Amer. Intelligence Test: Tax Reform - When Is the Truth A Lie? – Deductions

All Americans know that our Tax System is unfair and biased. What all Americans don’t seem to know is that not all Americans agree on what it is about the Tax System that is so unfair and/or biased. This renders the popular “common knowledge” about taxes as not common, not knowledge, and most importantly as not wise. This unfortunate circumstance follows along the line of reasoning that something cannot be both true and false simultaneously if we are talking about the exact same attributes of the same ‘thing’, in this case taxes. While some attributes may be true and other attributes may be false, a given thing such as your financial Income cannot be both income and not-income. Although we find ourselves with a tax system that has different types of income that are not considered equal to one another; and because of their clear distinctions are given different tax treatments from each other. Under the current Tax System and certainly under any Reformed Tax System income will be defined, and that definition classifies something as income (true) or not-income (false) but not both for the same purpose.

What does all this have to do with Tax Reform? It means that when deciding what is true (or false) about claims made about a new Tax System, it must be measured against the appropriate and corresponding attributes that are meaningful. One might argue this is more simply put as: Claiming something is better is not the same as proving that it is better. It may be ‘true’ that your tax-bracket will have a lower rate. That doesn’t mean that your taxed amount will be. So, in the Tax Reform effort to be pursued there is expected to be significant changes to Deductions. A major argument about deductions is that many (maybe all to some) are unfair and/or biased. Let’s see if you can show how well you understand the truth (or falsity) about Deductions. 

Question A:   Since all citizens will not meet the requirements for a deduction, is it fair to give them to some but not all?

(1). Yes

(2). No

Question B:   If all citizens can use the same deduction, like the ‘State and Local Taxes’ deduction, would that mean that it is fair and unbiased?

(1). Yes

(2). Yes, but only for State taxes

(3). Yes, but only to a fixed maximum

(4). Yes, but only to the degree that their state doesn’t get more federal funding than the national per-capita federal funding

(5). It’s much more complicated than that and the rules need to reflect that complexity

(6). No, some states’ taxes are higher and give their taxpayers a larger deduction

(7). No, unless their per-capita federal taxes are higher than the national average

(8). No

Question C:   Indicate which, if any, of the following Deductions are fair and unbiased?

(1). Standard Deductions

(2). Charitable

(3). Contributions to eligible Non-profits

(4). Donations to Religious (recognized) organizations

(5). Unreimbursed business expenses

(6). Investment losses

(7). Interest expenses – All

(8). Interest expenses – Some but not all

(9). Interest expenses – Mortgages only

(10). Corporate capital investments

(11). Medical expenses

(12). All of above

(13). None of above

Question D:   Is there a distinction between a Deduction, a Tax Credit and an Exemption?

(1). Yes

(2). No

Question E:    Is there any reason that some Corporations should have deductions that are fundamentally only applicable to their industry or sub-segment of an industry?

(1). Yes

(2). No

Question F:    Is the Cost of Living the same in every state, and does the Cost of Living make a difference on one’s taxes?

(1). Cost of Living, Yes; Changes taxes, Yes

(2). Cost of Living, Yes; Changes taxes, No

(3). Cost of Living, No; Changes taxes Yes

(4). Cost of Living, No; Changes taxes, No

Question G:   Deductions are intended to:  [select the items that apply]

(1). Promote investments

(2). Insure that families can make ends meet

(3). Establish a poverty level below which no taxes are required

(4). Encourage charitable, religious and community-oriented giving that benefit the nation

(5). Allow corporations to offset losses from equipment/resources depletion over its life

(6). Provide benefits for the wealthy to reduce their tax burdens

(7). Offset expenses that put taxpayers at financial risk

(8). Improve the economic robustness of the nation’s private sector

Question H:   Eliminating deductions will make higher income earners pay more taxes and promote a stronger middle-class.

(1). True

(2). False

Question I:      What does a stronger middle-class mean: [Select any that apply.]

(1). That 60% of the wage earners earn 60% of the nation’s wages

(2). That net wealth of middle half of wage earners increases faster than inflation

(3). That the concentration of wealth doesn’t exceed a specific percentage of wages earned

(4). That total family assets increases for middle 50% of wage earners grows faster than upper 0.5%

(5). That’s the problem, we don’t know what it means

(6). That there are fewer people below the ‘poverty’ level on average over any five-year window

Question J:    Is it true that eliminating deduction will make the tax system more ‘fair’?

