Tax deductions, not rates, hurt U.S. budget

 

It’s Tax Day on Monday and I have plenty of reason to denounce the government – my federal tax bill has doubled since 2006.

How could that be?
I could rant about how Americans are “taxed to death,” but I know that the facts show that’s not true. I could blame it all on President Obama. Except that he has kept the Bush tax cuts intact for middle class families like mine.
Despite all the rhetoric in Washington and on talk-radio, the conclusion is fairly obvious. The issue is not tax rates. The issue is tax breaks.

Across Michigan, those who are paying Lansing for the first time in many years, rather than receiving a refund from the state, suddenly realize the value of the old child tax credit or the big tax exemptions on retirement income. Their tax bill is going up due to the loss of deductions. Their rates remain the same.
In a speech in Harrison Township on Friday, Gov. Rick Snyder said that he is trying to “blow up” the Michigan tax deductions and credits but the state still begins its annual budget process with a $500 million hole due to long-term tax giveaways promised by legislators.

At the federal level, the impact of tax loopholes and exemptions looms much larger. Forbes magazine listed the most expensive tax policies and came up with basic, middle class deductions that add up to massive numbers.
That is why Congress remains so squeamish about revamping the tax code and creating a fairer revenue-generating system.
According to Forbes magazine, the largest “tax expenditure” granted by Washington is the business deduction for employer-paid health insurance. Those who denounce Obamacare as an expansion of the federal government may want to consider that, for years, the single largest loss of revenue was caused by federal subsidies for health care.
That one tax break will cost us $760 billion over the next five years – a figure that is nearly equal to budget deficit projection for the coming fiscal year.

Other major tax deductions include state/local taxes, $431 billion over five years, and the mortgage interest deduction, $379 billion over the next five years.
We all pay for each of those big tax subsidies. The political reality is that Congress cannot slash or eliminate these tax code goodies, but they can subject them to means-testing so that a nation struggling with huge deficits is not subsidizing the mortgage and property taxes paid on million dollar homes with six bedrooms, eight bathrooms and an indoor pool.
The tea party types who rail against federally subsidized housing for the poor must come to the realization that the nation’s mansions and vacation homes are also subsidized by Washington.

It’s also worth noting that, for every $1 paid to Uncle Sam by taxpayers, low-income housing assistance costs one penny. Welfare payments and food stamps combined cost less than 3 cents on the dollar.
In the politically polarized atmosphere of 2013, the disinformation about taxes is probably exceeded only by the overblown visions of a federal bureaucracy gone wild.
In addition to foreign aid, federal programs that cost a family earning $50,000 less than $1 a week include: Customs and Border Protection, mass transit, special education, Centers for Disease Control (CDC), National Forest Service, FBI, foster care and adoption, NASA, the Agriculture Department, employment and training programs, the entire worldwide U.S. diplomatic corps, National Science Foundation, and the Environmental Protection Agency (EPA).

House Speaker John Boehner is fond of saying, “We don’t have a taxing problem. We have a spending problem.” Yet, Speaker Boehner knows that we suffer from both problems. As a percentage of GDP, revenues are historically low and expenditures are extraordinarily high.
In reality, Americans’ overall tax burden is at its lowest level, compared to personal income, since 1950.
Of course, we’ve got a whole lot of things to pay for that we didn’t have in 1950 – Medicare, Medicaid, a huge Pentagon budget and two wars, a much more elaborate transportation and airport system, and environmental protection – just to cite a few big-ticket items.

As Americans, we want it all; we just don’t want to pay for it.
That’s why we receive $1.40 in services for each $1 we pay in taxes.

Tax deductions that we all take for granted play a huge role in that unbalanced math. The federal tax rate set by Congress is just a starting point. It means practically nothing. The real tax burden is reflected in your “effective rate” – the bottom line on your 1040 IRS form.
The system is loaded with deductions and credits that essentially provide financial rewards or assistance for buying a home, having kids, paying tuition, buying stock, making your house more energy efficient, buying a fuel-efficient car, and saving for retirement.

The result?
The average middle class household, after deductions, pays a true income tax rate of less than 10 percent – in many cases closer to 5 percent -- according to the Congressional Budget Office.
As for complaints that U.S. corporate taxes are a burden, corporate profits hit a 60-year high in 2011, just as the effective corporate tax rate hit a 40-year low. America’s largest companies, in fact, haven’t paid the full corporate tax rate in 45 years, and 26 have avoided taxation altogether for the past four years.

More than 25 years have passed since the last major overhaul of the U.S. tax code. We could hope for a repeat of 1986, when Republican President Ronald Reagan teamed up with congressional Democrats to enact the Bradley-Gephardt bill which lowered rates and eliminated numerous deductions.
Yet, we all know that Washington in 2013 is so paralyzed by hyper-partisanship that hoping for such a partnership is folly.

In Michigan, the new pension taxes have angered seniors as they send tax returns off to Lansing. But Michigan previously featured some of the most lucrative tax givebacks to retirees in the nation. For a state that ranked last or near the bottom in numerous economic indicators at the time, Snyder rightly decided in 2011 that Michigan’s generous retiree tax policies, based solely on age, had to end.
Consider this: The state income tax hike under Jennifer Granholm was barely noticed. The federal payroll tax cut of 2011-12, the most significant tax change for the working class in many years, was barely acknowledged.
But changes in deductions have a conspicuous impact on the taxpayer’s bottom line.

As for me, my effective tax rate was just 4 percent several years ago when I had two kids living at home and attending college. Now, my effective rate is 8.1 percent. But my circumstances have changed.
There is no “empty nesters” tax deduction and I don’t expect there to be.
I just want assurances that my contribution to Uncle Sam is based on a fair, reasonable system that’s designed to maintain the middle class while keeping deficits in check.

I never had six kids/tax deductions.
Then again, I never had a house with six bedrooms.