On Tax Policies, Part 2


by Don Fredrick, ©2017, author of The Complete Obama Timeline

(Nov. 14, 2017) — [Editor’s Note:  The following is Part 2 of Mr. Fredrick’s essay about the Trump administration’s proposed changes to federal tax law which Congress is currently debating.  Part 1 can be found here.]

Consider this: You have $200 in your pocket and are approached by an armed mugger on the street. He demands all your money and you reluctantly but immediately hand over the $200. Then, because you are some distance from home, you plead for $20 for cab fare. If the mugger keeps $180 of your $200 and gives you back $20, you did not receive a $20 “gift” from a generous and kind-hearted mugger. No, you were robbed of $180! It is your money, not his. You earned it, not him. (Obama and Elizabeth “Wampum” Warren may argue, “You didn’t build that” wealth; but you did.) As the mugger flees into the night, you do not head home with a smile on your face, happy to have had your income “redistributed” to the “less fortunate.”

Walsh defends the mugger, essentially lecturing, “Calm down. After all, you get to keep 10 percent of your income!” (How generous of him!) He further defends that defense by pointing out that fewer than one percent of American taxpayers are in the current top income bracket that is nailed with the 39.6 percent tax rate. That so few Americans pay the top rate, of course, makes it easy to label them the enemy in his class war. “There are only 1.3 million or so Americans in that group, so let’s further put the screws to them.” (No, he didn’t use those words. But he expressed those sentiments.)

Walsh tries to marginalize the impact of the 39.6 percent rate, writing, “A 90 percent top marginal tax rate doesn’t mean that if you make $450,000, you are going to pay $405,000 in federal income taxes. …Right now, you pay the top marginal tax rate on every dollar you earn over $406,750. So if you make $450,000, you only pay the top rate on your final $43,250 in income.”

Translation: “You would only be screwed out of 90 percent of all income above $406,750.” To the average person (even those who earn nowhere near that amount), that sounds like a disincentive to work hard. Why bother being productive, creative, and more valuable than $406,750 per year if you can keep only 10 percent of your income for any additional effort? You may as well do the bare minimum and let some other sucker work hard for next to nothing. (How would those who support a $15 per hour minimum wage feel if Congress responded, “Okay, we’ll approve a $15 minimum wage, but you will have to pay a 90 percent tax on all overtime”?)

Ah, but it gets worse. Writes Walsh: “If rates are high for the top earners and low for everyone else, there’s a big chance you will pay a low rate and a small chance you will pay a high rate. Given these odds, it is rational to accept high income tax rates on top earners and low rates for the rest…” That’s like writing, “There’s a big chance you will not get murdered if you live in one of Chicago’s better neighborhoods. Given these odds, it is rational for most north-siders to accept high murder rates on the city’s south side.”

If the government were to tax income over a certain level at 90 percent, what is the point of working harder to achieve success? It is accurate to state that few people probably ever paid the 90 percent rate when it was in effect. But why was that so? Because it was so draconian that people found ways around it! If you tax high incomes at 90 percent, businesses will simply find other ways to reward their high-paid executives. Instead of paying them $5 million per year, they might pay them $500,000 per year and give them incredible perks that are more valuable than the after-tax income they lose. If I earn $5 million but must pay a 90 percent tax on my final $4,500,000 in income, for example, I would get to keep only $450,000 of that $4.5 million. I would ask my employer to slash my pay and give me benefits and extras worth far more than $450,000! I would get around the system. That is, instead of being paid $5 million, I’d rather get paid $500,000, plus $4.5 million or so in perks and privileges that are not taxed.

Meanwhile, the federal government could actually lose tax revenue! Why? If my employer were to slash my salary from $5 million to $500,000, the government would not receive 90 percent of $4.5 million; it would receive zero percent of that amount because I will not have received that income in the first place! Duh! (Note to math-challenged “progressives”: Zero percent of nothing is not better than 90 percent of something.)

Increasing taxes to sky high levels would encourage employers to reward executives with non-taxable benefits. I might even set up a tax-free organization called “The Don Fredrick Foundation,” and ask my employer to contribute $4.5 million per year. I would distribute a minimal portion of that amount for well-publicized charitable causes, but would mostly use my “foundation” to rent a furnished mansion for me and cover my first-class travel expenses. (Do you wonder where I got that idea? Hint: It rhymes with “shill and pillory.”)

Yes, Congress would then work overtime (for a change) to tax those non-taxable benefits. But that is how the IRS code got to be tens of thousands of pages in the first place!

