Another priceless letter to the editor

[Monkeyleg]

While engaging in one of my favorite nightly hobbies--reading the Milwaukee Journal Sentinel's letters to the editor--I found this gem tonight:

First, create jobs

Instead of just handing out tax credits to the rich who already have profited, why couldn't the rich earn them by proving they have created at least 100 new jobs and workers? Each new 100 jobs will be given X number of tax credits.

This would create more working taxpayers to cover the tax credits. First, create the jobs; then you will be compensated for your initiative.

This would work twofold. The businesses would be making more profits from more workers. and the United States would have more taxpayers. We all want to see our country move back to prosperity.

Lois Wittnebel
Beaver Dam

Where to begin with this? She wants the "rich" to somehow demonstrate that they deserve to keep some of their income by providing others with jobs? If not, then they get to keep less of their money?

What a novel idea. We could apply it to all sorts of walks of life. Hey, you with that Harley. Have you used it to deliver food to the homeless? No? Well, then, we're taking it.

Hey, John Kerry. Have you used your yacht to bring Cuban refugees to the US? No? Sorry, buddy, it's US property now.

I wonder what ol' Lois might have that we'd want. With a name like Wittnebel, my guess is not much.

[MicroBalrog]

Does she understand what a tax credit is?

[Waitone]

Dick, you need to find something else to do late a night.  I suggest driving a nail through your off hand.

[seeker_two]

Does she understand what a tax credit is?

I don't think most people understand what a tax credit is..... 

[KD5NRH]

Dick, you need to find something else to do late a night.  I suggest driving a nail through your off hand.

That's the problem with self-crucifixion; there's just no way to get that last nail in.

[birdman]

I don't think most people understand what a tax credit is..... 

I don't think we should even need to know...tax credits are the worst version of exemptions/deductions, all of which are predicated on the basic belief of those in power of "giving" someone something, by letting you keep what you have earned...as if all earnings were first the property of the state.  Refundable tax credits are the worst, as they are blatantly, and absolutely, redistributive.

[Monkeyleg]

Eh, it's just fun to watch people try to think. It's not painful...usually.

It's just bizarre to know that someone thinks the rich--who have already earned their money--should have to earn the right to keep it again by creating jobs that may or may not be necessary.

As for the tax credits, if the credit is 1:1, then there would be more incentive for the "rich" person to make X dollars less and not hire anyone, thus not getting a credit of X, than it would be to make Y dollars more, get the credit of Y for hiring the person, then deal with all of the headaches that come with employees. Make the credit 2:1 (double the size of the credit per the cost of the employee), and there's a possibility.

If she's talking a tax deduction, well, what's the point of getting 28% or 35% per dollar off on your taxes for the "pleasure" of an employee who may or may not be needed.

I don't think Ms. Wittnebel has ever run a business (or done her own taxes, if she ever owed any).

[230RN]

Hm.... Wittnebel.  White fog?

[MicroBalrog]

Help me here. Aren't tax credits/discounts officially given for doing something the government wants to encourage?

Like - "Buy a car for your company - qualify for tax credit since we're trying to help the automotive industry", or "Have N+1 dependants - qualify for a tax credit since we want to encourage people  to have more children"?

[Monkeyleg]

Help me here. Aren't tax credits/discounts officially given for doing something the government wants to encourage?

Like - "Buy a car for your company - qualify for tax credit since we're trying to help the automotive industry", or "Have N+1 dependants - qualify for a tax credit since we want to encourage people  to have more children"?

Yes, for something that the government wants to encourage, or something that a powerful lobby wants to encourage. Home sales, for example.

There's several problems with the government doing this, not the least of which is that the tax code should not be used to influence citizens' behavior. In doing so, taxpayers not engaging in the approved behavior are subsidizing those who are.

Right now there's a tax credit for hybrid cars (or is it just the Chevy Volt?). Because of the new technology, these cars cost $40,000 to $50,000, considerably more than a comparable non-hybrid car.

For most middle-class taxpayers, a $40K to $50K car is outside the budget, or requires sacrificing something else. Yet these same taxpayers are shelling out their tax dollars to help people who can already afford these cars to get a tax credit. It's socialism turned on its head, but it's still socialism.

