Tom Clyde: The tax code’s diminishing returns
A year and some change ago, Congress passed what was called sweeping tax reform. The biggest change was a big reduction in corporate tax rates. While it sounded outrageous to lower taxes on corporations, the reality was that our corporate tax rates were so out of sync with the rest of the world that it didn’t work. U.S. corporations were moving their headquarters into P.O. boxes in the Cayman Islands or Ireland to avoid US taxes. So it made sense to bring our rates sort of into the mainstream of other countries. The savings, which were theoretically going to turn into higher wages, mostly didn’t.
There was also a promise of lower rates for the middle class. President Trump and House Speaker Paul Ryan were shown smiling and holding up a new postcard-sized tax return that individuals would use. You would have a simplified tax law, pay less money, and do it all on a postcard.
They lied. Shocking. My “postcard” ran 38 pages this year, and it’s not like I’m running some complicated multinational venture. There are a few stock trades, some business expenses, and income that came in various flavors. In the end, the tax reform didn’t change my tax bill one way or another by enough to matter.
A lot of people with big families are finding out that their taxes went up. The standard deduction for a family went up to $24,000, so for a lot of people, there’s no advantage in itemizing deductions. That was more or less offset by the fact that the personal exemptions went away. If you have several kids, that’s a huge and expensive change.
Every year, when I go through this exercise, I wonder why we tolerate it. First off, IRS has almost all of the information you put on your return already. It would be simple for them to mail you a bill and say, “This is what we think you owe, do you have any corrections or additions?” So that’s where you put in things that don’t get automatically reported by your bank, employer, mortgage holder, etc. That would simplify things a lot. We don’t do it that way because there is a whole tax preparation industry that benefits from selling us software or helping file returns in booths at Walmart. People whose affairs are complicated enough to need an accountant would still need an accountant, but for most people, an IRS-generated return would spare us from buying software. The software sellers don’t much like that idea, and have successfully prevented that from happening.
Mechanics aside, the system is fundamentally unfair. What you pay depends as much on the flavor of your income as the amount. If your income comes from wages, you pay FICA on that, and then the income tax rate hits. If you’re self-employed, you get to pay both halves of FICA. There’s the standard deduction, or, if you own a house in Park City, you are probably paying enough interest to itemize. But in the end, you are going to pay a significant amount in tax on “earned income.”
On the other hand, if you bring in the same amount, but it comes from dividends, capital gains, and municipal bond interest — “unearned income” — you don’t pay FICA, and the applicable rate on the rest could be somewhere between 0 and 15 percent, 20 percent on capital gains if you are really raking it in. My effective tax rate is about a third what my nephew pays on essentially identical income. He has a job and I’m retired. Sucker.
There used to be a real disadvantage to renting. Mortgage interest is deductible because the real estate lobby has convinced Congress that the federal treasury should subsidize home ownership. Rent is not deductible, which ultimately makes it harder for renters to save enough to buy. In all but the high-priced housing markets, the increased standard deduction helps equalize that for renters. That was probably an accidental benefit rather than an intended outcome.
Trump’s tax returns are in the news again, or at least, the Democrats’ efforts to get a look at them. I suspect there were no loopholes left behind. If my return ran 38 pages, his must take a forklift to handle. The cable news pundits are insisting that even the most long-shot presidential candidates immediately release years of tax returns. It’s a year before the first primary vote is cast. Congress wants to pass a law requiring that disclosure — for presidential candidates, but certainly not for congressional candidates. Why would the public have any interest in what financial skullduggery members of Congress are up to? I’m all for disclosure when the field gets thinned, but also for disclosure from congressional candidates.
The fundamental unfairness of the tax code is really shameful. Each round of reform only makes it worse.
But have a nice day.
Tom Clyde practiced law in Park City for many years. He lives on a working ranch in Woodland and has been writing this column since 1986.