Wednesday, April 11, 2012

Gotta Share This...


By Brett Arends... @ Smart Money

Have you got your Schedule C in order?

Have you hunted down all your receipts? Have you made sure to count the depreciation on your laptop and the percentage of your cable bill attributable to your home office expense? And what about those education credits?

Why isn't there a riot about this? According to the National Taxpayers Union, we each waste about 12 hours a year, every year, filling out this crazy stuff. Schedule B. Schedule C. Above the line. Below the line. Deductions, exemptions, non-refundable credits. Medical bills over 7.5% of adjusted gross income.

It's like we're being mugged and held hostage. Every year.

The instruction booklet for the 1040 now runs to 189 pages. No kidding. Seventy-five years ago, says the NTU, it was two pages.

The U.S. tax code is insane and out of control. It's tripled in a decade. It now runs to 3.8 million words. To put that in context, William Shakespeare only needed 900,000 words to say everything he had to say. Hamlet. Othello. The history plays. The sonnets. The whole shebang. But the IRS needs four times as many words? Really?

Your tax bill this year is a lie. You're only seeing about two-thirds of the full cost of government services. Really. Taxes are $2.3 trillion. Government spending is $3.6 trillion. The rest is being put on the national credit card.

The tax bill is a lie every year. We've only paid our bills in full on April 15 five times in the last fifty years. The last president to balance the books every year he was in office? Calvin Coolidge - back in the 1920s. How pathetic is that?

Deficits are just future taxes. According to the non-partisan Tax Foundation, "Tax Freedom Day" falls on April 17 this year - but "Deficit Day," which includes the full bill, won't come for another month.

Aunt Sally in Dubuque lives off her savings. Her taxes should be relatively simple. But good luck with that.

She has money invested in blue-chip companies like AT&T and Wal-Mart. Her stock dividends are taxed at 15% or less. Meanwhile her bond coupons are taxed at ordinary income rates up to 35%. It's crazy.

Yes, I know the corporations get a break on their bond payments. But what's up with that?

Now try this: Aunt Sally can pay lower taxes on the money she makes from bonds - but only if she sells them after a year for a long-term capital gain. If she hangs on and keeps clipping the coupons, she gets whacked with higher taxes.

The tax treatment of investment income is arbitrary and stupid. We treat debt and equity differently for companies and investors. It's irrational. The rules encourage debt. And we treat long-term capital gains better than short-term ones. That's absurd. We only buy securities because we think they are undervalued. Why is it better if they rise in price slowly instead of quickly?

It doesn't end there.

Why should you pay income tax on zero-coupon bonds last year just because they rose in value - even if you didn't sell them or pocket any income? If that's the rule, why shouldn't you pay income tax on your Apple stock? Instead you don't even have to pay capital gains tax, until you sell.

Uncle Sam should stop bribing me to borrow money I don't have to buy a home that I cannot currently afford.

The mortgage interest tax deduction is wildly popular, but it's a terrible idea. The logic is upside down. It rewards debt and real estate speculation. It rewards high earners who buy really pricey homes at the expense of everyone else.

Forget the idea of a "middle-class tax break." If you're a typical family, you're lucky to save a few thousand dollars. But if you're a bond trader buying a Park Avenue penthouse it could save you $20,000.

Until the recent housing collapse - caused, of course, by too much debt - this tax break helped drive up real estate prices. That priced many ordinary people out of the housing market. They had to borrow even more to get in. Cue the debt crisis. (Or they were forced to rent for longer - and their rents, perversely, weren't deductible.)

According to various analyses, home owners "save" about $130 billion a year from this break. But that's nonsense. Tax breaks like this drive up overall tax rates for everybody. To bring them back down, you have to borrow money and buy an expensive home so you can take the deduction.

(*RUEFUL CHUCKLE*) (*SMIRKY GRIN*)

[Just] get rid of this stupid break and just raise the standard deduction for everyone[!]

Uncle Sam wants me to save for my retirement. But only under certain conditions. Sure, he says, I can put aside $17,000 in pretax income. But only if I save through my employer's 401(k) plan. If I'm a regular salaried worker, I can't go down to Fidelity or Schwab and open my own such plan. Why not?

