2009-04-15

Let's Talk About Tax, Baby

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It's April 15th and, like many of you, I sent in my check to Goldman Sachs AIG the Treasury Department this morning. As a CPA, I find that everyone I know on or around this time of year suddenly wants to talk about taxation, socialism/redistribution, the IRS' blood-lust, or something along those lines, so I decided that today I would use my blogging powers for good and channel all of that energy into creating a "Top 5 Ways to Cope with Paying Taxes." My only hope is that this counts as charitable giving and I can deduct my time on my 2009 tax return that you the reader might benefit from my efforts. Plus with every major news outlet talking about "tea-bagging" breaking out in every major city, this post practically wrote itself. So here we go:


1. Remember Things Could Be Worse

Nate Silver runs the numbers and reveals that not only has the top marginal tax rate come down dramatically since its peak in the 1960’s (a virtual socialist paradise at 90%), but the top marginal tax threshold has come down dramatically as well. He reveals that the “median top income tax threshold since 1913 -- adjusted for today's dollars -- is a little over $1.3 million, almost four times higher than it is now.” It appears that we have drasticaly redefined what it means to be "rich" in this country over the past 100 years.





2. Taxation with Disproportionally High Representation Drinking Game

This game is great whether you participated in the "tea-bag" protests held all over the country today or not. There is one simple rule, every time David Schuster says any variation of "tea-bag" (either the verb or the noun), take a drink.





3. $10,000,000 < $100,000

The popular line of reasoning from flat-taxers is that higher tax rates hurt innovation and actually reduce hard work due to the higher penalty on increasing one's earnings. Mother Jones counters that argument somewhat by revealing that the effective tax rate for those making between $100k - $200k is actually higher than for those making > $10 million. So in other words, you're just not working hard ENOUGH.





4. Everything's Bigger in Texas... Except the State Income Tax
Ezra Klein politely reminds the aforementioned group from question #3 that there are additional taxes to consider before you arrive at the conclusion that taxes soak the rich. Oddly enough, when you include the effects of state and local taxes each quintile's share of the tax burden roughly matches their share of total income:





5. Be Glad That I'm Not President
I say this because one of the first things I would do would be to eliminate the home mortgage tax deduction. Why? Because the US is the only Western country who still allows this and it is a ~$100 billion subsidy provided by all non-homeowners and China. It also incents people to buy bigger houses than they otherwise would (which consume much larger amounts of energy), and building equity should be the purpose of owning a home, not tax deductions.

I would also implement a carbon tax (or cap & trade), but I would use the revenue from this to reduce or eliminate the payroll tax, which I think makes both sides happy. Call me ideologically schizophrenic.





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4 comments:

Leah on 3/6/09 said...

I have to agree with you that I am glad you aren't the president. One could argue that homeowner's pay local property taxes and school district taxes that renters do not pay, but still benefit from. I disagree that China and non-homeowners are paying for this particular tax deduction. China and ALL taxpayers are footing the bill for irresponsible government spending. I'm just going to assume that homeowners pay more taxes than non-homeowners on a whole, even with the mortgage deduction, but you can correct me if I am wrong.

Also, I don't think many people are buying houses primarily for the purpose of getting a mortgage interest deduction, as you implied. It is only an incentive - like giving to charity. However, I would spend less money if I didn't give to charity and if I wasn't paying mortgage interest, but I do both. The money I receive back from the tax deduction is not, in itself, enough to make me purchase a home or give to charity. The reason people choose to buy instead of rent is because of earnings potential, not mortgage tax deductions.

Also, more money does not necessarily mean bigger houses (which I don't think is bad anyway); it might mean a different location, or a more money to increase energy efficiency in the home (which also has its own tax incentives) or add upgrades, or it could just mean more money in the bank.

I am also a conservative real estate agent, so maybe I am biased. :)

Mike on 3/6/09 said...

Leah thanks so much for the comment, although I'm offended. I thought I could count on a fellow blogger and friend to support my run for the White House, despite my youth and lack of experience (and occasional differing beliefs). I would've thought point #2 might've won you over, but I can see I've hit a nerve on point #5 though we may not be very far apart in our views.

My point was that we live in a world with constrained resources, and therefore any tax incentive should be viewed as a trade-off, i.e. without a corresponding decrease in spending (a conversation for a different day) the cost is added to the deficit.

Additionally, why are we giving subsidies to homeowners based on the size of their debt (which rewards greater debt) when we could use that money to attempt to balance the budget? That sounds like a pretty fiscally conservative approach to me. I will give you that I should've written that building equity (or something simpler like living in nice neighborhood) should be the "primary" reasons for owning a home; deducting interest would be more akin to a nice side-effect. As you even state:

"The money I receive back from the tax deduction is not, in itself, enough to make me purchase a home or give to charity. The reason people choose to buy instead of rent is because of earnings potential, not mortgage tax deductions."

So then why should the government reward this behavior to the tune of > $100 billion?

Leah on 3/6/09 said...

Actually, I don't totally disagree with you. If I had it my way, there would be no tax deductions, credits, subsidies, incentives, what have you. And also, we'd have a flat tax rate. I should have put more thought into my response. "The heart of the righteous ponders how to answer..."

However, if the government (or you, as president), just took singled out the mortgage tax deduction right now without any other reform, I think the consequences on the housing market and mortgagors might be greater than our economy can handle at the present time.

Though it was not the case with us, I will agree that the mortgage tax deduction has provided incentive to increase leverage, make smaller down payments, and has reduced incentive to pay off debt as quickly as possible. Many people did take that deduction into consideration when purchasing their homes, and you can't necessarily blame them, even if you wouldn't have done it yourself. I think many of those people would suffer if you took the deduction away. I wouldn't really be able to feel sorry for them, though, because my mantra is "never trust the government."

Dang, now I sound like the schizophrenic.

And as you can tell, I'd prefer to balance the budget by reduced spending, not increased taxes. I think the people (apart from the government, not through the government) should bear the primary responsibility for taking care of the poor, increasing energy efficiency, etc. But like you said, conversation for a different day.

I was too harsh. If you ran for President, I would vote for you.

Leah on 3/6/09 said...

Actually, I don't totally disagree with you. If I had it my way, there would be no tax deductions, credits, subsidies, incentives, what have you. And also, we'd have a flat tax rate. I should have put more thought into my response. "The heart of the righteous ponders how to answer..."

However, if the government (or you, as president), just took singled out the mortgage tax deduction right now without any other reform, I think the consequences on the housing market and mortgagors might be greater than our economy can handle at the present time.

Though it was not the case with us, I will agree that the mortgage tax deduction has provided incentive to increase leverage, make smaller down payments, and has reduced incentive to pay off debt as quickly as possible. Many people did take that deduction into consideration when purchasing their homes, and you can't necessarily blame them, even if you wouldn't have done it yourself. I think many of those people would suffer if you took the deduction away. I wouldn't really be able to feel sorry for them, though, because my mantra is "never trust the government."

Dang, now I sound like the schizophrenic.

And as you can tell, I'd prefer to balance the budget by reduced spending, not increased taxes. I think the people (apart from the government, not through the government) should bear the primary responsibility for taking care of the poor, increasing energy efficiency, etc. But like you said, conversation for a different day.

I was too harsh. If you ran for President, I would vote for you.

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