Did I Pay My Fair Share of Income Taxes?

March 19, 2015

Here we are again approaching the deadline for filing income tax returns. I’ve just finished an all-day session with my tax software and miscellaneous 1099s, receipts, cancelled checks and the like. Now I ask myself whether I paid my fair share.

To borrow from a former President, it depends on what the meaning of “fair” is. Like most people, I suppose, I believe it begins with paying more than filers with lower incomes. Like most, but not all people. We mustn’t forget the flat tax folks, who’d consider our tax system fair if everybody paid the same share of his/her income.

I’m pretty sure I paid more than people with considerably lower incomes, but I doubt that translates into my fair share. I’ll tell you some of the reasons why because they speak to what seem to me dubious preferences built into the federal tax code.

First off, I paid a lower percent of my income than people who earned the same amount by working. That’s because I benefited from the preferential rate for both capital gains on assets held for more than a year and qualified dividends, i.e., those that meet specific criteria, as most paid to shareholders in U.S. corporations do.

Defenders of the rate claim, among other things, that it’s an incentive to invest — thus grows our economy, creates jobs, etc. This seems to me pretty lame. What would I do with the money instead? Spend it all, which itself would grow the economy? Put it under my mattress? In a savings account, where it would lose purchasing power because the interest rate is usually lower than the inflation rate?

Defenders also claim the money has already been taxed, either as corporate profits or as income earned by working. For me, the latter isn’t altogether true — at least, not in the sense that I would be taxed twice. I have as much investment income as I do because I was a beneficiary of trusts established by my grandmother and younger sister.

I sold some of the stocks I inherited last year and others in earlier years. I didn’t pay taxes on anything close to the difference between purchase and sale prices — the usual basis for capital gains. Instead, I paid only the market value the stocks had gained since the trusts passed them along to me.

So the total profit was far greater than the taxed amount because the value of the stocks was “stepped up” to the dates when my grandmother and sister died. Nobody paid taxes on the value gained before then. I can’t see what’s fair about that.

But it’s not exactly a loophole, as President Obama has termed it. It’s a feature, not a bug in the estate tax — and ardently defended.

What then about the income taxes I pay to the District of Columbia? The District has a fairly progressive income tax structure. But the tax itself is based on the federal, both adjusted gross income and itemized deductions.

So the break for capital gains and dividends carries over. Likewise, the hidden capital gains break due to the stepped-up basis. I thus benefit twice over.

I don’t want any misunderstanding here. I’m not — and never was — one of those CEOs or hedge fund managers whose compensation packages are artfully structured to minimize what they owe Uncle Sam.

I’m a fairly ordinary middle-class person, born to middle-class parents, one of whom had a parent who actually bootstrapped his way off the streets of New York. Wouldn’t have those trust assets without him.

I understand that the tax code can’t be rejiggered to compensate for the advantages I’ve had because I chose my parents wisely. But that doesn’t mean it should pass those advantages along by preferential rates and the like.

The tax code, after all, is how our federal, state and local governments raise revenues for all the programs and services that compensate for disadvantages — from pre-birth through adulthood — that make it so difficult for people born poor and near-poor to live in reasonable comfort and security.

The Institute on Tax and Economic Policy says that a “fair tax system is one that asks citizens to contribute to the cost of government services based on their ability to pay.” I’m inclined to go further because so many critical services don’t cost enough now.

All but 14 of more than 150 federal programs that are supposed to serve the needs of low-income people — and in some cases, others too — have less in real dollars this year than they had in 2010. About a third have effectively been cut by at least 15%.

This argues for an end to sequestration, i.e., the spending caps Congress passed as a fallback, thinking (wrongly) that the members appointed to the so-called supercommittee would come up with a more sensible deficit reduction plan.

Such a plan would surely include measures to raise more revenues from individuals who have the ability to pay, as well as corporations that now have — and exercise — the ability to pay less than nothing.

Two Republican Senators — Marco Rubio and Mike Lee — have instead come up with a plan of sorts that would, among other things, altogether eliminate the capital gains, dividends and estate taxes.

If you think the tax code is unfair now, as I do, just imagine how more unfair it might be. And how much more unfair our country would be, since the Rubio-Lee plan would cause the deficit to skyrocket.

We know what would happen to programs for low-income people then. We need only look around our communities to see what’s happened already.



Time to Rethink Homeownership Preferences

November 13, 2012

Several months ago, I was sitting at our dining room table and thought I heard raindrops while my husband was showering. Turns out I was hearing water running down the inside of a wall from a pipe that had been leaking for some time.

So parts of the pipe had to be replaced, of course. Also the rotted drywall, plus an unrotted portion that the plumbers had sawed out. And the whole dining room-living room area had to be repainted because the new drywall would otherwise look lighter.

