One Of The Problems In Reforming The Tax Code

Yesterday the Wall Street Journal posted a story which might explain some of the difficulties Congress and the President are having in reaching a budget agreement before going over the fiscal cliff. The current American tax code is currently approximately 6,000 pages and 500 words. To say that it is difficult to navigate is a serious understatement.

One of Speaker of the House John Boehner‘s suggestions has been a limit on annual deductions. During the election campaign, Mitt Romney suggested a deduction cap somewhere between $17,000 and $50,000 a year.  Many liberal pundits supported the idea as representing equity. However, now that the election is over and the idea is examined more closely, there are serious consequences to this change–many of those consequences are political.

The article reports:

…For example, 44% of Connecticut filers itemize their deductions, but only some 21% of North and South Dakota residents do.

One tax writeoff in particular illustrates the point: the deduction for state and local income taxes. This allows a high-income tax filer who pays, say, $20,000 in state and local income taxes to deduct those payments from his federal taxable income.

Because the highest federal tax rate is 35%, the value of the state and local deduction is enormous for high-tax states. If President Obama succeeds in raising the federal tax rate to 39.6%, the value of those deductions rises to nearly 40 cents on the dollar. This deduction certainly eases the pain of New Jersey‘s 8.97% top tax rate, or Hawaii’s 11%.

The article explains that five states accounted for nearly half the tax revenue lost because of the state and local tax deduction–California, New York, New Jersey, Maryland and Massachusetts. California accounted for $51 billion of the writeoff due to state and local tax deductions. All of those five states can be found in the Democrat column during national elections.

The article explains:

To put it another way, when Californians voted to raise their top rate to 13.3% last month, they were voting to reduce revenue for the federal Treasury and thus increase the political pressure to raise tax rates on all Americans. The state and local tax loophole helps disperse and disguise the real cost of big government. As Mr. Obama likes to say, this is reverse Robin Hood.

The article concludes:

Mr. Obama wants to raise tax rates, rather than eliminate deductions, so his fellow Democrats can keep raising state and local taxes without bearing the full economic and political cost. Tax equity and economic growth are the big losers.

Because the current tax code is so politically loaded, I really don’t see Congress and the President agreeing to change it significantly. Unfortunately, it needs to be changed significantly.

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The Obama Deficit Plan In Pictures

Yesterday’s Washington Examiner posted an article explaining why President Obama’s deficit reduction plan will not work. The article included two graphs:

The main point of the article is that tax revenues at the end of the Clinton administration hit 20.6 percent of the Gross Domestic Product (GDP). The highest number for that percentage is 20.9 percent in 1944. Unfortunately, government spending will reach levels well above 20 percent in the near future. The problem is not the revenue–it’s the spending. Most Americans have figured out that it is not productive to spend more money than you take in. It’s time the government also learned that principle.

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