I’ve just finished a multi-day dialogue with my tax software. As always, I’m grouchy when I get to this point. So, as always, I’m ready to vent.
This year, I was ready even before I’d started keying in figures, shuffling through bills and 1099s, etc., thanks to an action alert from Americans for Tax Fairness.
And it’s fairness that’s on my mind, as I consider what I owe, what I might have, but for some advantages and advantages that only others enjoy.
Corporate Dodges and Intended Breaks
Americans for Tax Fairness seized on what, for obvious reasons, it calls a tax dodge. Seems that Pfizer, the pharmaceutical giant, planned to evade an estimated $35 billion in U.S. taxes owed on profits it’s made overseas.
You may have read about the maneuver — a so-called inversion. A new rule has apparently queered it. But the dozens that are already done deals have enabled corporations to shift profits to others in low-tax countries and then borrow or lend them as if they weren’t gained here.
Many American corporations shield profits they’ve made in this country from taxes without fictitiously relocating. They instead attribute them to subsidiaries — often merely mailing addresses — in jurisdictions that impose little or no tax. The tax havens enable them to collectively avoid an estimated $90 billion a year in federal income taxes.
Last year, we individual filers, who can’t engage in such maneuvers, paid somewhat over $1.5 trillion in income taxes. Corporations paid about 22% as much.
It’s not only the maneuvers that account for their seemingly skimpy share. They can claim diverse tax credits, exclusions and, in some cases, speedier write-offs to reduce their tax liabilities. Fingerprints of special interests all over some of these, as I’ve noted before.
What the American Public Says
No one likes paying taxes, of course. But most of us aren’t much troubled by what we have to pay, according to a Pew Research Center survey. A majority of us, however, are bothered “a lot” by the feeling that some corporations don’t pay their fair share. Nor wealthy individuals.
Tax fairness is in the eyes of the beholder, I suppose. But it’s hard to view our tax system as fair. What those with plenty of money don’t pay, the rest of us must — or live without what the tax revenues could pay for.
Some of both, it seems, since we all endure under-funded transportation systems, lapses in agency enforcement of environmental rules and the like.
And many of us have major concerns about insufficient funding for a host of programs that serve needs we may not have ourselves, e.g., high quality education for disadvantaged students, childcare subsidies, food assistance and other safety net benefits.
Tilt Toward Well-Off Individuals
It’s not only loopholes and preferences deliberately built into the corporate tax system that rankle us. As I indicated, most of us also feel that the individual tax system lets other people pay less than their fair share.
Forty-two percent of the Americans Pew surveyed feel that at least some poor people don’t pay enough. Far more feel that wealthy people don’t pay as much as they should. Very few — only 4% — put themselves in this category, it seems, suggesting the rest of us aren’t bothered by tax breaks that benefit us.
What seems beyond question is that the system is structured to reward certain choices of how to spend and how to get money — choices that far from all of us have.
On the spending side, we’ve got the mortgage interest deduction — the second largest preference in the individual tax code. The federal government will forfeit roughly $77 billion this year so that people can purchase homes — not just one per individual or family, but two, including a yacht.
The benefit to higher-income households, combined with the property tax deduction is, on average, more than four times greater than what the federal government spends to subsidize housing for low-income people.
On the getting side, we’ve got the lower tax rate on income gained by selling stocks and other assets, including those extra homes that qualified for the mortgage interest deduction. Same lower rate on dividends from stocks held for more than a couple of months.
No tax at all on money socked away in special savings accounts for college tuition and related expenses or healthcare costs insurance doesn’t cover. Justifiable as these breaks may be, they don’t benefit people people who need every penny they’ve got to keep food on the table, a roof over their heads, etc.
By and large, low-income filers get few tax breaks — and only if they’re both working and raising children. The largest of these preferences — the Earned Income Tax Credit — can actually increase income (not taxable).
But it does little for workers who don’t have children they’re supporting in their homes for most of the year. So little that the lowest-paid are taxed into poverty — or deeper poverty — because their credit doesn’t even offset what’s deducted in payroll taxes.
These, however, are only workers with Social Security numbers. The EITC does nothing at all for those who don’t have legal authority to work in this country, but dutifully pay taxes on what they’ve earned.
Now these are all preferences (or the opposite) deliberately built into the tax code. We’ve also got at least one gaping loophole — a provision that allows hedge fund managers to pay the capital gains rate on compensation they receive for doing their job.
They collectively save an estimated $18 billion a year. Here too, we pay that much more or lose what those billions would pay for.
Consensus Only on Need for Fairer Taxes
Everybody from left to right agrees that the federal tax code is ripe for reform. No consensus on what a fair system would be, however, as plans Presidential candidates have floated show.
We all, I think, can see how some of those plans would make the system less fair. But I, for one, couldn’t spell out what a fair tax code would look like.
I’m pretty sure that I’d pay more because, animadversions notwithstanding, I claimed all the deductions I could and paid the lower capital gains/qualified dividends rate.
No way to waive that rate. But I could donate the savings to the federal government. I’ll just stick with charities and, feeling somewhat hypocritical, deduction my donations again next year.