Got me to thinking about costs of homeownership we don’t read much about — and more generally, about how our public policies tend to push people toward a housing choice that, for many, may be personally unsuitable and/or financially imprudent.

Consider, for example, the federal income tax code. People who sign on to a mortgage get to deduct the interest they pay, plus “points,” i.e., upfront interest that cuts the mortgage rate. Also what they pay in real property taxes.

These are fine examples of  “upside down” tax policies — so called because they deliver the most to those who need it least.

High-earners get the largest deductions because their top tax bracket is higher and they generally buy costlier houses.

Also multiple houses. And they can take interest deductions on the first $1 million they owe for two of them.

Low-income filers who’ve managed to get a home loan get a much smaller tax benefit — less than $100, on average, from the mortgage interest deduction, according to a Center for American Progress brief.

In many cases, this cuts their tax liability less than the standard deduction they can take instead. Which one reason some economists say that the mortgage interest deduction doesn’t promote homeownership — only the purchase of costlier homes.

There’s, of course, no tax preference at all for people who indirectly pay mortgage interest and property taxes as a portion of their rent.

And they generally can’t deduct interest on other debt they incur, except for student loans.

Homeowners who borrow against their equity can — interest on as much as $100,000-worth of debt, no matter what they use the money for.

These policies don’t spring out of nowhere. Owning a home is a key element of the American Dream.

We pay more than twice as much to support it, through the tax code, as for all programs administered by the U.S. Department of Housing and Urban Development, CAP says. And the Center’s talking only about the mortgage interest deduction.

This deduction alone cost the federal government an estimated $140.5 billion last year — more than any other tax expenditure except the exclusion of employer-provided health insurance from what the Internal Revenue Services counts as income.

So there’s a good fiscal argument for blowing away the homeownership preferences — if not altogether while our economy in general and the housing market in particular are still so shaky, then when our recovery seems reasonably secure.

But I think there’s a broader argument as well.

Homeownership is fine for those who can afford it — not only the mortgage, the insurance and the taxes, but the unexpected expenses like leaking pipes and fires.

Fine for those who are quite certain they want to sink roots in one place — and can uproot if they need to, even if housing prices fall.

But we can have secure, stable communities and residents who engage in civic activities, go to PTA meetings, etc. without distorting housing choice incentives, though interested parties say otherwise.

We read that younger people aren’t embracing homeownership the way they used to. Perhaps, as some experts suggest, we’re witnessing “the creation of a generation of renters” — and thus a partial redefinition of the American Dream.

I think this would be a healthy thing for individuals, communities and our society as a whole.

Surely it would be healthy to rebalance public policies and our collective narrative of middle-class success so that signing a lease becomes every bit as good as signing a mortgage contract.

Who Are Those Folks Who Don’t Pay Federal Income Taxes?

October 25, 2012

You recall, I’m sure, the 47% of Americans who don’t pay income tax and thus can’t be persuaded to “take personal responsibility and care for themselves.”

Romney’s since said his statement was “completely wrong” — undoubtedly referring to the part that wrote all these people off because the part about 47% not paying federal income taxes is basically correct. Or would be if we substitute “households” for “people.”

The Center on Budget and Policy Priorities dug into data from a Census survey and the Tax Policy Center to find out who they are.

Not surprisingly, 22% of the non-payers are elderly — many of them presumably former low-wage workers now trying to get by on Social Security benefits or very elderly people who now rely on Social Security because they’ve exhausted whatever they had in retirement savings.

But the tax code gives seniors some special preferences. Their standard deduction is higher, for example. And all or some portion of their Social Security benefits may be tax-exempt.

These preferences, plus a credit for those with low incomes help explain why so many elderly filers wind up not owing anything.

Another 17% of the non-payers are students, people who aren’t working because they’re too sick or too severely disabled and some heterogeneous others, e.g., jobless workers, those who retired early (maybe because they couldn’t find jobs.)

Which leaves a surprising 61% who are working, as indicated by the fact that they pay, through deductions, the taxes that go to Social Security and Medicare.

About half of these people don’t pay federal income taxes simply because they don’t earn enough. The standard deduction, plus however many personal exemptions they’re entitled to brings their taxable income down to zero, as Roberton Williams at the Tax Policy Center explains.

Another 30.4% of working families, especially those with children don’t owe federal income taxes because the Earned Income Tax Credit, the Child Tax Credit and, in some cases, the Child and Dependent Care Tax Credit wipe out whatever tax they’d otherwise owe.

I personally have some difficulty understanding why I should be able to claim a higher standard deduction just because I’ve managed to live past the age of 65.

