I’ve written about taxes for most of my adult life, and I don’t know shit. OK, fine, GRITS, GRATS, unitary trusts, generation skipping taxes, flow-through entities, MACRS depreciation schedules , AMT preference items – I do know shit, but that’s the problem. The more I know, the more I realize that the whole thing is a ramshackle patchwork of crazy.
So far as politics are concerned, taxes equal economics. Changes to the tax code are the main weapon in most political arsenals. Mostly, candidates try to buy votes by figuring out who their target market is and promising to cut their taxes, often with balancing promises to raise the taxes of some ill-defined “rich” to compensate.
My biggest problem with taxation is the byzantine, inexact and approaching on arbitrary way in which it is collected. For years, MONEY magazine ran a yearly experiment. Several reputable accountants were given a hypothetical set of facts concerning an upper-middle-class family and asked to prepare its tax returns. Every year, these tax experts would come back with wildly disparate answers, with the high and low tax burdens differing by huge margins.
To say that the highest marginal tax rates should be 30% or 40% or 70% is meaningless when the hodgepodge of credits, exemptions, phase outs, phase ins, deductions and preferences available mean that most people don’t pay anything close to their “rate.” The poor, based on my experience, probably pay more than they would if they understood the tax code (for example, while most lower income filers will gain nothing by itemizing, they often forget to take the standard deduction to which non-itemizers are entitled, which would, in most cases wipe out any tax liability they might have). The rich, after paying various advisors often considerable sums, generally pay far less than their marginal rates.
When you begin to look at tax court decisions, you see the arbitrary nature of it all. Some taxpayer is picked out, accountants on both sides swear they are right, and the tax court frequently ends up arbitrating instead of judging — splitting the difference between positions because, given the complex and often contradictory nature of the tax code, even the experts can’t tell mistakes from abuse, legitimate positions from fraud.
And, while tea partiers and liberal lefties alike rant and rave about income taxes, the rich – the real rich – don’t care. Because for them, income, as defined for income tax purposes, is the least of their concerns. That piddling mid-six-figures salary? Window dressing. It’s the couple or several million delivered through stock options or other tax-preferred executive compensation schemes that matters. It’s the continuing stream of revenue from what they own that matters. Capital gains is the name of the game.
My sense is this – both Republicans and Democrats love to use the tax code for political purposes, but neither of them have any real interest in meaningful change. They focus almost exclusively on individual income tax rates, when there would be more meaningful money to be had from a variety of other changes.
A couple of examples. In 1993, Democrats pushed to have the income limit on Medicare taxes eliminated so that the 2.9% collected for Medicare would be collected on all income, not just the first $100,000 or so as previously had been the case. But that tax is collected only on income. Suppose you are a wealthy business owner, say a personal injury lawyer like John Edwards. What do you do? You set your business up as a Sub Chapter S corporation, take only $360,000 a year of the $26.9 million you earned in the four tax years between 1995 and 2000 as income, and claim that the rest is “dividends” on which, of course, the 2.9% Medicare tax is not paid. Edwards did just that to save $591,000 in taxes.
Or cast your memory back to the election of 2004. Suppose, for the previous tax year, you’re a fabulously wealthy re-married widow who inherited a fortune upon your first husband’s death – a fortune somewhere between $1 and $2 billion. What sort of taxes do you suppose you’d pay on the income that fortune generates? If you’re Ms. Heinz Kerry, you pay $750,000 on $5.1 million in claimed income.
Only $5.1 million in income on a fortune that, at the most conservative estimates amounts to more than $1 billion? That’s a return of 0.05% percent on her billion dollars, when most wealthy persons manage consistent returns of at least 10%. Of course, she likely is realizing such returns, too. It’s just she can use any variety of trusts to shield virtually all of her income from taxes until she decides to spend it. Meaning what? Meaning that behind the walls of her trust documents, Ms. Heinz Kerry likely earned something like $100 million (or, if her fortune really is $2 billion, $200 million) and paid, best case, 5% of that in taxes. If she paid the marginal rate that a wage earner would have to on that amount, she’d pay better than $28 million in taxes.
In many of Obama’s tax proposals, the “rich” are defined as families with annual incomes of $200,000 or more. How many taxpayers making, say, $200,000 a year would you have to tax at the current top marginal rate in order to get $28 million in revenue?
The fact is that income taxes on wages, as they stand, disproportionately target the least wealthy portion of society. For those with fortunes, businesses, and the resources to pay for top tax planning talent, income taxes are a nuisance at most. Anyone actually interested in getting the rich to pony up more would look elsewhere — would look at the sort of tax dodges that Edwards, Kerry, Kennedy — and Bush and Chenny — use. Of course, that would be a more complicated argument, since the vast majority of voters only understand income taxes on wages, and then only barely. And, oh yeah, changing anything else also would mean that politicos on both sides of the aisle personally would start coughing up a lot more in dough.
Until we arrive at a simple, clear method for determining tax, I’m really not interested in discussing rates, cuts, increases or any of the other crap that constitutes the current system.
If you really want to get the rich to pay, I’d say scrap the income tax entirely and switch to a consumption-based tax, say a VAT or national sales tax. Ain’t no fun being rich if you can’t buy shit, and the rich buy way more shit than the poor. If you’re worried this would be too regressive, that the poor would end up paying more than they do now, then exempt food and drugs if you want, or give everybody a mag card at the beginning of the year worth X dollars in tax-free purchases . The rich will pay more because they spend more. Politicians won’t be able to try to buy votes by pitching cuts, credits or other BS to their target demographics, and I can stop cramming every receipt I find into file folders and just get on with my life.