Monthly Archives: August 2016

Are Tax Deductions Inherently Unfair?

Economics, Politics

 

 

This was supposed to be the week both major party candidates concentrated on their visions and proposals for growing the American economy.    On Monday, Donald Trump focused on reduced tax rates, deregulation and repeal/renegotiation of trade agreements. We have yet to hear from Hillary Clinton (scheduled for Thursday) but we know she will likely include proposals to hold or lessen the tax burden on low and middle income families while raising rates or eliminating loopholes which primarily benefit the wealthy.  Although other events have dominated the election news, economic growth and equity still deserve our attention.

My question is, “Are tax rates the best or only way to address inequities in the tax code?”  This question was inspired by Donald Trump’s proposal to convert the current child care credit to a deduction and increasing the dollar limit on eligible day care costs above the current $3,000 for one child and $6,000 for two or more children.  Who would benefit most from these changes?

  • Today, a family of four living on the cusp of the poverty line ($23,550) which spends the maximum ($6,000) on child care gets a tax credit of 30 percent or  $1,800.  However, it is highly unlikely a family at the poverty level could spend over 25 percent of their total earned income on child care.
  • In contrast a family with the median family income of $53,637  who spends the maximum $6,000 on child care  (11.2 percent of their annual income) would get a 20 percent credit worth $1,200.
  • However, if a family on the poverty threshold spends the same percentage of income (11.2 percent) on day care, their credit is only worth $790 (30 percent of $2,635 in day care expenses).

So even though the tax credit is progressive based on earned income, the absolute benefit is higher for a wealthier family.

We do not have the details of the Trump proposal,  but he talked about a tax deduction versus a credit and raising the maximum dollar amount.  Just for argument sake, let’s say he raises the dollar limit to $10,000.  Here’s what happens to those two families.

  • The family on the poverty line will have a taxable income of $0 (income of $23,550 less $12,600 standard deduction and four exemptions at $4,000/person).  Therefore, they will receive no day-care subsidy.
  • The family at the median family income will have a taxable income of $25,037 ($53,637 minus $28,600 with exemptions and the standard deduction).  They are in the 15 percent tax bracket.  If they spend the maximum $10,000 for day care, they will receive a $1,500 subsidy.
  • And a family in the proposed highest rate of 25 percent will receive a $2,500 day care subsidy.

This is just the tip of the iceberg.  Think about the major tax deductions such as mortgage interest, state/local taxes and charitable giving.  In 2013 (last year for which there are IRS statistics), total mortgage interest claimed was $317 billion.  Total charitable giving claimed was $194 billion.  And state/local tax deductions claimed equaled $506 billion.  The overwhelming majority of these claims are made by upper income taxpayers who are currently subsidized at rates of 25 to 35 percent for these personal expenditures.

Want to make the individual income tax more equitable?  Here is my proposal.

  1. Raise the exemption to $5,000/person.  Therefore, a hypothetical family of four would have its first $20,000 exempt from federal income taxes.
  2. Abolish the standard deduction.
  3. Convert all current tax deductions to flat rate credits.  For example, instead of subsidizing home ownership based on income (zero to 35 percent), paid mortgage interest would entitle all taxpayers to a flat rate refundable credit.  I am not sure how much the exact percentage would be, but it would easy to calculate.  What is the total tax expenditure for the mortgage interest deduction?  The Tax Policy Center estimates the total mortgage interest subsidy in 2016 will be $75.3 billion dollars.  My preliminary estimate suggests a refundable tax credit somewhere in the range of 15-18 percent would be revenue neutral.
  4. Develop revenue neutral deduction to credit conversions for all major Schedule A line items.
  5. All future tax incentives would be in the form of flat rate refundable credits available to all taxpayers regardless of filing status or income.

This proposal is presented only as a first step to make the individual income tax code more equitable.  During my research for this post, I found there are other organizations such as the Center for Budget and Policy Priorities which have previously raised similar issues.  After watching the current presidential campaign, my next question is, “Is the American body politic capable of organizing a movement behind solutions instead of anger and dissatisfaction?”

For what its worth.
Dr. ESP

 

 

“Never Mind” Part II

Politics

 

Many Republicans have suggested Ronald Reagan would not be welcome in Donald Trump’s version of the Grand Old Party.  I’ll leave that debate to others.  But I am sure if Reagan and Trump were on the same debate stage, the Gipper would be recycling the line he used so effectively against President Jimmy Carter in 1980.  “There he goes again!”

