Tax Reform: Seven Political Spins You Need to Know

The debate on tax reform dominates cable news. If you care about your future taxes, you need to understand how politicians are spinning the truth, abusing the language, and corrupting basic economics.

Pay for It?

Almost immediately, when the tax debate began earlier this year, House Speaker Paul Ryan pushed for a Boarder Adjustment Tax – a 20% tax on everything coming into the country to “pay for” the proposed tax cuts, as if the tax cuts were buying something. This is a variation on the claim that tax cuts should be “revenue neutral.” Both these obfuscations mean that the intent is not to cut taxes, but to shift by whom or how the taxes are paid. It’s as if the money belonged to the government and not the people and we were being unreasonable in asking for the government not to take it.

These spins are meant to counter the insistence of “deficit hawks” that the tax cut be “deficit neutral.” This phrase means that if taxes are cut by, for instance, 2 billion dollars, spending should be decreased by 2 billion. That only makes sense, so that is unlikely to happen.

Deficit is Not Debt

But, even this argument is fogged up by politicians misusing the terms “deficit” and “debt”. “Deficit” refers to the amount spent which exceeds the amount of income. The national “debt” is the amount the country has borrowed to cover its deficits.

House Minority Leader Nancy Pelosi condemns the proposed tax cuts for increasing the deficit. She could, of course, suggest areas where federal spending could be cut. Don’t hold your breath. When President Obama was still in office, Pelosi praised his fiscal responsibility because he “slashed the deficit by 50 percent.”

To put this in more understandable personal terms, slashing the deficit means that last month you spent $1000 on your credit card. This month you only charged an additional $500. Wow, good job. You cut your monthly deficit. However, your debt has increased by 50 percent.

The Corporate Tax Myth

Another walk down confusion lane takes place when we hear that corporations and “the rich” should pay more. I call this the Scrooge McDuck theory of economics. Like the animated character, people envision corporations sitting on huge piles of gold that they have stolen from the poor.

Taxes are an expense for corporations, which, by the way, are made up of individual people. If, to make a tire, for instance, a corporation needs to pay $40 for materials, $60 for labor, $20 for distribution, and needs to profit $10 to pay its shareholders and have money for reinvestment, the tire will cost you $130. Let’s tax that greedy corporation $10 on every tire it sells.

Guess what. Now your cost for a tire is $140. Only individuals pay taxes. But, can’t we stop that evil corporation from passing on the cost of taxes? Perhaps, but then shareholders and people who make up the corporation would receive less compensation. Again, only individuals pay taxes.

And what about those rich people? In a free society you become rich by providing a service or product for which other people freely give you money. Sorry, but Scrooge McDuck is only a cartoon. No force is used in the accumulation of wealth, except if you are the government.

SALT

SALT stands for State and Local Tax. Currently, these are deductible from federal taxes. Proposals to abolish these deductions are called “un-fair” to people in high-tax states such as New York, Illinois, and California who would end up paying more in federal taxes.

Looking at it from the opposite perspective, why should people in low-tax states, such as Wyoming, Florida or Texas, pay for more of the federal government’s expenses to offset spending in other states in which they have no say?

It is really, however, nearly impossible to tell what effect eliminating the SALT deduction would have because of debt and deficit, and because the current system is so convoluted with exceptions and loopholes.

Loopholes

Loopholes? Let’s close them. We often hear this suggestion made as if the “loophole” were an accident or oversight which allows people to cheat the system and get away without paying taxes. Do you think the army of congressional staffers and huge accounting firms at their disposal would miss things like this?

Loopholes are not accidents, but special privileges and advantages intentionally put into the tax system by legislators to “help a needy constituent”, or, just maybe, to get a big campaign donation. Democrats and Republicans are equally to blame for this. Does that sound fair?

Flat and Fair

You may have heard of Flat Tax and Fair Tax proposals.

A flat tax means that everyone pays the same rate whether you make $12,000 or $120 million per year. Most flat tax proposals include a minimum you must earn before the tax kicks in. Even if a flat tax could be passed, how many years, or minutes, would pass before someone, perhaps receiving a big donation from an interested party, would propose exceptions and exemptions.

The hopelessness of this approach is foreshadowed by the fact that many of the fixes to the current tax code in the Republican proposals would expire after ten years. If the tax code needs to be fixed, the fix should be permanent. Otherwise, why bother?

The word “fair” is tossed about by politicians to the point where it becomes entirely meaningless beyond, “If I don’t like it, it’s not fair.” This is one of Nancy Pelosi’s go-to terms.

The fair tax, however, is a national sales tax. Everyone who makes purchases would pay it. If you buy a loaf of bread, you might pay 2 cents. If you buy a BMW 640i Gran Coupe, you might pay $2000.

Everyone pays and the IRS becomes unneeded, as the taxes would be collected by state agencies. Even millions of foreign visitors, visa holders, illegals, and the underground economy would pay. Evasion would be nearly impossible, and millions of tax audits would be unnecessary, saving even more.

The usual objection to a fair tax is that it becomes invisible. Taxes, we are told, should hurt. They certainly do now. Even though a fair tax sounds like a good idea, it is unlikely to be implemented because of what goes un-said about our tax system.

What Isn’t Being Said

With all the talk about this deduction and that credit, what becomes obscured is the purpose of taxation. We allow government to tax us to pay for common services a society needs: protection from foreign enemies, prevention of crime, and the enforcement of contracts. But, this has become twisted.

When the government begins granting exceptions to certain people or industries and taxing others more, it is using taxes to manipulate, control and even punish, rather than to raise revenue. Extra taxes on cigarettes, sugar-filled drinks, or coal are aimed at reducing their use. Tax credits for oil exploration, or more recently, solar power, subsidize these industries. Paying farmers not to grow certain crops inflates prices. Government tax policy becomes a tool for forcing you to make choices you might not if the free market set prices, and a weapon favored businesses can use to gain advantages over their competition.

The public loses twice by paying higher prices and having politicians financially dependent on industry or political lobbies.

It’s time not only to simplify the tax code, but to de-weaponize it. It should be a means of raising revenue not a sword to limit your freedom.