July 17, 2012
On Mitt Romney’s Taxes and Real Tax Reform

Amidst all the buzz about Mitt Romney’s tax returns, I’ve been struck by an obvious — at least to me — gap in all the discussions:

—OF COURSE Mitt Romney played the tax code to enhance his wealth. That’s what all rich people do.

Think about it. The tax code is riven with loopholes, the vast majority of which benefit businesses and better off people. Whether it’s depreciation allowances for purchases, or treating investment income as “capital gains” rather than ordinary income, or allowing you to write off the costs of maintaining a horse declared to be an investment (to the tune of $77,000 one year in Ann Romney’s case), the simple truth is that these kinds of loopholes (or incentives, if you wish) are only available to people who make enough money for them to matter. The rest of us simply can’t take advantage of them because we don’t make enough money.

Now don’t get me wrong: this is legal. It’s not someone’s “fault” they used the rules to their advantage. While it is certainly true that people like Mitt Romney have worked hard to infuse the tax code with loopholes (or incentives) that benefit them, it is also true that it is legal for Mitt Romney to do what he has done…. Even if it seems he is now embarrassed by his machinations, or doesn’t want to explain his taxes.

But here’s the thing: THE TAX CODE HAS LOTS OF BENEFITS FOR MIDDLE CLASS PEOPLE, TOO. I get to write off my mortgage interest and property taxes. Employers get to write off the cost of providing us with insurance off their taxes, thus subsidizing employer-sponsored healthcare. Middle class persons are far more likely to take road trips across public roads and send their children to public universities — which are still, although to a lessening extent — supported by tax dollars. I get to write off miles and expenses for business trips. For example, when I lived in London while on sabbatical, it turned out the federal tax code allowed me to write off $91 A DAY for living expenses as well as the whole cost ($3200 a month! of my St. John’s Wood flat (just behind Abbey Road Studios). (Thanks, by the way: had I known that in advance of my trip I might have not lived like a graduate student.)

Really, the only people in society the tax code doesn’t subsidize is the poor — basically because they don’t have enough money to do any of the things that one can get a subsidy for. Poor people receive benefits, of course, or at least they can, but these rarely add up to much. And since sales and sin taxes are wildly regressive, they really get screwed by the tax code, not subsidized by it — a few tax credits notwithstanding.

Basically, you need to think of it this way: the rich get VAST subsidies in the tax code. The middle class gets SOME subsidies in the tax code. The poor get basically NO subsidies in the tax code. 

Which is why if you’re serious about tax reform, you need to do three things: 1) set a minimum below which no one/family will ever pay income taxes, adjusted over time for inflation; 2) eliminate ALL exemptions and exceptions from the tax code, from capital gains to mortgage interest to health care to depreciation; and 3) set graduated, simple rates so the tax code remains progressive. 

Everything else is nibbling at the edges. You should stop worrying about the obvious: that Mitt Romney played the tax code and got richer doing it. Instead, you need to focus on the problem: a tax code that is fundamentally rigged in favor of Mitt Romney and his fellow wealthy people first, the middle class second, and the poor last of all.

April 16, 2012
Taxmaggedon: January 1, 2013

People should know this. From David Leonhardt, New York Times

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ON Jan. 1 of next year, the federal tax bill for a typical middle-class household — making in the neighborhood of $50,000 — is scheduled to rise by about $1,750. This increase, which would come from the expiration of both the Bush tax cuts and the Obama stimulus, would follow a decade of little to no income growth for many people. As a result, inflation-adjusted, after-tax income for the median household could fall next year to its 1998 level, in spite of the continuing economic recovery.

The middle-class tax increase is just the beginning of budget changes set to take effect at the start of 2013. Poor families would see their taxes rise somewhat, too. Total federal taxes for top-earning families would rise by tens or even hundreds of thousands of dollars a year. Spending cuts would also take effect, squeezing domestic programs — education, transportation, scientific research — and the military.

All in all, the end of 2012 will be unlike any other time in memory for the federal government.

The tax increases and spending cuts are the result of Washington’s having previously kicked the can down the road, to use a phrase that is popular here. Rather than pass a plan to cut the deficit, policy makers have put off tough decisions. With the Bush tax cuts, lawmakers deliberately made them temporary, to avoid running afoul of budget rules intended to hold down the deficit.

Not surprisingly, leaders of both parties now say they are opposed to letting the changes happen on Jan. 1. Economists are also frightened of what such a sharp shift in government policy might do to a still fragile economy. Ben S. Bernanke, the Federal Reserve chairman, has referred to the various expirations as “a massive fiscal cliff.” Congressional aides, quoted in The Washington Post,call it “taxmageddon.”

The problem, as always, is that the two parties cannot agree on what changes should take place. The combination — of political stalemate and potential economic cataclysm — will create an extraordinary period after this year’s election. A lame-duck Congress and Mr. Obama, either re-elected or defeated, will have less than two months to agree on an alternative plan, or the tax increases and spending cuts will take effect….

Optimists — yes, there are still some — say that the prospect of the tax hikes and cuts could finally nudge the two parties to the kind of deficit solution that many experts prefer. It involves sweeping tax reform that would close loopholes, reduce marginal rates, simplify the tax code and perhaps even lift long-term economic growth. Such tax reform has always been easy to put off, but the compromises it requires may end up being easier to accept than taxmageddon.

YET there is still a basic contradiction with which most politicians and voters have yet to grapple, the same contradiction that has helped create this strange situation in the first place. Talking in exasperated tones about the importance of fiscal responsibility is easy. Cutting the deficit is hard, because it involves unpopular tax increases or unpopular spending cuts — and huge cuts if the solution involves only spending, not taxes, as many Republicans urge.

Either way, the changes will affect the vast majority of Americans, given that the deficit reflects a basic disconnect between the government we have and the taxes we are willing to pay. Social Security, Medicaid and Medicare may become less generous. The Pentagon may no longer be able to get just about whatever it wants. Taxes may have to rise from their recent levels, which have been lower, as a share of the economy, than at any point in 60 years. That could mean higher rates. Or, if tax reform actually happens, it could mean smaller tax breaks for health care, housing and retirement savings.

The looming end of billions of dollars in popular government benefits may seem ridiculous. And the fact that Washington keeps delaying a serious deficit plan until another day may seem equally ridiculous. But they make perfect sense in a country where hypothetical solutions are a lot more popular than any actual ones.

Nothing highlights the paradox quite like tax reform.