(*SHRUG*)

For that matter, why am I allowed to invest $5,000 in a Roth IRA, but only if my income is below a certain threshold?

Why are married couples filing taxes separately basically not allowed to invest in a Roth IRA at all?

And why do the "catch-up" provisions, which allow people to save even more in their IRAs, only kick in once they turn 50? Isn't that too late? Shouldn't we be encouraging people to save more when they are younger?

Uncle Sam has some good instincts, but he is like your worst boss or your most annoying aunt. He just can't stop meddling. He just can't leave people alone.

Most 401(k) plans are mediocre, because employers run them. They have to protect themselves from costs and liabilities. So they limit the choices, and shunt you into one-size-fits-all investment plans. Yet amazingly they often include one of the riskiest investments you can make - their own stock.

It makes no sense. If Uncle Sam wants me to save $17,000 off the top of my income, he should just let me do so, and get out of my way. And the "catch-up" provisions should affect everyone.

Tax Freedom Day came early in Louisiana this year: April 1. Bully for them. But there's a reason which has nothing to do with freedom. I'm helping pay their bills. According to the last study conducted by the Tax Foundation think-tank, taxpayers in certain states - mainly in the northeast, and along the West Coast - typically pay far more in federal taxes than they get back in federal spending. Here in Massachusetts, we paid at last count about $1.22 in taxes for every dollar we got back. In New Jersey, which apparently fares the worst on this measure, they paid $1.64.

The main reason for this is that we live in high cost, high income states. Uncle Sam taxes us on our high incomes, but makes little allowance for high costs. The winners are those in states with lower incomes, even though they also have lower costs.

In Louisiana, they paid less than 60 cents for every dollar they get back. Lucky them. I congratulate them on playing the game so successfully. But that doesn't mean I want to keep playing - with my nickels.

You'd think the politicians from states like mine would be down in Washington, D.C. fighting to bring my money home, wouldn't you? Funny thing - they're doing exactly the opposite. They're the ones pushing every expensive federal program you can find.

The Tax Foundation study is long in the tooth these days - the last related to 2005 - but it was pretty consistent year after year, and there's no reason to think the picture has changed that much since.

So let's bring the money home. Each state should pay its own way. Last I looked, this was the principle enshrined in the Constitution anyway.

Some people on Capitol Hill want to solve their deficit problem by limiting the amount of state taxes you and I can deduct. I will vote for anyone who vows to do the absolute reverse, and lets me cut my federal tax bill, dollar for dollar, by the amount I pay in my state.

Apple made billions of dollars overseas last year, but it won't have to pay U.S. tax on the money so long as it leaves it there. The same goes for Exxon, General Electric, and Johnson & Johnson.

You and me? Ha ha[!]

The United States is about the only country in the world that taxes its citizens on all their worldwide income. And, most outrageously, it does this even if they live overseas. Yes, even on money they earn overseas, and on which they are already taxed overseas.

I know this issue leaves most people cold. If you're a Democrat, you probably think Americans working abroad are all super rich tax cheats. If you're a Republican you think they're all fancy-pants elitists sitting around left-wing salons in Paris sipping chardonnay and -- even worse -- eating brie (this is now a capital offense in Texas).

Yes, everybody hates them.

But this is a myth, a cartoon. And what's at stake here is a basic matter of justice and common sense. Americans working abroad are mostly middle-class, and they get whacked with two tax bills -- one from the host country, and one from Uncle Sam. It's grotesque. The compliance costs are a nightmare. I have personal experience of this. When I lived in London I had to spend a fortune employing two sets of accountants. If I hadn't, I would have ended up being taxed at a marginal rate of 80%. No kidding.

No other major country does this. Belgians living here don't have to pay Belgian taxes too. Ditto immigrants or temporary workers here from India, or Canada, or Singapore. The rest of the world has worked it out.

Our rules don't catch the rich tax cheats anyway. They get around them. The real victims are middle-class Americans who have families overseas or who gain work experience there.

