Eliminating A Tax Break That Only Benefits The Rich

The class warfare that surrounds tax reform is bothersome. It’s not constructive and most of the information is false. The reason some tax cuts appear to benefit the rich is that the rich pay 80 percent of the taxes. They are the ones who need tax breaks. However, there is one tax break that generally impacts the rich that may disappear if the tax code is truly reformed.

Yesterday The Daily Signal posted an article about the elimination of the deduction for state and local taxes. The article explains how this deduction impacts the residents of California:

Yes, California has high state income taxes. For instance, the rate for millionaires is 13.3 percent. It’s not insanely lower for the middle class, either: A married couple making $103,000 or more would pay a 9.3 percent rate, and while $103,000 might go far in plenty of areas in the United States, California’s outrageously high housing prices ensure that such a couple wouldn’t have an easy time paying all the bills.

But those Hollywood liberals raking in the big bucks and paying the 13.3 percent rate? Well, they’re not actually paying the 13.3 percent rate, thanks to our current U.S. tax code, which allows deduction for state and local taxes.

Let me explain. Currently, if anyone files taxes with itemized deductions, he can deduct his state and local taxes. In other words, if Joe Random makes $250,000 a year, and pays $26,000 in state and local taxes, and then donates an additional $14,000 to charity annually, he could deduct $40,000 from his salary—and pay federal taxes on only $210,000.

This deduction has big benefits for wealthy Californians. According to The Heritage Foundation’s research, that deduction means the effective tax rate for rich lefties in the Golden State is 8 percent, not 13.3 percent.

Essentially the rest of the country is subsidizing California’s high tax burden.

The article further reports:

Furthermore, for individuals pulling in over $200,000 a year, the average benefit of the state and local tax deduction is $6,296, according to Heritage research. For those making in the range of $40,000 to $50,000, that benefit shrinks to $134.

And it’s not just California whose blue-state government is currently raking in the perks thanks to the tax code.

“Just seven states receive 53 percent of the value of the state and local tax deduction: California, New York, New Jersey, Illinois, Massachusetts, Maryland, and Connecticut,” write Rachel Greszler, Kevin D. Dayaratna, and Michael Sargent in their upcoming report for The Heritage Foundation.

Why should Americans from red states and lower-tax blue states be subsidizing other states? If states like California want to embrace big government, that’s fine—but they should also have to finance it themselves, not ask for a handout from the rest of the country.

Ending the deduction for state taxes would help make the income tax more equitable for everyone. There will be loud cries from the states it will impact, but it still needs to be done. Hopefully the Republicans will have the courage to do it.

Ignoring Facts For Political Purposes

President Trump has introduced his tax reform plan. It’s not a truly conservative plan, but it is a plan that will ease the tax burden of many Americans. It will also eliminate the ‘death tax,’ which has resulted in the sale of many family farms and small family businesses. The Democrats are making their usual noises–tax cuts for the rich, etc., choosing to ignore the fact that the top 10 percent of earners pay 80 percent of federal income taxes. Obviously, if that is the case, those are the people who are going to benefit from lower taxes. Actually, President Trump’s tax cuts are aimed more at the middle class and at corporations, two groups that have been negatively impacted by the current tax code. As it stands now, the tax code is a recognition of the hard work of lobbyists. That needs to change.

One of the needed changes that will get the most opposition is the elimination of the deduction for state taxes. Under the present tax code, states with low taxes are currently subsidizing states with high taxes. Congressmen from New York, California, Illinois, Connecticut, Massachusetts, and other high-tax states love this. The residents of these states grumble less when their taxes go up because they can deduct them on their federal income taxes. You may not hear this discussed a lot in the debate on the tax plan, but it is a major issue. Expect a lot of opposition from Congressmen from high-tax states. Those states may be forced to become more fiscally responsible if this change is made.

Yesterday The New York Post posted an article listing some of the lies we can expect to hear from those opposed to the proposed tax reform. The article also includes some of the past history of the impact of lowering taxes.

The article reports:

In 1962, President John F. Kennedy slashed investment taxes. After his assassination, his broader tax cuts were enacted, producing eight years of soaring growth — 5 percent a year.

In the 1980s, President Ronald Reagan slashed rates again, giving the nation nearly a decade of robust 3.8 percent growth.

In 2003, George W. Bush’s tax cut boosted the economy, producing 4 percent growth for six straight quarters.

Compare this vigorous growth with President Barack Obama’s eight years of stagnation. Obama’s economy lumbered along at around 2 percent growth because high taxes and over-regulation discouraged companies from investing. Democrats still insist that 2 percent growth is the new normal. Nonsense. Roll back regulations and taxes, and the economy will surge.

So why would anyone oppose something that would grow the economy and increase the spending power of working Americans. There are a few reasons. There are people who simply refuse to learn the lessons of history–the simply do not understand the economics of lowering taxes. There are people who oppose the plan for political reasons–Democrats have made it clear that they have no intention of cooperating with anything President Trump proposes. And last of all, there are establishment Republicans who are determined to protect the status quo. Expect a lot of political posturing in the near future about the tax reform. The thing to remember here is that Washington does not need more of our money to spend–Washington needs to learn how to be responsible with the taxpayers’ money.

An Unbelievable Temper Tantrum

America needs tax reform. Our current tax system is a tribute to lobbyists and special interests in Washington. It is not pro-growth and does not encourage Americans to save and plan for their futures. There is pretty much universal agreement that the tax code needs to be reformed. But the process of reform has run up against a truism stated by Harry S. Truman, “It is amazing what you can accomplish if you do not care who gets the credit.” The plan to reform the tax code has encountered opposition based not on its worth, but on politics–the Democrats don’t want President Trump to achieve any success, and also, part of the Democrats success as a party is in class warfare. Cleaning up the tax code might have an impact on those Democratic voters that receive more money from the government than they contribute. That is the actual reason the Democrats are going to fight any changes in the tax code. Now for the reason they will give (because it works politically).

