Sunday, June 5, 2011

Why not cut tax loopholes and spec interest deductions?

Previously published on June 5, 2011 in the Terre Haute Tribune Star

I’m confused. I thought Republicans were all about low taxes. Why then is it a problem that only half of income tax filers are paying any income taxes? Isn’t this a good thing for a party that preaches a gospel of low taxes?

Eric Cantor, House Majority Leader, is, as politicians do, willing to “sin” if it can be called something else. (To be fair, President Obama sought to decrease taxes on low-income families rather than creating a “spending” program to address those challenges.) Cantor signaled his willingness to eliminate loopholes and special interest tax deductions to create a “pro-growth tax proposal” that would modestly increase revenues. As is usually the case, specifics are missing, which “loopholes” and “special interest deductions?”

Tax-cutting mania began in 2001 with the “Bush tax cuts.” These cuts reduced tax rates across all income groups. It also created additional ways to reduce taxable income through contributions to retirement plans and increased the standard deductions for those married but filing jointly. The Heritage Foundation, at the time, proclaimed a panacea of good outcomes by 2010 resulting from this major tax stimulus plan (remember they were meant to be temporary until the economy picked up):

n Under President Bush’s plan, an average family of four’s inflation-adjusted disposable income would increase by $4,544 in fiscal year (FY) 2011, and the national debt would effectively be paid off by FY 2010.

n The net tax revenue reduction, after accounting for the larger tax base that would result from higher employment and faster economic growth under the Bush plan, is $1.1 trillion from FY 2002 to FY 2011, 33.4 percent less than conventional static estimates.

n The plan would save the entire Social Security surplus and increase personal savings while the federal government accumulated $1.8 trillion in uncommitted funds from FY 2008 to FY 2011, revenue that could be used to reform the Social Security and Medicare systems and reduce the payroll tax.

I didn’t see any concern that these cuts might produce a situation, a decade later, where half of filers paid no taxes. These predictions were prior to 9/11, two wars paid for with borrowed money, and the financial meltdown of 2008. Keep such things in mind when rosy predictions for the future for other major, if not radical, changes are offered from ideological think tanks.

The “average family of four” seems to be the benchmark for profiling the middle class. Deloitte Tax shows how the average family of four paid no income taxes in this last tax year:

n $50,000 minus (the standard deduction of $11,400 and four personal exemptions of $3,650 each — $14,600) equals $24,000. Federal income tax liability on $24,000 is $2,769. But with two kids under 17, the family qualifies for two $1,000 child tax credits. President Obama’s “Making Work Pay” credit adds $800 because the parents filed jointly. Result? A $31 check from the IRS.

According to the five most common deductions are as follows: 1) home mortgage interest; 2) charitable donations; 3) income taxes paid to state, county, and municipalities; 4) real estate taxes paid; and 5) medical and dental expenses. The five most common tax credits, according to are as follows: 1) child and dependent care expenses; 2) education credits; 3) earned income tax credit; 4) first-time homebuyer credit; and 5) the Making Work Pay credit.

Are any of these the “loopholes” or “special interest deductions” that House Majority Leader Cantor indicated the elimination of to create a “pro-growth tax proposal?” Two deductions and one credit are for housing. Is the special interest group homeowners or the construction and real estate industries? Or both? The Making Work Pay credit is for low-income filers; don’t charitable contributions benefit them, too? How about the 41 states with income taxes (whose residents can deduct from their federal income taxes)?

I agree with Mr. Cantor. Let’s eliminate all the special interest deductions and loopholes from the income tax codes (for both individuals and businesses). Here is how we can identify the special interests: if there is a lobbying organization or any group funneling money to politicians or who fund issue advertising that favor a credit or deduction, that is a special interest and it goes. Bye-bye mortgage interest deductions, ethanol subsidies, agricultural subsidies, education credits and the deduction for charitable contributions. And many, many, more.
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