Tax Thoughts

April 15th is now behind us. Some of us have sent away checks, some have received refunds. I filed mine in March, so for me it is ancient history.

I find it fascinating but deeply ironic that after several failed attempts, when income tax became legal, salary was not considered “income”. Your salary was considered the result of bartering your time for money, and hence was not taxable. Things were much simpler then Income was when something came from nothing; like farm crops or investment income. Nowadays, this is called “Capital Gains”. It is also ironic to consider that the United State survived and thrived quite happily for over a century and a half without income tax. Just as ironic is the fact that income tax is a “temporary” tax that has to be voted by Congress. Every. Single. Year.

Nobody likes paying taxes. Taxes are evil. But they are a necessary evil. If we want infrastructure like roads and freeways, infrastructure like sanitation and communications, government-run institutions like schools and prisons, taxes have to be collected. Nearly half of the taxpayers pay no federal income tax, but they get the benefit of all of these things. Fair enough.

If we had to pay our taxes in one big check at the end of each year there would be a tax revolt. So the powers that be institute a “bleed-them-slow” policy that takes a bite out of every paycheck.

If you are a conservative, taxes are always too high – taxes throttle trade and depress economies. If you are a liberal, taxes are always too low – here will always be more poor folks that need “help”, or some deserving cause that needs to be adequately funded. They’re both right, but either way, someone else should pay them.

And so begins the never-ending search for deep pockets. Everybody is looking for someone else who can pay the lion’s share of the taxes. The poor can’t afford to pay taxes. Sad but true, get over it . The rich can afford not to.Get over that too. That leaves the middle class – those who can afford to pay taxes and don’t have the patronage or the power to avoid it by legal means.

Everybody wants tax reform. But nobody wants tax reform that will hurt them. For instance, I would be in favor of dropping all taxable deductions, including home mortgage (if you can’t afford a house, don’t buy one), dependents (if you can’t afford kids…), charitable donations. the lot. Because every tax deduction I get shifts the tax burden on to somebody else.

The problem with this approach is that implementing it would hurt the Real Estate business – people would buy smaller houses because the mortgage deduction would no longer be there. It would also hurt the banks and financial institutions that write the mortgages.

But wait! There’s more! Charitable donations would drop through the floor. I tithe irrespective of deductions, but many people – particularly the very rich – give large amounts of their taxable income to charity, presumably on the assumption that a charity can be trusted more than could the government with the tax dollars that this income would attracts if they kept it. But if there was no incentive to give away the money, how many people would do so?

There is much talk that if all deductions were removed, the effective tax rate could be cut in half and the same amount of money would be raised. This sounds good until you think about Value Added Tax – or VAT. This tax was introduced in the United Kingdom in 1973 as a 3.5% tax on “luxuries”. When I left England twenty-one years later, it was a 17.5% tax on everything but basic foodstuffs.

Deductions also carry an element of social control; the government telling us, in effect, what behavior they consider acceptable. Have lots of kids. Live in a house. Don’t work.

Don’t work? Yes. For the harder you work, the more tax you get to pay. But that is another story for another time.

Morals:

  1. Taxes always go up.
  2. A “Temporary” Tax will live to celebrate its hundredth birthday.
  3. You get more of whatever you subsidize.
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