Do the Democrats not understand why high-income earners move from states like California, New York, Illinois, and Connecticut to states with low or no state income tax, such as Nevada, Texas, and Florida? Highly-paid people are not stupid. They have enough sense to escape high taxes by moving to another state—or by moving overseas. Amazingly, Democrats see corporations moving overseas to avoid high corporate taxes, yet are not intelligent enough to comprehend that increased personal income taxes will also drive individuals overseas. (This is not the 19th century, when traveling to Europe took weeks on a ship. An American can work and live in Europe, fly back and forth in only hours when necessary, and communicate with friends, relatives, and business associates immediately via the Internet. Our ancestors endured incredible hardships crossing the continent in covered wagons in search of better lives. Seven hours on a flight is no big deal.) The greater the tax burden, the greater the incentive to flee the tax man. If the burden is too great in New York, businesses and people will move to Texas. If the burden is too great in the United States, businesses and people will move overseas.

Even many Democrat legislators understand that corporations (which cannot print money) do not pay taxes. They merely pass the corporate taxes on to consumers with higher prices on their goods and services. The corporate tax in the United States is 35 percent. You can be assured that when you buy a product Made in USA, its price covers that 35 percent. (Similarly, when a company advertises “free shipping,” the cost of shipping has already been included in the product’s price. Nothing is free.)

True conservatives seek a government that is no larger than it needs to be, and taxes as low as possible. Democrats push for increased spending, in an effort to force tax increases. Republicans push for tax cuts, in an effort to force spending cuts. What happens, of course, is that spending never gets cut, and taxes can never be increased enough to cover all the spending because such high tax rates would cause the economy to contract—if not collapse entirely.

Meanwhile, Democrats and Republicans alike try to force changes in human behavior with various tax code provisions. To promote home ownership, for example, they have long allowed taxpayers to deduct mortgage interest. Such tax deductions are unjustified. Why is where you live the business of the federal government? Why should homeowners get a tax break that renters cannot receive? As the population grows, the nation will certainly need more housing. But what difference does it make if those people live in houses or apartments? A carpenter paid to install doors should not care whether those doors are in single family homes or apartments. Yes, homeowners are likely to take care of their homes better than renters take care of their apartments. So what? People who own their cars probably take better care of them than people who rent or lease cars. So what? Should car owners pay lower taxes than car leasers?

The Reagan tax cuts reduced income tax rates, but many people forget (or are unaware) that the legislation also phased out the deduction of credit card interest. That was an effort to limit the loss of tax revenue. As usual, of course, Americans were inventive, and they quickly found a way around the tax code. What was their solution? Home equity loans. Taxpayers could deduct interest on home equity loans. But that did not eliminate credit card debt. It only saddled homeowners with home equity loans and credit card debt. Renters, however, lost the ability to deduct credit card interest, but had no homes against which they could borrow. As a result, many of the least wealthy Americans (renters) ended up worse off than homeowners because of the Reagan tax cuts. It would have made more sense to allow no credit card or home equity loan interest deductions, and set the tax rates even lower.

There is now an uproar over the proposed loss of deductibility of state and local income taxes from federal tax returns. But why should residents of states with no income tax have to pay higher federal income taxes to subsidize residents of states with income taxes? Allowing New Yorkers to deduct state income tax results in decreased federal income tax revenue. The rates for everyone must therefore be made higher to offset that lost income. Floridians and Texans are therefore paying higher than necessary federal income taxes so that the New York state legislature can keep spending like there is no tomorrow. Senators and Congressmen from states like New York, California, New Jersey, and Connecticut are whining that the loss of that tax deduction is unfair and that their constituents will now have to pay higher taxes to subsidize Floridians and Texans. In reality, Texans and Floridians have been subsidizing the residents of the high-tax states for decades.

The tax code should not pick winners and losers. Tax revenue should be used as intended. (The gasoline tax should be used for roads and bridges, not for bicycle paths and jogging trails.) The tax code should not favor one group of citizens over another. There should be as few deductions and loopholes as possible. The tax revenue gained from closing loopholes and eliminating deductions should be offset by reductions in the tax rates. We must stop pitting the poor against the middle-class, the middle-class against the wealthy, homeowners against renters, non-investors against investors, married against the unmarried, and the childless against parents.

Of course, if groups of Americans are not pitted against each other, the taxpayers will join together against the politicians. But that is the last thing the politicians want, and that is why the tax code will continue to be burdensome, complicated, and unfair.

That’s my two cents worth (1.208 cents after taxes).


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