(1). Yes

(2). No

Question K:   Which of the following factors affect whether eliminating the State And Local Taxes makes the new Tax system “More”, “Less” or makes no difference? Group items as either an “M” or an “L”. Do not put items that make no difference in either Group.

(1). State And Local Taxes

(2). Cost of Living Index for each state

(3). Gross State Product

(4). Average / Median Incomes by state

(5). Employment rate by state

(6). Per Capita Taxes paid by state

(7). Federal spending level by state

(8). Federal Emergency Management Agency budget by state

Question L:    If the new Tax bill passes will the new Tax system be more ‘Fair’?

(1). Yes

(2). No

ANSWERS:

Answer - A:  Yes

Rationale - A:      While all citizens have the same rights that doesn’t mean that all citizens have the same circumstances nor that the nation and all its citizens don’t benefit from how taxes and deductions are applied according to those circumstances. There is also a practical aspect to this reality, there is no way to treat everyone the same since even the most similar of taxpayers are never going to be identical let alone every taxpayer being rationally comparable to all taxpayers. The proposed Reform Tax plan won’t treat everyone the same; yet like the current system we can hope it will treat everyone equally. If this seems to be contradictory, then you are on the path to wisdom and perhaps even understanding our tax system.

Answer - B:  5

Rationale - B:      The notion that you can look at one variable to determine if everyone is treated equally is foolish (I wanted to avoid the use of the word ‘moronic’). To equate everyone as being equal on all other factors is known to be false to start with. To claim that those that appear to benefit more from a deduction is not actually proving that they do. Even with the ‘State and Local Taxes’ (SALT) deduction it is possible that those who get the larger deductions are still taxed more at the federal level than their peers in other states. It so how is taxing them more than the ‘more’ they already pay “Fair”?

New York, California and New Jersey are cited as getting almost a third of the benefits from SALT so that seems unfair. But these three states also are just over 20% of the population, and their incomes account for about 25% of the nation’s income. Does this mean that they pay more taxes to the federal government than other states also? Are we getting to a point where the claimed unfairness is a dubious claim?

It’s the complexity of a diverse nation that makes the simple-minded presumption that we’ll just make it simpler and the ‘problem’ will be solved. The SALT deduction may be beneficial to the economy, the nation and even the other states; if it is then what are the consequences to their loss?

Answer - C:  13. None of above.

Rationale - C:      Every deduction on this list makes some assumptions about what is a beneficial factor to the nation; otherwise there wouldn’t be a reason to have it in the first place. The theory behind a deduction is it is justified by providing a value to the economy and nation. Deductions aren’t actually meant for the citizens personally but rather to incent them to behave in ways that are good for everyone. The fact that they are a member of the set ‘everyone’ just means that they benefit also. Even the ‘standard deduction’ isn’t really the same for everyone except numerically.

Answer - D:  2. No

Rationale - D:      Ok, I will grant you a conditional ‘Yes’ if you want to state that they are different words with different spellings; but other than that, No, they are functionally the same. Each change what you consider a taxable amount of income in some manner according to some defined requirements and conditions. They can be explained and rationalized to sound like they’re different. But at the end of the day they just affect the number that you are taxed upon; so yes, they are different, and I am sure you can tell me how one changes the number differently than the others do. But until you can show me how the math changes the numbers differently, I am just going to have to wonder about the schools your parents paid good tax money for.

Answer - E:  1. – Yes, but 2. – No if you don’t agree with the requirement in first sentence of Rationale.

Rationale - E:      Well, Yes, if you think that Congress is smart enough to figure out how to determine what corporations will benefit the nation and our economy significantly or critically only if the deduction is granted. I have no doubt that circumstances and conditions exist where a corporate deduction is far better for the nation and economy than without one.

Answer - F:  4, mostly; there is a little of 3.

Rationale - F:      The Cost of Living is quite simple. It varies from state to state across the various factors that are looked at in a Cost of Living assessment. So, no it is not the same everywhere.

Now as to taxes, there is no implicit requirement in the tax system that adjusts anyone’s tax rate or basis because of Cost of Living differences. So, this is why Cost of Living isn’t a direct tax impacting factor. Now there are some aspects of Cost of Living that do actually impact taxes but not necessarily in a ‘fair’ manner, even if we knew what was considered ‘fair’ under our tax policy which unfortunately we do not. Consider that if your Cost of Living is higher then to be ‘on par’ and on an ‘equal playing field’ with your peers in other states then your wages have to be higher which leads to the unavoidable consequence that your taxes will also be higher. There’s a positive feedback issue at work here that pollutes the “common understand” of ‘Fair’.

