In Defense of Deductions and Exemptions
In his counter-argument to the popular lefty assertion that taking advantage of things like tax-free 529 college savings programs or the home mortgage deduction or health savings accounts count as net benefits received from the government, Alex Tabarrok at Marginal Revolution makes this absolutely crucial point:
People who use 529 programs and who think that they have not used a government social program are not willfully ignorant, they are demonstrating a healthy if fading appreciation of the distinction between civil society and government. What Rampell et al. implicitly imagine is that the natural state is slavery and any departure from that state a government benefit. Thus, if the government taxes your saving for a college education less than your other savings, you should be grateful for how government has benefited you and your children.
And if the government doesn’t jail you today, you should be grateful for how government has granted you the benefit of liberty.
This is the attitude of a serf not an American.
In just a handful of sentences, the George Mason University professor cuts to the essential distinction between modern American liberals and conservatives. To a liberal, the natural state of man is State bondage; to a conservative, the starting point is freedom.
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Dec '10
Re: In Defense of Deductions and Exemptions
The default position hasn't felt like liberty for a long time.
Dec '10
Re: In Defense of Deductions and Exemptions
So, they rape me and steal my money and when they offer back some pennies, I'm supposed to be grateful?
Call me when taxation is optional.
Jun '10
Re: In Defense of Deductions and Exemptions
Driving home from mom's on the fourth of July no less I heard on the radio that it was a "no-refusal" weekend during which police detaining people at roadblocks (sobriety checkpoints if that makes us feel any better) would receive instant court orders to conduct blood tests of people who refused the other tests. So if your own blood is subject to search and siezure against your will and your earned money (i.e. time from a limited life span) is not yours then King Prawn's attitude is understandable.
May '10
Re: In Defense of Deductions and Exemptions
I agree with your annalysis totally. Check out my post in Member area, it dove tails nicely.
Jul '11
Re: In Defense of Deductions and Exemptions
Anyone who quotes Bastiat is OK in my book. I shall add some relevant thoughts from him.
Frederic Bastiat
Perverted Law Causes Conflict
As long as it is admitted that the law may be diverted from its true purpose — that it may violate property instead of protecting it — then everyone will want to participate in making the law, either to protect himself against plunder or to use it for plunder.
The Law Defends Plunder
But it does not always do this. Sometimes the law defends plunder and participates in it. Thus the beneficiaries are spared the shame, danger, and scruple which their acts would otherwise involve. Sometimes the law places the whole apparatus of judges, police, prisons, and gendarmes at the service of the plunderers, and treats the victim — when he defends himself — as a criminal. In short, there is a legal plunder, and it is of this, no doubt, that Mr. de Montalembert speaks.
This legal plunder may be only an isolated stain among the legislative measures of the people. If so, it is best to wipe it out with a minimum of speeches and denunciations — and in spite of the uproar of the vested interests.
Edited on Jul 13, 2011 at 9:39pmJul '10
Re: In Defense of Deductions and Exemptions
I am actually for removing all deductions and credits from the tax code.
Transparency and understandability is crucial to legislation as important as government takings.
Aug '10
Re: In Defense of Deductions and Exemptions
My problem with deductions and exemptions isn't that the government is giving people stuff, but that they are usually rewarding behavior that they have no business granting a preference to. I'd like to see practically all deductions eliminated, and the tax rates lowered, so that people aren't steered in any particular direction by government rewards.
Feb '11
Re: In Defense of Deductions and Exemptions
Diane, this is the exact argument that went on between Justice Kennedy and Solicitor General Neal Katyal in the oral argument (and continued in Kagan's dissent) of Arizona Christian School Tuition Org. v. Winn, when Justice Kennedy said: "if you reach a certain age, you can get a -- a card and go to certain restaurants and they give you 10 percent credit. I think it would be rather offensive for the cashier to say, ‘and be careful how you spend my money."
Sep '10
Re: In Defense of Deductions and Exemptions
This goes back to something that I and other members have said before, but it bears repeating: it isn't enough to defeat the Democrats. We must discredit the Leftist idea that our substance belongs to the State first, and anything exempt from taxation is an "expense".
The Left is trying--with considerable success--to make this idea the implicit starting point of any discussion of taxation. If we want to retain the freedom we still have, we must call attention to this and show the public just what they're up to.
Edited on Jul 13, 2011 at 3:31pmJan '11
Re: In Defense of Deductions and Exemptions
Yes! The mortgage deduction, in particular, helped created a mis-allocation of capital into housing. And we see how well that went once the bubble popped. This tax advantage wasn't the only thing that caused this mis-allocation but it was a significant part of the problem.
Re: In Defense of Deductions and Exemptions
This is what we'd all like, but in reality, so long as Dems control the Senate and the WH, the closest we'll get to your vision is having practically all deductions eliminated and tax rates raised.
Re: In Defense of Deductions and Exemptions
You'll see the mortgage interest deduction go poof around the time 51% of the independent voters are renters.
Dec '10
Re: In Defense of Deductions and Exemptions
I agree with this in principle, but I think there would have to be a phase-out. People who own homes mostly bought them on a 30-year term mortgage with the understanding that one of the benefits to home ownership would be a mortgage deduction. We can't just pull the rug out from under them.
Diane Ellis, Ed.:
It's the difference between the European model and the American model. I prefer the term "subect" to serf or slave, though. We have British friends who moved to Boulder where they're ideologically comfortable. The fact that you have to pay $1 million for a rickety old starter home due to a building moratorium is a good thing to them. Reuse, Re-purpose, Recycle!