The tax breaks for working families are an altogether different story.

Anyone, I think, can understand why federal policymakers — Republicans as well as Democrats — decided to give low-income parents an incentive to work instead of relying on welfare benefits.

Also why they expanded the incentives when they ended welfare as we knew it, putting time limits on the benefits and setting the stage for the extraordinarily low level of support they now provide.

What’s difficult for me to understand is why Congressional Republicans — and apparently Romney as well — want to let the EITC and Child Tax Credit revert to their narrower pre-Recovery Act forms.

These, after all, are tax preferences that support core bipartisan values — work, marriage, child rearing, etc.

They also, in and of themselves, reduce the official poverty rate, as CBPP’s analysis of the 2010 Census figures shows.

If their end result is some 11.5 million or so working families owing no federal income taxes, that’s mainly because our policymakers prefer spending through the tax code rather than directly, as outlays in the annual budget.

Has nothing whatever to do with defects in personal responsibility — or, it seems, lead to solid support for the President, though some might say it would if the 47% voted their enlightened self-interest.

Do Taxes Have to Be So Damn Complicated?

April 17, 2012

I spent two and a half horrible days last week preparing my 2011 federal tax returns.

Worst of it was trying to answer questions my tax software was asking — and not because I hadn’t diligently squirreled away the mass of documents I thought I’d need.

It was the questions themselves — so many and some so perplexing, though I was quite sure I was supposed to know the answers.

Bookending the apparently relevant questions were long lists of potential deductions and credits I had to skim lest any apply. None did.

By the end of the process, I was ready to endorse a flat tax — that perennial favorite of far-right politicians and their think tanks. Well, not really.

But I truly was half-ready to get on board with Congressman Paul Ryan’s tax reform plan — not the rate reduction part, but the clean-out of the tax code that he claims would pay for it.

Shows how doing your taxes can drive you crazy.

As you’ve probably read, Congressman Ryan hasn’t said what tax breaks he’d get rid of. Nor has Mitt Romney, whose tax reform plan looks a lot like Ryan’s.

Smart move on their parts because the most costly tax expenditures — the technical name for policy preferences promoted by foregoing revenues — aren’t in those lengthy lists I skimmed.

They’re widely-applicable exclusions, deductions, credits and the like — employer-paid health insurance benefits, interest on home mortgages, contributions to retirement plans, etc.

Can you imagine the outcry if Congress decided to eliminate them?

And arguably it shouldn’t — not, at least, without making other policy changes to support the same goals.

The Earned Income Tax Credit, for example, is one of the largest and most effective anti-poverty programs we’ve got. In 2010, the Census Bureau reports, it lifted 5.4 million people above the poverty threshold.

Other tax expenditures also support major priorities, e.g., encouraging savings for a college education and retirement, home ownership, charitable giving.

But tax expenditures cost the federal government a lot — nearly $1.3 trillion this year alone, according to Donald Marron at the Tax Policy Center.

Some of them smack of nothing but successful lobbying — the now-famous corporate jet tax preference, for example, and a special deduction for alpaca breeders. Yes, really.

Seems to me we should get rid of these, though the savings would be relatively piddling.

But what about the more costly tax breaks that we who file as individuals may claim? There are good arguments against them too.

First off, most of them make our tax system less progressive since deductions are worth more to people with higher incomes.

A family in the top bracket, for example, gets more than twice the benefit per dollar paid in mortgage interest as a family in the 15% bracket. And, of course, families at the bottom of the income scale get nothing because it’s all they can do to afford a place to rent.

Second, economists say that tax preferences are generally inefficient. Those top-dollar individual benefits in particular are a waste of money because they reward people for doing what they’d do anyway.

Also, I should add, reward what we’ve no good reason to reward at all. Why give up needed revenues to reward a family for buying a vacation home in, say, La Jolla — or, for that matter, a yacht?

Top of my list, however, is the lower tax rate on long-term capital gains and qualified dividends — much on my mind after laboriously itemizing these.

I’ve never understood why tax policy should prefer wealth over work. The argument that the policy encourages the kind of risk-taking our economy needs seems to me stuff and nonsense.

What would we do if the money our money earns were taxed at the same rate as money we earn by working? Put in under the mattress?

The President, as you know, is pumping the Buffett rule. And surely it’s reasonable to collect a reasonable amount from millionaires — and billionaires like Buffett.

Nearly a quarter of them, we’re told, paid at a lower rate than comfortably middle-class filers during the most recent year the Internal Revenue Service can report on.

But we wouldn’t need yet another complexity in the tax code if we’d merely apply the same rate to investment income as to income earned by the sweat of the brow.


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