Ten Things I would do with the Tax Code, even if it ended up being revenue-neutral

As I mentioned in my previous post, taxation is something that no two people will ever see eye-to-eye on, and about the only thing we all have in common is that nobody wants to pay more. I’d like to put aside for the moment the idea of raising and lowering taxes, and propose several changes to the tax code simply for the sake of principle, simplicity or just what I see as common sense. Right off the bat, many will sound partisan, and the majority are actually out of the conservative’s playbook. But I want to stress right up front that none of these are being proposed as ways to raise or lower taxes. If some other area of the tax code must be altered to keep the overall federal budget revenue-neutral, and to maintain at status quo the tax liability owed by as many people as possible, then so be it. IOW – if you have to adjust the rates or brackets to accomplish some of these things and remain revenue neutral, DO IT.


#1: Every absolute dollar amount called out in the tax code must be automatically and annually adjuster for inflation. This would include the brackets, the limits on deduction, the upper or lower limits that define who qualifies for what, the dependant tax credits… basically anything that not a rate or percentage or that gets adjusted anyway. I realize there would be a lag in this – in 2010 we’ll be working on the 2011 budget and only know have the inflation rate for 2009. So there will be a two-year lag. That’s fine. It’s still better than what we have now, like the situation with the AMT where you have something that was passed 40-some years ago that was meant to hit only the super-rich now affecting 80-some% of America because the $80,000 salary mark where it kicks in was never adjusted for inflation. Which brings me to…

#2: Get rid of the AMT. I’m not a flat-taxer, as my last post clearly demonstrates. But the idea of creating a completely parallel system, just because there are too many issue with the current one just seems absurd to me. If there are people exploiting loopholes in ways that were not intended, then just FIX THEM. And if you have a guy making a Million Dollars a year and not paying any taxes? Well… look at the situation and ask “WHY?” If there are loopholes that can reasonably be closed then close them. If the brackets need adjusting, adjust them. If there is a way you can deal with the perceived problem (the exception) without affecting everyone else, DO IT. Otherwise? Live with it. He beat the system, and he’ll continue to. No sense screwing it up for everyone else.

#3: Get rid of Medical Savings Accounts. This one really pisses me off. There was a time when you could simply deduct all your medical expenses. Now you can only do that if they exceed $10,000. BUT, they’ll let you save UP TO $10,000 in an account tax-free to pay for medical expenses (and ONLY medical expenses) below that amount. WTF?! So now… I have to play some stupid guessing game about what my medical expenses will be for the year. If I guess right, then it’s just like before. If I guess too low, then I miss out on any deduction between what I guessed and $10,000, and if I guess too high then I have money tied up in basically a no-interest account that I can’t spend. (Unless I have some unforeseen medical issues.) This is stupid. Make it simple: go back to just allowing ALL medical expenses to be deductible, with no lower limit.

#4: Lose the estate tax. OK, before the liberals jump down my throat, remember I said that this should be revenue neutral! So go ahead and raise the income tax rate of those really high incomes that generate these estates in the first place.  But for Christ’s sake, once someone has paid income tax on what they’ve earned, capital gains or property taxes on whatever they invested in, not to mention the sales taxes generated by whatever their heirs BUY with the money… IT’S. BEEN. TAXED. ENOUGH. This is nothing more than an overly complicated series of laws designed to do little more than give estate planning lawyers a raison d'être. It’s practically insignificant in terms of actual revenue, and yet it’s grown into a completely unnecessary cottage industry. Get rid of it.

#5: Eliminate the limits on tax-free gifts. Again, this may sound bourgeois on my part, but can anyone explain to me why, when I give my son/nephew/godson/grandchild/best friend/etc… a gift, that the government has the right to tax them on it? Follow me for a minute here, because there is a very good reason that separates gift-income from earned income: A person’s earned income is deducted from someone else's tax liability. If a company takes in $1M in revenue, but pays $900K in salaries, they’re only taxed of the remaining $100K. THAT’S why we all pay income taxes: because this is money that our company does NOT pay taxes on. But in the case of a GIFT, I’ve already PAID the tax on that money! And while you may conjure up some scenario wherein this might be used to cheat the system, I’d love to hear it, because I think your fears are overblown. More people try to cheat the system NOW. #4 and #5 sort of go hand in hand. If you want to GIVE someone some money, out of an income that’s ALREADY BEEN TAXED, just LET PEOPLE DO IT.

