Tax Reform – What is Fair?

Unless you have been on another planet for the past several months, and or years, you know that we are facing difficult financial times. Our States, our Country and other Nations of the World, for that matter, are struggling to work through financial deleveraging from the excesses of debt growth of the past decade while, at the same time, dealing with the financial obligations of social benefit program promises. I have blogged in the past about the need for entitlement (benefit) reform, but today my focus is on tax reform.  

On the subject of Tax Reform, President Obama’s Simpson/Bowles Committee has issued their report on suggested changes to our tax policy. We also have had a legislative ‘gang of six’ work on tax reform and we now have a ‘super committee of twelve’ cloistered for results or so we’ve been promised! 

President Obama has just introduced his American Jobs Act of 2011 and he will shortly issue an aggressive 10 year budget deficit reduction plan. His Jobs Act, depending on who you talk to, will yield 1.2M to 1.8M jobs and 1.5 to 2.0% growth to 1st quarter 2012 GDP. Legendary investor Wilbur Ross is not so optimistic. He suggests that the Act will produce about that many $50,000 income level jobs (1.2 to 1.5M) but it will have created those jobs at a cost per job of $200,000. The Congressional Budget Office has yet to issue their opinion (score) of the Act’s capabilities. 

The American Jobs Act is said to pay for itself through loophole closings and sun setting of tax cuts. To rally support for his bill, President Obama will be stumping the home turf of his most outspoken Republican opposition so, like the NFL, it’s time to play ball.  

One side of the aisle says that raising taxes kills job growth by hurting the ‘job creators.’ The other side of the aisle asks – what have the tax cuts to those ‘job creators’ done for unemployment today? Common ground seems hard to find. What do you think is the right kind of tax policy for us to have? Should the ‘over $250,000’ wage earner pay a ‘surcharge’? Would you give up the mortgage interest deduction for something more like a flat tax? If you went to a flat tax, how would you equitably tax the business owner who has good revenue coming in but who expends a lot on plant and equipment enabling them to produce even more goods and services? Would they not be able to ‘write off’ those types of ‘outlays’? 

What do you think is fair?

Let’s remember that tax revenues are a product of two functions – (1) the tax rate and (2) the tax base defined as that upon which taxes must be paid. If you eliminate deductions, you can lower tax rates for a given desired level of revenue. Conversely if you wish to have some things allowed as a deduction against income, like mortgage interest, then you have to raise tax rates on those dollars earned that are subject to tax to achieve the same total revenue requirement. Canada, you might like to know, heh, does not allow mortgage interest deductibility.  

The IRS has recently issued the Statistics of Income (SOI) Bulletin for winter 2011. The Statistics of Income Bulletin tells us lots of information about what kind of tax returns are being filed, what levels of income are being reported, what kinds of tax deductions are being taken and other ‘tax data.’ Given all the discussion today in Washington about revenues and taxes I thought it might be nice to take a look at some raw data. Unfortunately and understandably, given the amount of data to process and analyze, SOI ‘recent’ data is two-plus years old.   

First let’s look at what kinds of tax returns are being filed and how much revenue they bring in…

Now let’s look at the breakdown of individual tax returns from the perspective of various income levels and the percent of filers at those income levels. Then out of total Adjusted Gross Income reported to the government what percentage of Adjusted Gross Income was earned by the related income level groups. The last column then looks at how much of total taxes paid in to the government was paid by that specific income level group…

[Note: AGI does not include earnings from tax exempt investments]

Lastly some miscellaneous information

• Percent that claim standard deductions (TY 2008) – 64.4%

• Percent that claim itemized deductions (TY 2008) – 33.8%

• Number of returns with AGI $1M or more (TY 2008) – 323,067

• State with the highest number $1M returns —California (TY 2008) – 44,027

• State with the lowest number $1M returns —Vermont (TY 2008) – 389

Based on the above 2009 tax year information, 42% of taxpayers earned 8.93% of total AGI reported to the government while providing 1% of the tax revenues. The taxpayers making more than $200,000 constitute 12.4% of all filers earning 48.11% of total AGI reported to the government while providing 74.7% of tax revenues.

In 2008, two out of three people did not even itemize.

I hope this provides some perspective for you to draw conclusions about tax reform and what is fair?