This time the topic was U.S./Japanese relations.  At a rally in Iowa last Friday, the Republican nominee suggested that mutual defense of the two countries was a one-way street.

You know we have a treaty with Japan, where if Japan is attacked, we have to use the full force and might of the United States. If we’re attacked, Japan doesn’t have to do anything. They can sit home and watch Sony television, OK?

Donald, as usual, is wrong on two counts.  First, from a military perspective, it is not a matter of not having to do anything, they constitutionally CANNOT do anything.  Article 9 of the Japanese Constitution adopted after World War II states:

ARTICLE 9.

(1) Aspiring sincerely to an international peace based on justice and order, the Japanese people forever renounce war as a sovereign right of the nation and the threat or use of force as means of settling international disputes.
(2) In order to accomplish the aim of the preceding paragraph, land, sea, and air forces, as well as other war potential, will never be maintained. The right of belligerency of the state will not be recognized.

Second, just because they do not HAVE to do anything, doesn’t mean they have not chosen to support U.S. security.  For example, Japan has provided logistical and financial support to NATO since the early 1990s “in a wide range of areas, including peace-support and crisis-management activities, humanitarian assistance and disaster relief, cyber defence, defence against terrorism, non-proliferation, as well as participation in military activities.”  The full April 2016 press release on NATO/Japanese cooperation can be viewed using the link below.

http://www.nato.int/cps/en/natohq/topics_50336.htm

Japanese financial assistance in support of Operation Enduring Freedom and the reconstruction and stabilization of Afghanistan now totals more than $10 billion.

Maybe Donald thought the topic was U.S./Javanese mutual defense efforts.

“NEVER MIND!”

For what it’s worth.
Dr. ESP

 

The Emily Litella Candidate

Politics, Uncategorized

Sometimes, I really miss Gilda Radner and her many Saturday Night Live characters (e.g. Roseanne Rosannadanna, Lisa Loopner). Each was guaranteed to bring a smile to your face.  My favorite, however, was Emily Litella, the hard of hearing guest commentator on Weekend Update. Once informed she had misunderstood the question, she would close with her trademark line, “Never mind.”  This morning, I missed her more than ever.

I was reminded of the Emily Litella character when Donald Trump announced he had seen a “top secret” video of palettes of cash being unloaded from a plane in Iran as ransom for four U.S. hostages.  At a campaign rally in Florida, Trump said:

I’ll never forget the scene this morning. Iran — I don’t think you’ve heard this anywhere but here — Iran provided all of that footage, the tape of taking that money off that airplane, right? $400 million in cash.”

Now here’s the amazing thing. Over there, where that plane landed, top secret, they don’t have a lot of paparazzi. You know, the paparazzi doesn’t do so well over there, right? And they have a perfect tape done by obviously a government camera, and the tape is of the people taking the money off the plane, right? That means that in order to embarrass us further, Iran sent us the tapes, right? It’s a military tape. It’s a tape that was a perfect angle, nice and steady. Nobody getting nervous because they’re going to be shot because they’re shooting a picture of money pouring off a plane.

There’s a good reason we only heard it from Trump.  It was not true. Despite the fact, several news outlets and national security experts immediately responded no such video existed, Trump repeated the story Thursday afternoon at a rally in Portland, Maine.

Finally, after no evidence of the video surfaced and his own campaign staff admitted he was referring to a b-roll video of the detainees’ release in Geneva, Switzerland, Trump tweeted the following this morning.

The plane I saw on television was the hostage plane in Geneva, Switzerland, not the plane carrying $400 million in cash going to Iran!

Donald, you could have saved a lot of keystrokes if you’d only tweeted, “NEVER MIND!”

For what it’s worth.
Dr. ESP

A Solution in Search of a Problem

Uncategorized

 

In an August 2nd interview with the Washington Post’s Phil Rucker, Donald Trump was asked about his statements that the 2016 presidential election might be rigged.

RUCKER: You said yesterday that you worried the election might be rigged in some way.

TRUMP: Yeah.

RUCKER: What is your worry exactly?

TRUMP: I don’t like what’s going on with voter ID.

RUCKER: It would be what’s happening in the states?

TRUMP: Well, I think it’s ridiculous.  I mean the voter ID situation has turned out to be a very unfair development.  We may have people vote 10 times.