[MicroBalrog]

Yes, of course.

But this is my point: tax credits are ALREADY for some kind of encouraged activity. Piling ANOTHER one on top to qualify for them makes... some kind of negative amounts of sense.

[birdman]

What's interesting is the total amount of taxes not collected due to deductions, credits, and exemptions is greater than the normal amount of discretionary government spending.  This is a result of tax changes being easier to make than laws...resulting in "legislation through the tax code" which unfortunately puts the compliance and market inefficiency costs on the taxpayer, while hiding the overall quid pro quo.  We need a fair, simple tax.

[Monkeyleg]

What's interesting is the total amount of taxes not collected due to deductions, credits, and exemptions is greater than the normal amount of discretionary government spending.  This is a result of tax changes being easier to make than laws...resulting in "legislation through the tax code" which unfortunately puts the compliance and market inefficiency costs on the taxpayer, while hiding the overall quid pro quo.  We need a fair, simple tax.

Your point also illustrates why tax revenues decline when rates go up. Those with the money to afford to find tax shelters do so. Some can also pressure legislators to add provisions to the tax code that create shelters. The tax code is so Byzantine that most people can't see all of the shelters and deductions available.

[birdman]

Your point also illustrates why tax revenues decline when rates go up. Those with the money to afford to find tax shelters do so. Some can also pressure legislators to add provisions to the tax code that create shelters. The tax code is so Byzantine that most people can't see all of the shelters and deductions available.

Agreed, but I hate the term "shelter" (and "loophole" for that matter) as both imply a quasi-legality, when in fact, those that can take advantage of such machinations are simply doing what was intended by the government when it crested those elements of the code.  It's a "loophole" if a politician wants it to seem bad (e.g. Foreign non-repatriated earnings) but an "investment" or "tax relief" when they want it to be a positive (e.g. Mortage tax deduction).  Ironically, most countries with no mr rage tax deduction (most of Europe) have not only higher rates of home ownership, but a more stable mortgage market and purchasers.  People complain about tax cuts "for the rich", when we have one of the most progressive tax codes in the world (the bush tax cuts actually made it MORE progressive, not less), and the mortgage deduction is the least progressive of ALL of the deductions, as there is no phase-out--so someone in the highest tax bracket, spending the most on mortgage interest not only can deduct more, but is reducing their taxes at the high marginal rate, instead of the lower.

All of which is fine by me, I dislike progressive tax codes, but encouraging "investment" in homes is poor economics, and distorts proper market oriented allocation of capital. 

[Monkeyleg]

Yeah, birdman, the semantics are frustrating.

...mortgage deduction is the least progressive of ALL of the deductions, as there is no phase-out--so someone in the highest tax bracket, spending the most on mortgage interest not only can deduct more, but is reducing their taxes at the high marginal rate, instead of the lower.

This really hit me when we moved from the high tax state of WI to the low tax (and home price) state of AL.

We were paying a lot more per square foot for a house in WI, and getting more of a deduction for interest and taxes than we do here in AL. So, the government needs X amount of tax dollars. Someone in CA or NY or another state with high home prices and/or taxes is going to pay less proportionately than someone in a low price/tax state like AL.

The people in the low price/tax states are effectively subsidizing the more expensive homes in the high price/tax states. I suppose it could be argued that those in the high price/tax states will have proportionately higher incomes, and thus pay more in taxes, but that still doesn't fix the problem of people in reasonable states getting less in deductions than those in high price states.

This tax system has to go.

[MechAg94]

Okay, help me here.  You only deduct what you are paying in interest already.  If you don't pay as much in interest, you get less tax deduction.  However, you don't necessarily get all that interest back in tax refunds.  If you never paid the interest to begin with, how did you lose out?  It would seem a net gain to me.

[birdman]

Monkey, I know what you are trying to say, but I can't get it from what you wrote. 

Mech is right, low tax/low price is a net positive...less outlay, means less deduction, but it's still a net positive of (1- marginal rate) times the difference in outlay.  So for the same outlay, the two are the same.  Now, for identical total outlay (total mortgage payment plus property tax), the high tax state will give a larger tax deduction, but the low tax person will either be able to get a larger mortgage, or shorter loan period for the same adjusted monthly outlay. 

