breaks
by John Tamny, Toreador Research and Trading (VE Guest Contributor)
After preparing my taxes last year, my accountant noticed my horror and responded that “You’re not playing the game right. Buy a house with a large mortgage, have children, or do something that’s deductible to reduce your tax bill.” The accountant’s words were true, and a shining example of a wealth transfer that’s not spoken of enough.
We hear all the time about how basic income taxes, government spending and inflation are redistributive in nature, but not mentioned enough is how both political parties use the tax code to redistribute wealth to favored constituents or individuals who live as Washington would like them to. Those who don’t play the game are essentially fleeced so that those who do can enjoy a lower tax bill.
So while it’s fair to assume that the recommendations of President Obama’s bipartisan deficit commission will be ignored in the same way that past commissions have been, one can hold out hope that some of their ideas will be voted on. Specifically, there’s talk of abolishing some of the deductions that ensure a high nominal tax rate; one that those in the game can reduce if they do as Washington desires.
This piece should in no way be construed as something which supports higher taxes. Quite the opposite. Instead, it seeks an end to high penalties placed on work that are only high thanks to both parties using a complicated tax code to ensure behavioral outcomes among the citizenry that wouldn’t otherwise reveal themselves.
By now most are likely aware of the “good” behavior that Congress rewards through deductions foisted on our nation’s “miscreants.” On its own, the deficit commission has happily listed mortgage interest, child tax credits and health insurance deductions as tax giveaways that should possibly go. Thank goodness.
Indeed, as financial historian Niall Ferguson observed in his book The Ascent Of Money, English speaking peoples already have an obsession with property, with or without tax breaks. In that case, why should those of us who choose not to own houses subsidize those who do? That the mortgage interest deduction is landlocking individuals at a time when they need to be highly mobile in pursuit of work is yet another reason to abolish a tax-code provision that the property-less must cover.
Child-rearing and conception are highly personal and emotional decisions, and ones that should in no way be driven by tax breaks. If couples want to have kids they should by all means do so, but not with the entitled view that others should subsidize their lifestyle choices.
Considering healthcare, politicians on both sides of the aisle remarkably decry nosebleed prices all the while allowing businesses to cover insurance costs with pretax dollars. Not acknowledged here is that this tax subsidy makes businesses marginally less caring about the price of insuring their employees, and this subsidy means individuals not on a company plan must suffer higher health costs driven up by this tax benefit.
By virtue of it being charity, the latter presumes the funding of dependency versus profit-oriented investment that leads to company formation and job creation. But investment success is taxed, while charitable donations are tax deductible. That the ability to give to charities speaks to disposable income to varying degrees means that those without means subsidize the underlying vanity that often causes those with means to give to begin with.
Worse, but not surprising, donations to 501(c)3 political causes are tax deductible. Basically those with a policy bent can support it, and their generosity toward a cause that will presumably enhance their wellbeing will be paid for by those who are apolitical, disagree, or both.
California and New York are generally thought to be desirable locales as evidenced by their populations, and as such, the tax price charged to live in both is quite high. But thanks to a tax code that allows for the deduction of state taxes levied against the federal bill, those in low tax states are forced to subsidize the living desires of the individuals who choose to live in high tax states.
Municipal bonds are deductible on a federal and state basis, and they’re also a way for the rich to secure predictable income streams that greedy governments cannot take. While it’s essential for economic growth that the vital few in society to keep as much of their income as possible, in this case tax favoritism subsidizes what is frequently government waste, not to mention that those with means receive huge tax breaks for supporting the aforementioned waste.
Big-government supporters on the left seek loan forgiveness for individuals with federally-subsidized education debt who choose to work for the government. On the right there’s growing support for tax deductions against private school tuition. Neither side acknowledges the greater truth that one reason education is so expensive has to do with both sides having turned it into a positive right that will be paid for by others.
On the left tax deductions are sought for individuals who buy hybrid cars, and for businesses that provide “green” energy. On the right, despite the basic truth that successful businesses do best when they produce with the least amount of employees, there’s growing support for tax deductions being handed to businesses that “hire” people.
So while most of us would prefer to have the fruits of our labor and productive investment penalized at lower rates, there’s a smaller number actually agitating for the abolishment of myriad tax breaks which at their core control our behavior, and ensure higher rates in the bargain. In that case, it’s time to simplify the tax code.
