Any tax reform that lowers the top rate and scraps deductions should be rejected (user search)
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  Any tax reform that lowers the top rate and scraps deductions should be rejected (search mode)
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Author Topic: Any tax reform that lowers the top rate and scraps deductions should be rejected  (Read 2374 times)
Torie
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Posts: 46,106
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Political Matrix
E: -3.48, S: -4.70

« on: March 15, 2013, 09:14:43 PM »

Deductions are worth far more to me than you guys out of box. The higher your tax rate, the more the value of the deduction. Heck maybe close to half of taxpayers get no deductions, because they claim the standard deduction. The whole thesis here is flawed. The middle class in the US is one of the most "under-taxed" in the world by the way, which is in part generating the fiscal crises, but I digress.

Dumping deductions, while lowering rates also leads to less tax incentives to make economically inefficient decisions, because the cost of the inefficiency is less than the value of the deduction favoring such inefficiency. Thus more buy homes than they "should." More invest in real estate than they "should." Charities are subsidized. And the cost of farmland is inflated.
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Torie
Moderator
Atlas Legend
*****
Posts: 46,106
Ukraine


Political Matrix
E: -3.48, S: -4.70

« Reply #1 on: March 16, 2013, 10:36:57 AM »
« Edited: March 16, 2013, 10:38:54 AM by Torie »

Deductions are worth far more to me than you guys out of box. The higher your tax rate, the more the value of the deduction. Heck maybe close to half of taxpayers get no deductions, because they claim the standard deduction. The whole thesis here is flawed. The middle class in the US is one of the most "under-taxed" in the world by the way, which is in part generating the fiscal crises, but I digress.

Dumping deductions, while lowering rates also leads to less tax incentives to make economically inefficient decisions, because the cost of the inefficiency is less than the value of the deduction favoring such inefficiency. Thus more buy homes than they "should." More invest in real estate than they "should." Charities are subsidized. And the cost of farmland is inflated.

This is true. My parents just sold their home in the Bay Area, and thus now will start getting hit by higher taxes since they can't deduct that from their income. Now they are thinking of buying a condo and renting it out to lower the amount of income subject to a tax. Wouldn't it be great if deductions were capped at a lower amount so they wouldn't have an incentive to do that and if tax rates were lowered on their income up to say 150-200k (I think the rates above that should remain the same even with a deduction cap. The rich do need to be soaked a little more.)?

The economically "efficient" rule would be to allow mortgage interest deductions without a cap on your personal residence, but offset that deduction with the imputed value of your home as a rental, since you are basically renting the house to yourself as both the landlord and the tenant, but the rental "income" is not taxed. I say this because if you have the cash, and mortgage interest is not deductible on your home, then you have an incentive to not have the mortgage, and pay all cash, because otherwise that cash will be generating taxable income, while the mortgage that allows you to have that cash, involves the payment of interest that you cannot deduct. The cost of money should be deductible always.  The same is true really for any such debt, including say credit card interest, which involves the same principle, although at a 20% interest rate, that is a bit rich, so only the interest cost should be deductible which represents the cost of close to a risk free loan, not a risky one, or one charging a predatory interest rate. Are you following all of this?

I oppose all deductions for state and local income taxes. That is just a subsidy to the localities from the Feds (and again favors high tax bracket taxpayers). Such subsidies should again be means tested, not across the board. In other words, Mississippi gets money, but Connecticut does not.  So the property taxes on your home that is not rented out generating taxable rental income should not be deductible.

Make sense?  Of course, most of this will never happen.  Tongue
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Torie
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Posts: 46,106
Ukraine


Political Matrix
E: -3.48, S: -4.70

« Reply #2 on: March 16, 2013, 01:25:51 PM »

I was discussing tax policy vis a vis economic efficiency. One can argue for public policy reasons for some inefficiency, although, no, most people probably pay more in mortgage interest than they could earn renting the house out after expenses  but prior to interest carry costs.

Adjusting means testing subsidies for regional cost of living indexes is a complex and difficult issue. It might be good public policy to encourage economic migration to lower cost areas, rather than subsidize the truncation of such migration. The devil is in the details.
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Torie
Moderator
Atlas Legend
*****
Posts: 46,106
Ukraine


Political Matrix
E: -3.48, S: -4.70

« Reply #3 on: March 16, 2013, 01:59:41 PM »

I was discussing tax policy vis a vis economic efficiency. One can argue for public policy reasons for some inefficiency, although, no, most people probably pay more in mortgage interest than they could earn renting the house out after expenses  but prior to interest carry costs.

I thought you meant deducting the entire rental income from the mortgage interest paid. Of course if you meant what the person gains after paying the interest on the mortgage, property tax and other expenditures, that is a different matter.

Yes, we are talking NOI here (net operating income before debt service other than principal pay down, to wit interest costs), not gross rental income.
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Torie
Moderator
Atlas Legend
*****
Posts: 46,106
Ukraine


Political Matrix
E: -3.48, S: -4.70

« Reply #4 on: March 16, 2013, 05:08:28 PM »

And therefore ... ?
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Torie
Moderator
Atlas Legend
*****
Posts: 46,106
Ukraine


Political Matrix
E: -3.48, S: -4.70

« Reply #5 on: March 16, 2013, 05:28:03 PM »


The middle class would miss these deductions far more than the wealthy.

That is indubitably true - unless offset by lower rates. However, the pension plan rules are pretty heavily skewed in favor of high income earners (an above the line deduction), along with to a lesser extent, the deduction for state income taxes, until you hit really high levels of income, and such deductions are phased out.
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Torie
Moderator
Atlas Legend
*****
Posts: 46,106
Ukraine


Political Matrix
E: -3.48, S: -4.70

« Reply #6 on: March 16, 2013, 07:28:43 PM »
« Edited: March 16, 2013, 08:08:18 PM by Torie »


The middle class would miss these deductions far more than the wealthy.

That is indubitably true - unless offset by lower rates. However, the pension plan rules are pretty heavily skewed in favor of high income earners (an above the line deduction), along with to a lesser extent, the deduction for state income taxes, until you hit really high levels of income, and such deductions are phased out.

Pension plan contributions are limited to about $18000 a year and Ira deductions are limited to $5000 per person.  

Lower tax rates would just add fuel to the fire of the problem by giving the wealthy a further benefit.  In a addition to losing a deduction that didn't mean much to them anyway, they get their rates lowered.

Nope. The limit is 55,500 actually for 2012 (including the $5,500 "catch up" for those over 50 years of age). My partners did that for 2012. They, and I, did this for about 20 years paying pennies into our two secretaries' SEP IRA's, all above the line deductions, considerably more valuable than Schedule A deductions because they come off the top from gross income. I don't make enough anymore to hit the max because I don't work for pay these days anywhere like I used to, and thus am not allowed to put in quite that much these days (for 2012 about a "mere" 40K this year maybe, I am not sure yet). Feel my pain.

You could give lower rates for the middle class, and not high income earners.

Any more thoughts on this or are we done?
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Torie
Moderator
Atlas Legend
*****
Posts: 46,106
Ukraine


Political Matrix
E: -3.48, S: -4.70

« Reply #7 on: March 17, 2013, 12:16:55 PM »

How about a 9.75% sales tax rate nationally and no income tax?

Yeah, screw poor people.

I can imagine the howls if I said something like that.  Tongue
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