I have a friend who I will call Dr. X, or DX for short.? He is a friend of mine who is involved in some but not all things that I am involved in.? We talked recently about taxes, and this is my stylized version of the discussion, because I did not tape it.
Me: So, DX, how did you make out this tax season?
DX: What do you think my federal tax rate was?
Me: Uh, 25%.? You’re a successful guy.
DX: Try again. Lower.
Me: 15%?
DX: Lower.
Me: 10%?
DX: I said LOWER.
Me: Uh, yeah… 3%?
DX: It’s lower.
Me: 1%?
DX: I’m sorry, LO-wer.
Me: O%, you paid nothing?
DX: I’m SORRY, lower.
Me: Wait, the government paid you?
DX: That’s one way to put it.
Me: Then I am clueless.? I have no idea what to do with someone like you who earns a lot, but pays no taxes.
DX: Negative 3%.
Me: How does that happen?? Why aren’t you caught by the AMT?
DX: Many deductions, and many children, with some in college, like you my friend.? Aside from that there is the swiss-cheese post-AMT that wipes out taxes.
Me: Wow.? Why would the government allow this to happen?
DX: Beats me, but I am happy to be wealthy and pay no federal taxes.? That’s been largely true for the prior two years as well.? It genuinely helps if most of your income is coming from sources of investments, and businesses that benefit from certain tax credits.
Me: This is ridiculous.? Why should you get off paying no taxes when our government is running huge deficits?
DX: That’s the fault of the government favoring certain actions.? As long as the tax code is a policy tool, there will be some that take advantage of it.? As for me, I made few active actions to take advantage of it, but also, the way that I do things paid off because I have a certain configuration of income that is presently favored, and a family structure and deductions that are favored.? It may not always be that way — look at the code from the Depression through the 70s; it would be the opposite for me.
Something in-between the two would probably be optimal, including taxing all income at the same rate, and limiting deductions severely.? Stop the games, and fairness becomes a? possibility.? Otherwise, you will have some well-off that pay virtually nothing, like me for the past three years.
Me: Indeed, DX.? You are the man, and have triumphed over the federal government. But what are the common men supposed to do?
DX: Do what I do, or, pay taxes.
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Dr. X is a bit of a “piece of work,” but he’s no Leona Helmsley.? (“We don’t pay taxes. Only the little people pay taxes.”)? Much of the reason for his low taxes stems from charitable giving, including donating appreciated stock.
But this helps to point out my point for what I call “true tax reform,” which I don’t think either side in DC would favor today.? Here’s the simple version of it:
- Flatten out the tax rates, and apply the rates uniformly to all income.
- Eliminate all tax preferences, and eliminate the estate tax.? Get people focused on growing the economy rather than employing clever people to eliminate taxation.
- Tax all income, including capital gains/losses, whether realized or not.? For illiquid investments, where there are no prices, assume a 12% return on equity for taxation purposes, and true it up when the investment is sold.? In other words, tax everyone as if they were traders, and develop fair market value accounting to do this.
- Tax corporations on GAAP income, which solves the problem on overseas subsidiaries.? If they act like private equity firms, then disallow the deduction for interest, or assume a 12% return on equity for taxation purposes.
- Eliminate all ability to defer taxation.? No more IRAs, or anything like them.? Tax the pension earnings inside corporations, etc.
My main point here is that the discussion on taxation should shift from rates to the definition of income.? You can tax wealthy people as much as you like, but if the definition of income is loose, you can bet that the wealthy will take advantage of it in ways that those less well-off can’t.
My proposal will make the clever wealthy pay.? It will make the poor pay.? We all will pay.? And that is fair.? Even Dr. X would agree with that.? And it will lead to a growing economy, because we will release many clever people who spent time trying to reduce taxes into trying to be productive.
DM: “Why should you get off paying no taxes when our government is running huge deficits?”
I am sorry, but the government’s inability to control its spending is a stupid reason why anyone (rich or poor) should pay more taxes.
We all want certain government services, and we can’t expect to get something for nothing. That is why we pay taxes. All the other reasons are lies.
The government’s “need” to waste money on a bloated overpaid bureaucracy, pensions for bureaucrats after only 20 years when normal people don’t get any pension ever, bridges to nowhere, wars for reasons no one can articulate — those are not reasons to pay taxes at all
“I am sorry, but the government?s inability to control its spending is a stupid reason why anyone (rich or poor) should pay more taxes.”