Indeed, if we want the government to remove its greedy hands from our pockets, we must stop reaching into the pockets of our fellow citizens in order to reduce our tax bills. The Obama deficit commission seems to be reaching a similar conclusion, and if so, this is something both political sides should embrace. Each seeks benefits for preferred constituents, investment styles and lifestyle choices, and it’s time for that to cease.
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About John Tamny:
Mr. Tamny is a senior economic advisor to Toreador Research & Trading, columnist for Forbes and editor of RealClearMarkets.com. Mr. Tamny frequently writes about the securities markets, along with tax, trade and monetary policy issues that impact those markets for a variety of publications including the Wall Street Journal, National Review and the Washington Times. He’s also a frequent guest on CNBC’s Kudlow & Co. along with the Fox Business Channe
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Taxing anything more than originally decided in the constitution equals half-ass socialism. The current system means some aren't taxed at all and then receive benefits for free, while others are taxed and then have to pay for the services as well.
Example: we pay for welfare mothers to send their children to preschool and then we also pay for our own children to go to preschool.
The problem is there are families making enough to have to pay taxes but not quite enough to send their own children. Those people always get fed up and say why bother, I'll get as much if not more if I quit working.
" Considering health care, politicians on both sides of the aisle remarkably decry nosebleed prices"
Legislators have a great health care plan that we pay for. Why worry?
Remarkable? Health insurers and medical malpractice insurers have enjoyed an exemption from antitrust prosecution since 1945. That fact was barely debated (publicly) during the months of wrangling leading up to "the historic health care vote"
This "exemption" is the single reason why costs have spiraled upward at a pace much faster than just about any other service you can think of.
Tax code is complicated because it's an ever-evolving history book of what behavior some group of politicians wanted to browbeat Americans into following.
A flat tax takes away the power of some asshole Congressman to tell you how you should live. Ergo, flat tax discussions are a flaming waste of time. The game won't be changed--just learn to play it.
Excise taxes and excise taxes only. end of discussion.
tax breaks should be abolished and taxes reduced....but let us remember that the plutocrats (and honest wealthy) benefit the most from government and should bear a larger part of its burden....
michael hudson speaks prudently about taxes and the rentier class....
and when taxes are reduced, debt and spending should fall even more.....
there is no reason in god's green earth why government should be warping the market with tax preferences....
fuck the american politburo...the problem with socialism is that you soon run out of other people's money....although the plutocrat's obscene wealth could use a little taxing...
Yes, this is my obligatory comment on tax-related posts.
In my research, the only tax that does not discriminate is a user fee on money.
IF, all other taxes were repealed (absolutely important), then a fee at a basis-point scale, 15-25 or so could be implemented.
Tax filing, gone. Social engineering via tax code, gone. Every exemption, gone. There must be NO discrimination in this plan. No non-profit exemptions. Nothing.
It is difficult to determine the exact tax base, but going this route breaks us out of the stuffy confines of GDP. We don't want to tax profits and wages and capital gains. . .taxes are PUNISHMENT and THEFT and TYRANNY.
We want to be encouraging profits and wage-earning and capital gains, not punishing it.
We should roll the IRS into the SEC and like commissions, so they can get busy with some investigations, prosecutions and the like.
Burn the IRS code in its entirety. Take the controls out of the control-freaks in governments' hands, and export the social engineers to countries they might be better appreciated. North Korea comes to mind.
What about all the non-profit nonsense?
Artists getting paid to paint gigantic Obamas on the side of buildings that reminded my teen of pictures she seen painted of Sadam in Iraq at the start of the war?
My family would live better if we turned into a 501c and gave our services to the "poor". But since when did poor people wear hundred dollar shoes, play xbox, own smart phones, flat screens and gucci handbag/sunglasses? Not to mention the expensive addictions that seem to come with trailer/project lifestyles.
I agree with flat tax. Nothings ever going to work until people stop living off of others. Its not PC to say this but welfare mothers are being rewarded for reproducing and spreading poor standards. Intelligent producers are having less and less offspring in order to afford to live and work. Half of America gets childcare free and the other half pays double to make up for it. We are diluting the gene pool. Maybe thats the plan, dependants will be easier to depopulate than the self reliant.
Tax church property.
Valid. If they can't provide a decent amount of public relief like shelter/food/cothing for strangers needs then they should be. It should be up to local taxpayers if they are willing to pick up the slack for each individual entity that will take up space without having to pay. The services had better be offered to all kinds and colors too! Some kind of CAP on how much money the church leaders can recieve in comparison to how much they give away is probably in order too!
