Educating ourselves on the real tax issues

Preface - Few things the government does affects the average citizen more than taxes.  When we are wage earners we are often a little oblivious to taxes since they are taken out of our paycheck before we ever see the money.  When you are in business you have a little bit different experience - you are confronted with the amount of taxes you pay, and have to actually write a check, on at least a quarterly basis.

Politicians have little incentive to figure out what taxes actually make sense - that takes time, and is hard to explain to people - not to mention it takes a lot of time and thought to figure out what makes sense.  So generally whatever lobbying group has a good theory will get their way eventually.

Putting aside the contentious issue of how much taxes to pay, it is in our interest as taxpayers to understand taxes and figure out what taxes make sense, and what taxes don't make sense. All taxes are first and foremost intended to raise revenue for government operations, but different types of taxes have different characteristics, justifications and impacts on our economic well being as a nation.

History - After the great depression and World War II we as a nation had a huge national debt.  After nearly a decade of wrangling Congress in 1954 made huge revisions to the United States Tax Code.  They built a tax code that balanced the needs of government against the needs of the public well enough that our economy took off and grew for 50 years.  Over that 50 years life has been really good here in the United States, so we as voters haven't really paid a lot of attention to taxes, so Congress has gradually let the expediencies of the day (satisfying lobbyists)  undermine the carefully negotiated balance that made the 1954 tax Code work.

We are now at a point in our history where we need to make major changes in the way we do government, including a major revision of our tax law, but we are stuck with a Congress still clinging to the self indulgent politics of self satisfied people.  We need to go back to basics and remind ourselves that, while all taxes raise revenue, some taxes exacerbate problems in society while others lubricate the smooth functioning of society.  Here are some things we need to keep in mind on the three most prominent types of taxes.

The Capital Gains tax - probably more than any other tax the nature of Capital Gains tax insures that it directly impacts economic development.   A good Capital Gains tax should encourage people to make the investments in time and energy to build or expand enterprises.  This type of investment contributes to building a stronger and more prosperous world for all of us.   On the other hand it should not encourage market speculation that is essentially a zero sum game - where for every winner there is a loser and no long term benefit is provided to anyone other than the winner.

One of the big ongoing problems of the Capital Gains tax is we have never indexed the Capital Gains tax for inflation.  So Joe, who bought a farm for $50,000 thirty years ago and now wants to retire, sells his farm for $250,000.  In the view of the tax code Joe has a $200,000 in Capital Gain.  In fact the $50,000 Joe paid 30 years ago may be the equivalent of $250,000 in current dollars, so in fact Joe has no real gain and is essentially being asked to pay tax on his initial investment.  We should demand from Congress that any Capital Gain tax should be indexed for inflation.

Another problem of the Capital Gains tax has been many speculator's engaging in zero sum financial market speculation, who provide no real gain to society pay far less tax on their income than folks working 40 hours a week doing productive, necessary work.  Speculative gains should be treated no differently than the income wage-earners take home as their way to make a living.  This particular issue has become prominent thanks some very wealthy people stepping forward and pointing out the unfairness of this tax.

Income taxes -  We want to structure the income tax law to encourage hard work - we don't want to discourage people from taking the time and making the effort to commit themselves to being as productive as possible.  On the other had we don't want to income tax to be used in a manner that allows some to benefit more from while paying less tax.

One of the factors that has allowed Congress to undermine the 1954 tax code is folks have sold us on the notion that to be fair we all should pay the same amount on each dollar of tax we paid.  That notion is predicated on the assumption we all benefit equally from each tax dollar.  Yet many programs are of great value to some and no value to others.  The income tax should, to the extent possible, match tax to benefit.

The lack of indexing for inflation has also been a big problem in the income tax, probably the single biggest reason for the taxpayer anger that has resulted from the current mess that is our tax code.  Over the years people who's real incomes aren't really increasing get bumped into high tax brackets by inflation.  It has been an effective hidden tax for decades.  We should demand that Congress index tax brackets for inflation.

Property taxes on land and buildings - The primary reality of property taxes is that they represent the ultimate finite asset.  There is only so much property.  The free market generally does a good job of relative pricing on land, a house on the Beach at Malibu is always going to be more desirable and vastly more expensive than a house in suburban Riverside.  If you want to live in Malibu it is going to cost you.

Inflation also impacts property taxes and has created many of the problems with property taxes in the public mind.  People who buy an house and expect to pay a certain level of taxation find their taxes rising through inflation as their home values rise.  If they are people on fixed incomes, or find themselves in some area that becomes popular so prices rise rapidly they may be forced out of their house.  Not a situation that will create happy voters.

One way to deal with the problem of inflation on property taxes would be to allow people the option of not paying additional tax attributable to inflation and give the taxing authority a lien on the amount of the accumulated additional taxes at the time the house is sold.