#6: Stop taxing dividends. Liberals also always hammer me for this one, but it stems from a fundamental misunderstanding of basic accounting. (Or it’s just a bit of class warfare going on. LOL) But taxing dividends is TEXTBOOK double-taxation. Here’s why: If I own my own business, a sole proprietorship, it’s like saying that I own every share of stock in it. There might not be any actual stock, assuming it’s not a publicly traded corporation, but the only difference is one owner versus many. And once I pay the CORPRATE tax, whatever is left is MINE. As I have 100% ownership so I can take as much of the after-tax profit as I want, and I WON’T PAY INCOME TAX ON IT! The way corporations dole out profits to multiple owners in through dividends. The multiple owners own stocks which represent their share of ownership, and thus their share of the profit. The company will first pay the corporate tax rate on it profits and then distribute SOME of this profit to shareholders, in proportion to their ownership. So if you’re going to attack this one, you’ll need to tell my why multiple owners should be taxed when a single owner is not. And again – this isn’t about lowering taxes. If the corporate tax rate, or the income tax rate, or the cap-gains rate, need to be adjusted to make up the difference, then so be it. And one thing you must realize is that dividend payment are not only for the super-rich. Typically the biggest recipients of dividend payments are the various pension funds that support the [already fixed] income of retirees, and the retirees themselves. So giving these funds a break can directly benefit many who really do need the relief.

#7: Eliminate the upper income limit for deduction student loan interest. This one’s just stupid: If you make good on the education your government financed, they WON’T allow you to deduct the student loan interest. OTOH, if you end up doing nothing with the degree, then you can deduct it. I’m not usually one to call progressive taxation “punishing success” but in this case I think it’s apt. (And again, think back to those first years out of school. Even if you were making good money, as me and my wife were, you still had no saving or assets at that points, and you could still have really used the break!)

#8: Eliminate Capital Gains taxes: OK, maybe not completely, and maybe not for everyone, but if you did this then we wouldn’t need IRA’s, Roth’s, 401-K’s, etc… All of these programs are just ways of avoiding the Cap Gains Tax. Well, if you create a tax and then immediately create 17 complicated ways that people can avoid it… WHY THE HELL DO YOU HAVE THE TAX?! Losing these would simplify retirement savings, education savings, estate planning, education savings, etc… Again, more people derive income from helping people avoid these taxes than the government ever gets from collecting them. So I’d eliminate Cap Gains for anyone over 65 (or whatever we call the “retirement age” these days, maybe 55?) and on any Cap Gains that amount to LESS than your earned income. I guess if you’re entire income comes from cap gains, then fine, we’ll call it income. (Or at least that amount that exceeds your earned income.)

And again, to answer the question, “What the difference between earned income and investment income?” Remember: One person’s earned income gets deducted from someone else’s taxable income. Investment income is either already taxed (corporate, dividends) or doesn’t need to be because no one else’s liability is being reduced (cap gains.)

#9: (Shifting gears a little…) Eliminate both the Federal Gasoline Tax AND all Federal Money going to states for transportation. Let the STATES tax their gas, and let THEM keep all the money and make THEM build and fix their own damn roads. Aside from being a states-rights / local control issue, I live in Michigan, where we generate more in federal gas tax, per capita, than any other state but get less federal dollars per capita for transportation than any other state. So our roads SUCK and we have NO PUBLIC TRANSPORTATION. Our roads get USED all to hell, but don’t get MAINTAINED. If the STATE kept that money, we’d have the best roads on the planet! Have you ever been to West Virginia, home of world-famous pork-barreler Robert Byrd? It feels like you're driving on clouds! Why? TONS of federal money to build roads in a state that nobody frickin’ LIVES in. So they have these awesome roads that nobody ever uses! States collecting their own Gas tax, and building and fixing their own roads just make more sense to me.

#10: Adopt brackets such as those described in my last post, or something similar, based on multiples of the median income. I’ve already laid out why I think that system is good (in my last post) so all that’s left would just to figure out where to draw all the lines and what rates to charge so that all of these simplifications end up REVENUE NEUTRAL.

And that last bit is important, because none of these are meant to give anyone a tax break, raise taxes, lower taxes or shift the burden from one group to another. These are meant to make the tax code MAKE SENSE. To SIMPLIFY it. I’m an engineer by trade, and I know that unnecessary complexity inevitably leads to inefficiency. And I design (and re-design) things for a living. So when I see an inefficient system, I’m driven to try and fix it. Even if it achieves the same result in the end, doing so efficiently means that the result is achieved with less input (cost, material, man-hours, time, etc…) so you still end up much better off. So before you tell me why these are a bad idea, assume that other adjustments are made so that everyone paying about what they’re paying now, or within +/-5%. (It won’t be to the penny, I realize that.)

But anyway… that's what I’d do.  And I'd do it for simplicity's sake, before we even get INTO whether the government needs more or can do with less.  THAT'S the political side of things.  What I'm talking about here is just bullshit meant to give lawyers more work.