Amen.
The AMT makes it difficult for us in the meat area of the sandwich to "play the game right". Children are not worth as much as they once were and deductions are not fully allowed.
Other than that, whether you pay tax on interest you receive or receive a deduction for interest paid on a mortgage only matters in the interest rate. The benefit comes from the higher interest rate.
I am told that the trick is have wealth increase pre-tax and never pay tax on it while getting the benefit of the money.... of so the beneficiaries of trusts tell me. Would be nice.
The mortgage tax deduction and FHA support does not enable more people to buy homes. It means the price of the average home goes up and proplr just end up deeper in debt. What would happen if the Feds decided to give everyone in the United States $500,000 to buy a home. Easy, all homes in the U.S. would go up in price by that amount. No gain. Get the government out of our economic decisions.
weeellll LOOKEEE there dear! fergners a comin' to town!
My accountant's advice was "if they ever catch up to you, just plead insanity"!
Great advice! I'll remember that line....it likely will not be far from the truth.
I do like my truck insurance company agent. I bought a work truck this year- a 3/4T dodge 4X4 with all the trims- and was aghast at the insurance hike.
I stopped in to the agent's office to whine and she began going thru a list of asks to see if she could lower the rate. One question was "Do you have a security system?" I said nothing that was above and beyond factory specs but then looked out the window and saw the 8 year old 80 pound Airedale was perched up on the siderails of the truck checking out the town sights. So I pointed out the window and said "Heck yes I have a security-system...no one is going past Airedale Jake to break into my rig". She looked out the window, burst into laughter at the sight of the wooly bearded canine craning his neck as an older woman walked her beagle past his perch, and gave me the extra $75 buckaroo discount for high class security systems. Now if I can just figure a way to get my tax accountant comfy with writing off my 4 legged critters that have human names....
What would wake up the lethargic Americans that directly benefit from this system woudl be a flat tax. All of a sudden liberals would realize the cost of "saving one child" is the starvation of dozens of them.
Never going to happen, we don't want no reality here.
The only thing I disagree with is your statement of "pretax" dollars for employer sponsered insurance. While it maybe a bonus for the big, meganationals, and in your mind a "subsidy" for business, for us little guys the subsidy of the government union benefits and huge companies has driven our costs through the roof. Our cost has more than increased 200% since 2004, throw a 38% tax rate on that and say "bye-bye" to small businesses ever paying for health insurance again. We're already being driven out of business by Asia, local tax regulators and OSHA/EPA, what the hell, America obviously doesn't need small biz anymore.
Good luck with that.
so are renters going to penny up on school tax??
this is so one-sided bunker talk
See #699487 above.
People are missing this for the same reason some miss the error in their desire to raise taxes on corporations. In the end, who really pays that tax? The corporation's customers. Here, the customer is the renter.
Exactly. My only question is whats the difference between corporations versus small business owners? Is it volume? Isn't all self sustaining business good business? And relatively speaking large and small business' take care of the same ratio of end-payers? The only difference I can think of is campaign contributions!
Just one point of interest on the above quote: Homeowners (and rental property owners) pay taxes which support the schools that renter's kids attend. You could say that the rental owner passes on real estate taxes but it's still not a direct cost to the renter that he recognizes as such. So, let's not get all uppity about real estate taxes being a boon to homeowners.
So you're saying the $1900 written off by a guy each month with a $1M 6.5% jumbo isn't better than the $0 written off by the renter? (Hint: it's more than the 1-2% he pays the state)
And don't you deduct those prop taxes on your Fed return?
Unless the property owner is losing money on the rental property (an unlikely scenario), it is actually the renter through rents who is paying the property taxes for the owner who then receives the tax deduction for the tax the renter paid. The renter is subsidising his own kids education. The property owner is getting the free ride.
A good deal is when both sides are happy.
There is benefit for the owner and the renter. I lease the property we live at and run our business from because when my husband and I quit our jobs to start this business were worried we would over extend ourselves and be stuck if things didn't work out. We were looking at properties 4x the cost of what we pay now back in '06 and could easily afford it.... BACK THEN. Had we risked it we would be in foreclosure right now. Where's my reward for NOT doing what everyone else did? That's a break that needs added in if all the others aren't going away.
