Tax Man

The sum total of my tax knowledge wouldn’t fit in the upper half of a 1040 form. Just the same I thought I’d wade into this latest plan from Congress. In order to understand it a little better (and be an adult) I’ve skimmed a couple of breakdowns that summarize the plan. My eyes glazed over a few times but I forced myself to focus like my college homework days. Reminding me of my Geology class freshman year and dozing off in front of an open text. It wasn’t a hard class but common, science plus rocks equal sleep.

Since I own a home the Mortgage Interest Deduction is something I thought to look at because I use it. Or at least I thought I did. Turns out I don’t qualify anyway and have to take the standard deduction. I don’t make enough money. Ok so this is good, soak the rich baby! Not sure what the current rate is but I am a safe distance away from it for now. The bill says only those above a certain threshold ($500,000) on new home sales get their deduction capped at a $10,000. So far so good. This might be the most controversial part of the bill since the home buyer groups will oppose it. If it remains in the final version it will certainly affect new home sales, which is bad for construction companies and realtors.

Another part that seemed strange was the limit on deductions for (SALT) state and local taxes. I don’t understand the thinking behind giving federal tax deductions for interest  paid to states and cities. This is like getting a price break on a new muffler from Pep Boys because you had to pay for new tires at Midas. Why should Midas care that you already paid to have a different problem fixed at Pep Boys? There might some give back the states are required to account for but I’m unaware of it. It seems if states and cities want to charge high rates for whatever excuse they can muster it shouldn’t be the fed’s problem. In either case I’m good. I live in a low tax state (relatively) and my deductions don’t amount to much anyway. So hooray again and soak the blue states!

The best part is the portion least likely to remain in place: the corporate tax rate will go to 20%. I say “best” because it practically guarantees companies will have the extra cash to invest in research and development, new construction and new hiring. Who doesn’t want more money and better paying job? The current rate is 35%, the highest in the world. In truth though hardly any company pays this rate. Most have exemptions and offsets built in to their current obligation. In order to get big business to back the plan the rate needs to be significantly lower since they are loathe to surrender their offsets. Some energy companies get to deduct ‘intangible drilling’ costs and ‘percentage depletion’ to account for fewer oil reserves. This is how they avoid paying the hefty top rate.

Part of the reason that going full overhaul on the tax code is so difficult is because someone always loses. They either lose a deduction they’ve counted on for years or they lose an incentive for business or personal reasons. Much easier to lobby an industry group, like labor unions or energy lobbies, to slip in a provision to the existing code. This is why the US has so many exemptions.

Think about why that probably is. If a blue state like California elects politicians who promise to ‘go green’ and cut carbon emission from the atmosphere, they are likely to tax coal. A coal state like West Virginia meanwhile elects representatives who promise to stop EPA overreach. They are likely to put an exemption in place for coal emitters. Both get what they want. Congress passes a bill limiting carbon in the atmosphere with a special exemption for coal. California politician can say he “Got tough on polluters” while West Virginia’s rep can say he saved the industry money. It is messy but the alternative is even messier, trying to write a new code. For any tax to work, it must reduce the overall tax burden below what companies would pay under any current law.

As with most giant re-writes this one will change significantly and resemble a small scale version of the existing one. The idea to change tax law is both to make it simpler and to cut down on the overall tax burden for corporations. If votes weren’t necessary the Republicans would only do the corporate part since this is the quickest way to grow the economy. Tax cuts for the middle class are pretty marginal at growing the economy but changing the law without including households is a nonstarter politically.

I imagine the reason that some get cuts while others lose their benefit is so the budget math balances. Congress has to account for a theoretical loss of income and offset that loss with increasing money from other areas. Federal tax experts always talk about ‘paying for cuts’ as if they shouldn’t nix some of the current runaway spending. The last budget was over 3 trillion dollars. Are there really no federal programs we can do away with? Even in a vibrant economy 3 trillion is ridiculous. I understand wars and health care are expensive but it shouldn’t be this expensive.

Anyway my tax knowledge is building about as fast as that giant cup of spare change on my dresser, but building still. Budgeting beats Geology anyway.