Friday, August 31, 2012

Tax Talk

Election years bring out the worst in us.

I find myself fighting an uncontrollable urge to argue.  Here is my attempt to sway your opinion.

While I don't work tax returns on a daily basis, my world is engross in tax policy. I know enough to be dangerous. 

Over the past few weeks, pundits have talked up Romney's tax plan because it radically changes tax law in the pursuit of simplicity and fairness.  While I've never doubted the importance of taxes, (I like roads and safe food) a friend pointed out the lack of fairness in the tax code.  For instance, he makes more money than I do, but he pays less tax (9% vs. 20%) due to the fact that he owns a small business which allows significant tax deductions.  Yes, I'd love a simple and fair tax plan.

Here are the main points of Romney's tax plan (

1.  Reduce marginal tax rates for all brackets by 20%
2.  Eliminate taxation on investment gains for those making less than $200,000
3.  Eliminate AMT (alternative minimum tax)
4.  Reduce corporate taxation

All of the points sounds good, but how do you pay for it?  The traditional argument states that reducing taxes results in economic activity and likewise will result in higher tax revenue.  While this might be true, the U.S. economy hasn't grown faster than 5% in recent history (the 5% occurred in 2000 with the dotcom boom and bust)

In reality, the only way to significantly reduce marginal tax rates for everyone is by eliminating a majority of itemized deductions.  In a recent article in the Wall Street Journal, Romney's economic adviser Martin Feldstein (Harvard Economics Professor) tried to clarify how Romney's plan could be feasible.  It turns out that virtually all itemized deductions would need to be phased out for people making $100K or more for Romney's plan to be revenue neutral.

Here is a quote from CS Monitor (Tends to lean conservative by the way)

"Taxes would rise on families earning between $100,000 and $200,000 in Feldstein's analysis because he considers a tax reform that would completely eliminate itemized deductions for taxpayers with incomes above $100,000."

In all reality, Romney's plan has no chance because it isn't plan, simply an ideology.

Here the top three itemized deductions:

1.  Charitable donations
2.  Home mortgage interest (House)
3.  Real estate taxes paid (House)

What congress would actually eliminate itemized deductions for a significant portion of our economy?  How would nonprofits survive without a donation incentive?  Don't we want to encourage home ownership?

This is just political pandering.  Let's get real.  We need to cut spending and increase taxes on the wealthy.  It is called compromise.  I'm willing to do my part (obviously I do because I pay a higher marginal tax rate than Mitt Romney).

By the way, marginal taxes rates are historically very low.  Look at the 1950's.... 90%+ tax rate.  Ouch.

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