The rules no longer effect me, but I know many people still getting shafted. A good friend now in London permanently, and raising a family there, goes through this every year. His U.S. citizenship costs him many thousands of dollars a year. I asked him if he'd give it up. His reply? "I can't. If I do, the Federal government will treat me for the rest of my life like I'm a terrorist or a drug-dealer."

How nice. Makes you so proud, doesn't it?

The average family probably spends $10,000 a year on their cars. They spend thousands on cell phone bills and cable TV. We think nothing of paying $2.50 for bottled water and $5 for a cup of coffee with a fancy name. We stand in line to replace last year's iPhone with this year's iPhone, and the fashion industry has no problem selling $300 shoes. But when it comes to paying a dollar in taxes, we scream absolute murder. It's an outrage! It's a con! Look at all the waste!

Nobody likes paying taxes, and our nation was founded on a tax revolt, but can we please get a grip?

After taking personal exemptions and the standard deduction, a typical family of four earning $50,000 a year is left with taxable income of just under $24,000, and would owe income tax of about $2,700. Yes, it's annoying, but is it the end of the world?

Okay, throw in thousands more for payroll taxes. But then you do get Social Security and Medicare at the end.

(If we didn't pay those taxes, we'd have to pay a lot more for retirement savings and health insurance.)

I'd take the complaints more seriously if our country didn't win the gold medal each year in the Wasting Money on Junk Olympics. We are schizophrenic about waste.

It does actually cost money to run a country, from roads to the FBI to providing relief. Meanwhile the most popular bogeyman, international aid and related spending, accounts for about one percent.

A guy washing dishes in a restaurant pays 15.3% tax on the first dollar he earns. If he's single, after he's made about $9,000 he has to pay another 10% in income tax, taking his marginal rate up to 25%.

Meanwhile your friendly neighborhood plutocrat is paying 15%, or even less.

I have nothing against plutocrats (some of my best friends, etc.) but you do not have to be Karl Marx to think this is completely upside down. Even Adam Smith, the godfather of the free market, said taxes should be related to the ability to pay.

According to the IRS, the top 400 taxpayers paid an average tax rate of 18% in 2008 (the last year measured). That was an increase from the previous year.

You needed adjusted gross income of $110 million - not wealth; income - to make it into this exclusive club. Yet a third of these guys paid less than 15% tax.

Aunt Sally in Dubuque pays the same tax rate on her stock dividends as Bill Gates. And if she lives on bond interest, while he enjoys stock dividends, she will pay a higher rate. Meanwhile corporation taxes - so beloved on the left - are flat or even regressive in their effects.

Worst of all? The so-called "carried interest" boondoggle.

If you make $500,000 running a restaurant or a factory the government will tax your income at ordinary rates, up to 35%. Ouch. But if a hedge fund manager makes millions, he only gets taxed at 15%. He gets a special low rate because of the big favor he's doing us all by running a hedge fund, while people like you take it easy running a factory. What kind of moron thought this up?

Forty years ago Congress - sorry, I gave you the answer - was shocked to discover that the tax code had become so complicated and insane and riddled with loopholes and the like that a few very rich people were able to game the system successfully. They were paying little, if any, tax.

The sensible response to this was to treat it as a wake-up call, and simplify the entire system.

Congress instead added yet another layer of complexity. They created a second, parallel tax code, the AMT. You have to run your tax calculations under both, and pay whichever bill is higher.

Making matters worse: They didn't index the AMT tax brackets for inflation. No, really. This year, AMT calculations kick in at $75,000 if you're filing jointly. For singles, it's $49,000.

You couldn't make this up[!]

The net result is that a tax designed to catch a few very rich people is now hitting millions of middle-class Americans, and the picture is getting worse.

The non-partisan Tax Policy Center in Washinton, D.C., says it will hit a record 4.3 million taxpayers this year.

Meanwhile, many of the super rich get around it anyway.

When someone writes the definitive history of the collapse of American competence, AMT will have its own section. There is absolutely no defense for it - none - and yet it persists, year after year.


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