Oct '10
Re: In Defense of Deductions and Exemptions
Huh. And here I thought George Harrison's "Taxman" was satire. Silly me.
Feb '11
Re: In Defense of Deductions and Exemptions
Michael Tee: I am actually for removing all deductions and credits from the tax code.
Transparency and understandability is crucial to legislation as important as government takings. · Jul 13 at 3:03pm
So you're proposing that the tax rate be applied to gross income? It's not that easy. What if a business has gross income of $5,000 but expenses of $6,000? There might not be any cash left to pay the tax.
And that's not even getting into questions of what actually qualifies as income and what qualifies as expense.
If you want transparency and understandability then ditch the income tax altogether and go with a sales tax.
Edited on Jul 13, 2011 at 4:45pmFeb '11
Re: In Defense of Deductions and Exemptions
LowcountryJoe
Yes! The mortgage deduction, in particular, helped created a mis-allocation of capital into housing. And we see how well that went once the bubble popped. This tax advantage wasn't the only thing that caused this mis-allocation but it was a significant part of the problem.
I don't buy it - I don't think the mortgage deduction influenced anybody nearly as much as it's made out to; are there stats on this? It is just an added feature to something people were going to do anyway for bigger reasons like using the house as an investment and owning rather than renting for similar monthly outlays.
Leave the mortgage deduction alone until the spending and all the other tax problems are fixed first. There's no sense in starting with the deduction that will directly affect those least able to bear it at the moment.
Dec '10
Re: In Defense of Deductions and Exemptions
Exactly.
Being that our taxes are paid to thieves (who are called Politicians in the modern English), I feel that it is my sworn duty to make sure they get the absolute smallest amount that can be conjured. Full stop.
Taxes are not patriotic. At best, they are a necessary evil, and at worst, they are state sanctioned thievery.
Profit is patriotic.
Dec '10
Re: In Defense of Deductions and Exemptions
Ed G.
So you're proposing that the tax rate be applied to gross income? It's not that easy. What if a business has gross income of $5,000 but expenses of $6,000? There might not be any cash left to pay the tax.
And that's not even getting into questions of what actually qualifies as income and what qualifies as expense.
If you want transparency and understandability then ditch the income tax altogether and go with a sales tax. · Jul 13 at 4:35pm
Edited on Jul 13 at 04:45 pm
I was just getting ready to say this.
Much of these "tax breaks" that politicians talk about are actually just good accounting. Machines and other capital equipment wear out (IE they have a finite life), so their replacement cost is spread out over the course of several years via a depreciation schedule. Those costs are not deducted from taxes, per se, but rather taken as a cost against your profits for the year.
This is actually a penalty in the year you buy the machine (if you have to pay for it all at once), because you lay out X dollars to purchase the machine, but can only claim Y dollars (where Y equals some fraction of X) against that year's profits, so your balance sheet in that year will show more profit than you actually made because you had to spend X dollars on equipment.
It's the same for oil and gas companies when they drill a test well, only instead of equipment, they're buy a hole in the ground. If it bears fruit, then they will make a profit off of it, but if it's a dry hole, the cost to sink it should count as a cost against their profit just like any other operating cost. They're only treated differently from me when I buy a new machine tool because their numbers are bigger.
I will also add, that because sunk costs retained in inventory are considered unrealized profit (and thus taxable), it is not uncommon at all for businessmen to have to borrow money to pay their taxes. See, while the IRS says they made a profit of $500k ($800k in sales + $600k in inventory - $900k in costs) they are actually completely broke, and because the IRS will not accept widgets in lieu of cash for the taxes on their "profit" of inventory, they have to borrow it.
Put another way, the .gov boys do not care at all whether their tax policy means you have to borrow money to pay taxes on a loss. It wouldn't even occur to them that this is a bad or unjust thing.
Edited on Jul 13, 2011 at 5:03pmJun '10
Re: In Defense of Deductions and Exemptions
Amen to straight sales tax. What percentage of your time do you spend working for no compensation for someone else's benefit? The fair tax (a national sales tax) has the concession to overcome objections that the sales tax is hardest on the poor (sort of hard to deny).
CoolHand
I will also add, that because sunk costs retained in inventory are considered unrealized profit (and thus taxable), it is not uncommon at all for businessmen to have to borrow money to pay their taxes. See, while the IRS says they made a profit of $500k ($800k in sales + $600k in inventory - $900k in costs) they are actually completely broke, and because the IRS will not accept widgets in lieu of cash for the taxes on their "profit" of inventory, they have to borrow it.
So, for a nation of 300 million having a little something in warehouses is a bad idea? So many parts of the market to distort, so little time.
Jan '11
Re: In Defense of Deductions and Exemptions
Ed G.
LowcountryJoe
The mortgage deduction, in particular, helped created a mis-allocation of capital into housing. And we see how well that went once the bubble popped. This tax advantage wasn't the only thing that caused this mis-allocation but it was a significant part of the problem.
I don't buy it - I don't think the mortgage deduction influenced anybody nearly as much as it's made out to; are there stats on this? It is just an added feature to something people were going to do anyway for bigger reasons like using the house as an investment and owning rather than renting for similar monthly outlays.
Using housing as an investment was a no-brainer. Four places to park one's money from '99 to 2007: under mattress; in low after-tax, low after-inflation yielding debt instruments; in a shaky stock market (during that period); or in a favored asset appreciating at a very good clip with tax advantages. I don't need a study or fancy regression to prove my assertion -- it's self explanatory and even you called it in the portion I underlined above.