Tax reform has been in the forefront recently. With Obama’s “Tax the Rich” speech earlier this week and John Boehner’s comments last week on long-term tax reform, I am starting to worry that my Small Business Tax Guide that I am writing will be outdated upon release. Although, even though it makes more work for me, I am actually in full support of some major tax reform…just not the kind Obama or Boehner are advocating.
It is no wonder John Stewart is so popular these days – both parties continually provide great content with the endless circus of playing politics and getting nothing substantial done. Boehner and the Republicans are overly-protective of those over $250k in adjusted gross income and their sacred tax cuts, while Obama and the Dems are overly-protective those under $250k in adjusted gross income and too afraid they will lose the middle class votes they so desperately need. It is all a circus and much of it could have been avoided had they all just made a hard decision back in December 2010.
The Bush tax cuts were all set to expire as of 12/31/10, which would have reverted much of the tax code back to 2001 and raised taxes for everyone by at least 3% or more. It should have been an easy political move for both parties as “technically” they would not have been “raising taxes”, and they could have blamed it on the recession. Yes, it could have brought upon the double-dip sooner, but we might have averted the downgrade and it would have been a fair solution as everyone would be paying more to help with the deficit. What did they do? They extended all the existing tax cuts and actually added new cuts. Biggest mistake ever…
Now we are dealing with an even larger deficit, a downgrade, a double-dip, and all the while our politicians are playing politics with the usual, tired arguments from both sides. This debate over what is “fair” in taxation drives me crazy. You cannot have parity in a tax system that has been so infused with social policy. Until the Internal Revenue Code is stripped of all these deductions and credits created by Congress as another means to affect social policy, we will never have parity.
The Washington Post had an excellent article on the glut of deductions and credits that have been given to the middle class over the years, which you never hear mention of from Obama or anyone in the middle or lower class. These deductions and credits have become entitlements for us over the years, and they also create a large amount of tax inequality among taxpayers. Now, I myself am a benefactor of many of these deductions; however, even though I would stand to lose tax benefits, I think it is only fair to discuss middle class loopholes if you are going go on about the rich and their loopholes. Plus, I am willing to pay more tax if there was more parity in our tax system.
While I appreciate my child tax credit, why should taxes be lower for population contributors than non-contributors? Do we really need to be encouraging people to have children these days? I was unaware our population was shrinking so much that such an expensive tax subsidy was needed? Wow, I guess I need keep up on current events.
Then there is the mortgage interest deduction (yeah, that worked out really nice!). Sure, homeownership is important, but at what price tag? Plus, is it fair that responsible renters pay a higher tax rate than homebuyers who foolishly bought more than they could afford? Lastly, has anyone studied the benefits of this tax break to see if we are even getting any benefits? By the way, studies by organizations ending in “Mac” or “Mae” don’t count.
Employer paid health insurance premiums not being taxable as wages to the employee? This made sense back in the 70’s when premiums were fairly immaterial in amount. Now premiums are a very material cost, which translates to a large deduction for businesses that is not taxable income to the employees. Usually, when there is a deduction somewhere, you have corresponding income on the other side of the transaction – it is a basic principle. This creates mass tax inequality between those working for large companies or governmental agencies and those working for small businesses. A phased in change to this rule could greatly help the deficit and bring about tax equality.
Want a few more? Sure…
Non-cash charitable contributions only lead to abuse and waste tax preparer and IRS auditor time. Would Goodwill and other charitable organizations really get less if we ended this deduction? I seriously doubt it. Plus, is it fair to non-itemizer who cannot claim this deduction?
Earned income credit…don’t even get me started. Get it out of the tax code and call it what it is – welfare and income assistance. EIC only complicates returns for our poor citizens. Their tax returns should be easy to prepare without assistance. H&R Block must have a good group of lobbyists.
The whole idea of injecting social policy into the tax system is really ridiculous. Considering our current credits and deductions, I think Congress should consider the following:
- “I didn’t blow money on a flat screen I could not afford” tax credit,
- “I don’t drink light beer” tax deduction, and the honorable
- “I didn’t walk away from my upside-down house and actually kept making payments even though I could have walked away” tax credit.
Point is – if we are going to talk tax inequality, all adjusted gross income levels need to be examined and everyone should have to pay to fix this mess. Yes, we have bad income inequality right now, but that is the result of some macro issues we have little control over. For example, technology has been quietly eliminating jobs for years and the gained efficiency has created more and more profit for owners, but taxing the rich and redistributing their income is not going to solve anything in the long-term. This is part of our ever evolving economy, and I do not think there is any one quick solution that will fix it all. Politicians shouldn’t act like they hold the answer, and at the same time, we should not be foolish enough to buy into their politics.
Ok, back to writing my book…
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