One has to assume, Trump was referring to recent decisions by federal courts which have struck down voter ID laws in Texas (July 20), North Carolina (July 29),  Wisconsin (July 29), Kansas (July 29) and North Dakota (August 1).  However, contrary to Trump’s concern, there has not been a single case of multiple voting in states which do not require voter IDs or in the states involved in the court decisions prior to their passage of voter ID laws.

Justin Levitt, a professor at Loyola Law School in Los Angeles has been tracking instances of voter fraud in the United States since 2000.  He uncovered 31 documented cases of voter fraud out of more than 1 billion ballots cast.  In Texas, the chance of voter fraud was one in 18 million (four cases out of 72 million votes).

How improbable is that?  According to the National Weather Service, the chance of being struck by lightning in Texas is only one in 1.35 million. National Geographic calculates the odds of being killed by a meteorite at one in 1.6 million.  About the only thing more unlikely than voter fraud is winning the Powerball lottery (odds of one in 292 million).  Perhaps that is why former Kansas Lieutenant Governor Gary Sherrer described state lotteries as a “tax on people who failed probability in school.”

As noted in a previous post, Mr. Trump, you are entitled to your opinion that the election is rigged, but you are not entitled to your own facts.  Unless the margin of victory in the popular vote or in any state is less than 31 votes (giving you the benefit of the doubt since that number covers 12 years), the outcome is due to something other than the lack of voter ID laws. Take another guess.

For what it’s worth.
Dr. ESP

 

The Real “Khan” Job

Politics, Uncategorized

 

Dictionary.com defines the term “con” as a verb meaning (1) “to swindle; trick” or (2) “to persuade by deception, cajolery, etc.”

I looked up the term after businessman and former New York City mayor Michael Bloomberg addressed the Democratic National Convention last Wednesday night.  Playing off of Donald Trump’s defense of “New York values” following the derogatory use of that term by rival Senator Ted Cruz, Bloomberg said, “I am from New York and I know a con when I see one.” He elaborated using Trump’s history of bankruptcy and unmet obligations to address the first definition.  He followed with examples of the Republican’s campaign rhetoric and policies to suggest the second definition also applied to Trump’s efforts to gain voter support.

While the convention attendees cheered and applauded another billionaire’s rebuke of a peer, I had the feeling this was one more example of “he said, he said.”  And as expected, Trump used Bloomberg’s comments to remind his supporters that Hillary Clinton is the favorite of the rich and famous while he is “the voice” of the common American.  Furthermore, accusations that many Trump business deals ended in failure were not news.  They have been documented by the press continuously since Trump secured the Republican nomination.

Which brings us to Khizr and Ghazala Khan.  I have a friend and colleague from my days at Miami University who always urged his students to “be the adult in the room.”  To be honest, there have not been a lot of adults in the room during the current election cycle.  That changed last Thursday night.  Not only did the Khans remind us what makes America exceptional, they, I believe, unintentionally taught us how to deal with bluster and bullying.

References to Trump’s thin skin have been plentiful, including Clinton’s invoking this character flaw in her acceptance speech. “A man you can bait with a tweet is not a man we can trust with nuclear weapons.”  The Khans chose a different tack.  Instead of telling us how Trump responds to criticism, they created a situation in which he could either affirm or disprove charges of hypersensitivity.  They actually gave him a chance to be the adult in the room.  Not only did he fail, he garnered the lowest possible grade on this simple test of character.

Equally amazing, we soon discovered old billionaires can learn new tricks.   At a joint appearance in Omaha, Nebraska with Hillary Clinton on Monday, Warren Buffett drew on what he learned from the Khans.  He did not call Trump names for refusing to release his tax returns.  Like Khizr and Ghazala Khan, the “Oracle of Omaha” created a situation where Trump again has an opportunity to show he is an adult.  Buffett, whose tax returns are also under an IRS audit, said he was willing to make his public if Trump would do the same. Trump has ignored the challenge.

For a year, Donald Trump has warned us radical Islam will destroy us.  How ironic a patriotic Muslim and his wife may have just destroyed any hopes of Trump’s winning this election.  I look forward to the Oxford English Dictionary adding the term “Khan job” to the lexicography.  The definition?  A noun which describes the process of exposing con jobs.

For what it’s worth.
Dr. ESP