Actually, it is an incredibly good reason for why people should pay more taxes. If their pay-checks directly reflect the costs of the services they demand from government, it is likely that they will not demand so many government services. As it stands today, borrowing gives the appearance that these services are free (even though the reality is that young people in the future will have to pay for these services in some way).
This also works with war. Do you think that people would support three concurrent wars if funding had to come out of their pockets?
I don’t think the voters / taxpayers support three wars now, even if they are “free” / deferred cost. The reasons given for all three were never really well articulated in the first place.
We sure as hell did not support ObamaCare. Even Democrat pollsters showed that 63% of the public was against ObamaCare (that doesn’t mean they were against any health reform, just against that plan). The corrupt Congress jammed it through in defiance of public opinion.
Forcing us to pay taxes for a government that does not represent us is unjust and un-American. You may recall that “No taxation without representation” was a rallying cry for the US Revolution.
Today, we have two hopelessly corrupt political parties that are both bought and paid for by special interest groups. Recent “elections” have charitably been a decision between the lesser of two evils
Congress must be forced to obey the people before we allow them to increase taxes in any way.
Obamacare does two great things: gets rid of preexisting conditions, and prevents a health insurer from terminating you coverage because you may have come down with a chronic condition. Why it needed 4000 pages to do these two things is beyond me. But to me it’s a small price to pay and deserves any efforts I make to try and defend it.
That the two parties are corrupt isn’t an excuse to trash the government we have. I don’t see any significant amount of people supporting any of the existing small parties or creating a new party to challenge the Republicans or Democrats. And however limited my say is in the governments that govern me (county, state, & federal) I wouldn’t want to give up that say.
I think our current problem is that we have large government benefits with small government taxes and the two don’t go together. We need to either increase taxes or shrink benefits.
@DM:
“Eliminate all ability to defer taxation. No more IRAs, or anything like them. Tax the pension earnings inside corporations, etc.”
I would generally support a simplified tax system, as you have suggested above. However, I am not entirely concerned about special treatment of retirement income (as it is structured today) for several reasons:
1. Contributions to these special tax vehicles are small and probably don’t represent a significant source of lost revenue–expecially in the case of tax deferred vehicles (like and IRA) where only the deferral value is lost as revenue.
2. Promoting saving is similar to promoting self-sufficiency. If there are no incentives for saving (that are realizable immediately), people will not save in aggregate. This creates a need for government social safety nets (which I generally loathe and suspect you do to some degree).
I think that the tax code could be best compromised like this:
1. No deductions at all for anything (especially interest, which subsidizes debt and thus increases volatility in the financial system).
2. Create a cost of living index segregated by region. Establish a threshold for household income, deflated by regional indexes, below which no taxes are paid at the Federal level (in order to maintain a greater degree of social order among the very poor).
3. No distinct classes of income–capital gains=interest=regular income. Taxes are levied at a flat rate.
There is an even simpler plan.
Roll back **ALL** spending to 2000 (when we supposedly had a surplus if you didn’t count social security / medicare).
No member of Congress, from any state, will be allowed to sit unless they accept term limits. Government was never supposed to be a career.
Spending increases are restricted to GDP growth. Any increase beyond that limit causes automatic government layoffs. You can’t spend money you don’t have, period.
Any military engagement, declared or not, results in automatic tax increases for EVERYONE — rich, poor and tax dodging corporations alike. No exceptions. Again, if it is not important enough to pay taxes, then the war is not important.
All spending programs will have sunset clauses, no exceptions.
Programs that go over budget will result in government bureaucrats not getting any cost of living increase and automatic layoffs. Welcome to the real world public servants!!!
Whoops… forgot the last item.
Lobbying members of Congress will be considered prima facie an act of bribery. Both the lobbyist and the Congress member will face mandatory prison time and be listed as felons on release. If you want to exercise your freedom of speech, you must do so in full view of the public and under the same conditions as the public
99% of “we the people” can not get private face time with Congress — the lobbyists should not have special access.
Re taxes – The simplest change would be to put a cap on all deductions except medical, say at $20k. Until we have socialized medicine we should not have a cap on medical. And change capital gains, dividend, & interest income so that the 1st $20k is tax free and the rest is treated as ordinary earned income. This doesn’t simplify taxes, but would shift more taxes away from the poor and lower middle class.
Re term limits – I think better than term limits would be to forbid any currently elected official to be in an election. In other words noone could serve two consecutive terms in office and no elected official would be campaigning on taxpayer dollars.
Re Greg’s automatic war tax – This one I like as is.