[MechAg94]

I remember it was one of those things Dave Ramsey kept telling people.  Keeping a mortgage for the interest deduction makes no sense and is a net loss.

[Monkeyleg]

OK, let me be perfectly clear (to borrow a line from our president which means "I'm about to really lie to you").

Two guys with the same incomes and the same home, but one lives in AL and the other in WI. The house belonging to the guy in Alabama cost him $100,000 after his $20,000 down payment, and he owes $100,000. He pays $500 a year in property taxes.

The guy in Wisconsin paid $150,000 for the same house after his $30,000 down payment, and he still owes the $150,000. He pays $4000 a year in property taxes.

Both have mortgages at 5%. The guy in Wisconsin will be able to deduct 50% more in interest over the course of his 30 year loan, because his mortgage is 50% larger. He'll also be able to deduct $4000 in property taxes. The guy in Alabama will only be able to write off two-thirds as much in interest over the course of the 30 year loan, and he'll only be able to deduct $600 a year in taxes.

Everything else being equal, the guy in Alabama is paying more to bring in the necessary tax revenues than is the guy in Wisconsin.

[MechAg94]

I disagree.  The guy in AL is paying $3500 less in property taxes, and less in interest, and likely less in total income taxes before the deductions are even considered.  $3500 by itself is a huge starting lead.  The guy in WI is only getting a portion of that extra interest payment money back in tax refunds from the deductions since it only reduces your taxable income; it doesn't cut your tax payment by that much.  The guy in WI is still out the extra interest money and taxes.  He might pay a little bit less in total federal income taxes, but since he is paying more money to interest and property taxes in the first place, he is still behind the guy in AL overall.  At least, that is how I see it.

[Monkeyleg]

MechAge94, that's why I said "everything else being equal". I'm looking solely at how the tax law treats two people in nearly identical situations, the only difference being the housing market and tax environment where they live.

Yes, the guy in AL has less to pay out in local taxes, but that's a function of the government where he lives, not a function of the federal government. The tax laws give a deduction for each child you have, but the amount doesn't vary according to the cost of living in your area.

If it was going to be set up to be "fair" there would be no deduction for interest or property taxes (which the real estate industry would not allow to happen), or the taxpayer would get to deduct a fixed amount for interest and property taxes, which would likely play a role in peoples' decisions as to where to live and how large a mortgage to take on.

[wmenorr67]

Such the reason behind going to a flat tax.

[Scout26]

A Tax Credit or Deduction is a fair, balanced and justifiable way for me to pay less taxes.


A Tax Shelter or Loophole is a corrupt lobbyist induced flaw in our tax system that you exploit so that you don't pay your Fair Share^tm .

[Tallpine]

A Tax Credit or Deduction is a fair, balanced and justifiable way for me to pay less taxes.


A Tax Shelter or Loophole is a corrupt lobbyist induced flaw in our tax system that you exploit so that you don't pay your Fair Share^tm .

You got that right 

[makattak]

MechAge94, that's why I said "everything else being equal". I'm looking solely at how the tax law treats two people in nearly identical situations, the only difference being the housing market and tax environment where they live.

Yes, the guy in AL has less to pay out in local taxes, but that's a function of the government where he lives, not a function of the federal government. The tax laws give a deduction for each child you have, but the amount doesn't vary according to the cost of living in your area.

If it was going to be set up to be "fair" there would be no deduction for interest or property taxes (which the real estate industry would not allow to happen), or the taxpayer would get to deduct a fixed amount for interest and property taxes, which would likely play a role in peoples' decisions as to where to live and how large a mortgage to take on.

Except, because the cost of living in WI is higher than in AL, the buyer of the identical house that is $150K also has a higher income, but the same standard of living as the gentleman in AL with a lower income.

Since he's got a higher income, he may also be in a higher tax bracket and paying a larger percentage of his higher income.

Thus, although the AL homeowner isn't deducting as much, he also isn't paying as much since his income is likely less but his standard of living is similar.

So, does this mean you're wrong? No, it's just an example of how convoluted out tax system is.