From a Thursday editorial in the Investor’s Business Daily:

Taxes: Democrats say they won’t work with President Trump on tax reform unless he first releases his tax returns. This has to be the lamest excuse for not fixing the tax code we’ve ever heard.

Senate Minority Leader Chuck Schumer said this week that “if he doesn’t release his returns, it is going to make it much more difficult to get tax reform done.”

Democrats say that seeing Trump’s tax returns is critical to tax reform, because otherwise how would anyone know if changes to the tax code will benefit Trump.

As Schumer put it, “releasing his own full tax returns (would) erase any doubt of where his priorities lie.”

Not coincidentally, this argument has started popping up in newspaper opinion pages at the same time.

USA Today posted an op-ed on Saturday by the Citizens for Responsibility and Ethics in Washington, arguing that “before this administration even thinks of proposing any changes to the tax code, we should see what tax code provisions the president himself has been and is taking advantage of, and how much tax he has paid in the past few years.”

Some of President Trump’s tax returns have already been released. Also, we just finished eight years of a President who never released his college transcripts, or an explanation of why he had a Connecticut Social Security Number when he has never lived in Connecticut. The fuss over President Trump’s tax returns is simply a political red herring.

The article concludes:

Besides, the entire point of doing tax reform is to broaden the base and radically simplify the tax code — taking away the loopholes and other tax gimmicks that Democrats are sure Trump has used or will use, in exchange for lower and flatter tax rates.

The tax reform plan that Congress comes up with will have to be judged on those merits, not on how it might, possibly, conceivably affect one person many years from now.

Simplifying the code in this way will also make seeing a politicians’ tax returns — Trump’s or anyone else’s — even less important, since tax liability will be a straightforward calculation and there will be far fewer ways to dodge the tax man.

The real story here isn’t Trump’s tax returns. It’s the fact that Democrats don’t want to engage on tax reform because their highly agitated liberal base doesn’t want them to lift a finger to work with Trump on any issue.

Tax reform is vital to restoring economic growth and vitality. No one denies that. If tax reform fails — and the economy suffers as a result — it won’t be Trump’s tax returns that are to blame. It will be shortsighted Democratic lawmakers kowtowing to the extremists in their party.

The Democratic Party using the tax return issue to block tax reform is another reason that the Party is rapidly losing voters. As someone who feels that the Democratic Party has become a party that seeks to divide Americans and create divisions among us, I am not unhappy that they are losing support.

 

This Is Called Blackmail

Yesterday Fox News posted an article with the title, “IRS chief warns of refund delays over budget cuts.” You don’t have to be a rocket scientist to figure out what is going on here. If people experience delays in getting their tax refunds, they will complain. If they make enough noise, Congress will have to give the IRS more money to get the refunds out promptly. I hope Congress is smarter than that.

The IRS in recent years has abused its power and become a political tool. I think it is time to cut its funding (actually, I think it is time to make it go away and replace the income tax with a consumption tax of some kind).

The article reports:

IRS Commissioner John Koskinen gave details Thursday on ways the tax-collection agency might try to cut costs. He said everything from taxpayer services to enforcement efforts could be affected.

But, in a move that could impact millions, he said there could be a lag in refunds being processed.

“Everybody’s return will get processed,” Koskinen told reporters. “But people have gotten very used to being able to file their return and quickly getting a refund. This year we may not have the resources, the people to provide refunds as quickly as we have in the past.”

In recent years, the IRS says it was able to issue most tax refunds within 21 days, if the returns were filed electronically. Koskinen wouldn’t estimate how long they might be delayed in the upcoming filing season, which is just a few weeks away.

Congress cut the IRS budget by $346 million for the budget year that ends in September 2015. The $10.9 billion budget is $1.2 billion less than the agency received in 2010. The agency has come under heavy fire from congressional Republicans for its now-halted practice of applying extra scrutiny to conservative groups seeking tax-exempt status.

I totally support cutting the budget of the IRS. I would also support eliminating the agency.

 

Reaping The Rewards Of A Well-Run State

Reuters reported yesterday that Louisiana Governor Bobby Jindal has proposed a plan to simplify Louisiana’s tax code to make it more friendly to business. The Governor’s plan is to eliminate all corporate and personal income taxes in a way that would be revenue neutral.

The article reports:

But political analyst Maginnis (John Maginnis) questioned whether the Republican-majority Louisiana legislature would endorse Jindal’s ambitious plan.

“Any tax increase (such as sales tax) or elimination of exemptions would require a two-thirds vote, a form of legislative approval that would require (Republican) solidarity and significant Democratic support,” Maginnis said.

Jindal said his team will meet with lawmakers soon to discuss details of his tax reform plan.

“Eliminating personal income taxes will put more money back into the pockets of Louisiana families and will change a complex tax code into a more simple system that will make Louisiana more attractive to companies who want to invest here and create jobs,” he said.

There an important lesson in this idea. Raising taxes slows economic activity and does not necessarily result in an increase in tax revenue. Lowering taxes increases economic activity and often results in increased tax revenue.

During the 1980’s President Reagan lowered taxes. This resulted in an increase in revenue taken in by the government. Because the Democratic congress never kept their promise to cut spending, the federal deficit did not decrease, but federal revenue did increase.

Lower taxes mean more economic activity. Washington needs to learn that lesson.

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