Anyway the only guilt I have of renting, not owning, is when it comes time to vote on levys that would increase the owners taxes. The property owner lives out of town but I think he should be the one voting on those issues - not me.
The problem arises from homeowners who do NOT have kids in schools. Now, who is subsidizing whom? And don't give me that societal benefit crap.
This is why you need a head tax for local taxes. Since schools take the lion's share of taxes, those with more children pay more. As you get older (retire) and your children leave, your taxes drop since you are no longer using the school system. That way you do not get hammered for living in the same house for years that happened to appreciate (recent history excluded).
Property Value. Good schools = families with money = nice houses = taxes collected = well kept community = suburbs
There you go! Beat me to it.
Not really. The rental property owner has to live somewhere as well. He's paying property tax on his own home. The rental property owner is perhaps breaking even on the rent portion that is a tax pass-through -- perhaps not.
ha - quick racoon you are.. beat me to it
Neither income taxes nor property taxes are consistent with ideas of liberty or property-- if the State gets paid before you do for your labor, you are a slave to the state; similarly, if you have to pay taxes on your property, that means that the State has the ultimate claim on the property, which makes them the true owner.
Direct taxes (i.e. income tax and property tax) were forbidden in the Constitution for this reason; only excise taxes were permitted, before the abomination known as the 16th amendment was passed. Income taxes and property taxes shouldn't be reduced, or changed; they MUST be eliminated, and the revenue-raising power of the state MUST be restricted to excise taxes if we are to see a return of Freedom in our time.
This.
Never happen, unfortunately.
let's DO IT!
BINGO!!!! We have a winner!!! this is exactly right! end of discussion end of debate!
The flat tax was analyzed by DRI-McGraw Hill in the mid 1990s (after the Gingrich revolution) for the purpose of seeing what it would do to capital turnover and they noticed some odd behavior in the housing stock. After the Washington Post reported on the prospective loss of the mortgage interest deduction, with quotes from these consultants, the flat tax was never again seriously discussed in DC despite reports from the Heritage Foundation and others challenging the DRI work.
The article makes a number of good points. But contains one egregious error.
The fact that a renter pays more income taxes than a homeowner does not subsidize the *homeowner*. It subsidizes whatever it is that government is subsidizing with tax dollars: the non-productive, the unions, public makework projects, foreign aid to countries who hate us, etc.
"The vital few"- are those the ones with their boots on our neck? F--k you and your vital few.
Except for your bootlicking tendencies,I do tend to agree with you on this, though.
Abolish all taxes. We have QE-MCMLXVII.
exactly.
Has anybody ever analyzed what the real tax rate would be if there were absolutely no deductions and everybody payed a flat tax rate? This also assumes fiscal responsibility by all government agencies, which I realize is an oxymoron.
"absolutely no deductions"
Nice slogan, but kind of simplistic. Are you arguing for a gross receipts tax? One goes from gross receipts to income by subtracting things that are the cost of doing business, and these things are called 'deductions'. So you'd have to be assuming that there are on individuals with business expenses to be deducted.
Or, if business deductions are only for business, then everybody who wants to sell on Ebay needs to form an S-corp (or llc, or ...). That makes this just another full-employment act for lawyers and accountants.
Just repeal the 16th amendment. There is no way to jigger the income tax to be 'fair' without deductions, and there's no way to keep the laws about deductions sane as long as the problem involves money and politicians.
FLAT TAX.... BITCHES
Not Junk. True and entertaining.
If you're going to junk it - have the fortitude to comment on why.
Junked?!?!
A flat tax makes perfect sense. It slams shut the loopholes and exempts no one.
[1] All tax breaks for any group must be paid-for by the other taxpayers...unless the gov't spends less than its income.
[2]The rich, who are immune to any "crush" of taxes on their fine-dining, decent housing, lack of paycheck or access to healthcare, have no incentive to correct unfair burdens on those who must struggle to eat, have a paycheck.
And it is the rich who write the laws...and who are immune to any fair application.
As for a simple flat-tax or VAT equally applied without exception, where will all the unemployed tax-industry accountants, etc and IRS employees find productive work?
Justice can be too horrible, even on leeches, tho they may be protected under Endangered Species laws.
I didn't junk this, but I do think there are a few people who automatically "Junk" anything that falls along the lines of ____________ BITCHES!! (or BITCHZ! or whatever)
But yeah: Flat Tax, bastards!