Answer - G:  1, 4, 5, 6, 7, 8

Rationale - G:     Deductions are to encourage things that the government supports. So, the mortgage deduction encourages home ownership which the government believes is good the for the economy and our society. Deductions for children are viewed as good for the nation since a healthy economy requires a population to maintain that economy with a family-structure that provides for children. Likewise, deduction for corporations that enable them to prosper and support economic growth has national value. Another aspect of a deduction is that it should be generally independent of knowledge about who it benefits but rather based on why the deduction is beneficial (and thought not done today, there should be a verification requirement for demonstrated benefits or it expires each 5 years).

This doesn’t mean that all deductions are therefore good or beneficial but rather that there ought to be a societal, economic and national benefit associated with them. This is not always the case mostly because they are created by politicians who can’t seem to stop themselves from providing deductions that benefit special-interests that do not meet the essential requirement(s) for a deduction. Yes, your elected politicians are not there for your good but for the good of ‘valued’ people and you are just there to help fund them.

Answer - H:  2 – False

Rationale - H:      It’s false because it depends upon things not required to be true. If you want you could argue that it’s “iffy” but again depends upon things that are not a given.

If all deductions were eliminated then it may be more likely to be true, but if only some are then there will remain paths for higher income earners to side-step more taxes. Since there is no higher tax rate applied to higher earners than today they don’t pay more unless they use a deduction that is eliminate.

There is also a potential (probability) that if one deduction is eliminated that the alternative is to shift to another that is not. It may result in higher earners paying even less in taxes.

And let’s not forget that there is a distinction between ‘earned’/wages income and other income that the wealthier are differently taxed at than the more traditional wage earners are. So do ‘higher’ earners pay more? And if the middle-class earns more which is required to restore the middle-class as an actual middle-class they may have to pay more on their earnings. Should these higher wages not correspond to higher Costs of Living the restoration of the middle-class may be another ‘promise’ in hope only without any reality to substantiate it.

Answer - I:  5

Rationale - I:        Politicians and political parties talk a great deal about restoring the middle-class but they don’t actually spell out what that would mean for those who are suppose to be part of the “middle-class”. Unfortunately, without that simple and clear understanding it’s just another nice sounding promise; and we all know what politicians’ and party’s promises are worth. There’s nothing of value in the promise that isn’t ever fulfilled.

Answer - J:  No

Rationale - J:       Look at Answers for G and H. Deductions are part of the tax system. They are neither good nor bad because they are a deduction. So you have to look at what makes any given deduction ‘unfair’. This puts you back into the root cause / root problem realm. If you don’t define your terms competently, adequately and openly then you can never achieve the results that you demand: ‘Fair’. Is it hard to do this, to define ‘Fair’? If you think so, then why exactly did you vote for the politician you voted for, because none of them has defined it either; and it is not hard to do.

Answer - K:  More Fair:  1, 2, 5  ;   Less Fair: 1, 2, 4, 5, 6, 7, 8

Rationale - K:      If you noticed that items 1, 2 and 5 are on both the More and Less fair lists. The reason is simple enough, that it’s complex but also comprehensible. Nothing in taxes, wages, wealth, employment, deductions, budgets or the economy are isolated and independent from each other. If you do not understand how these factors interact then you choose to care for what you want to be true over what is true. The reasons for such a choice can be many and varied but I doubt that ‘fair’, honorable, or anything close to our American values would be part of it.

If you want to believe then you ought to be quite clear on what it ‘fair’.

Answer - L:  No

Rationale - L:      Until ‘fair’ is competently defined, it’s a convenient fiction to expect let alone to believe that any tax system that politicians define will be ‘fair’; and competent politicians are the “unicorns” of American political parties. Of course, politicians are merely representatives of the voters; this might explain quite a lot.

Amer. Intelligence Test: An Old Question: Are You Better Off?; A New Question: How Do You Know?

Politicians usually like to tell you what you are supposed to think, but once in a while one of them will ask a question. A rather salient question was raised by Ronald Reagan during his 1980 Presidential campaign. It resonated with many voters because it made them ask how they were doing under the then current Administration. The core-concept of this question was considered a economic/financial assessment. The question was quite simple: “Are you better off then you were four years ago?” Now that is a good question, and surely a simple one. And so, I suspect that you would feel it relevant to ask during every election. Now there are a trick or two in the question. For each person it must have an easy answer. So, let’s see if your answer(s) are easy and that you know or don’t run afoul of any tricks. Just as Reagan’s question related primarily to an ‘economic’ perspective, this test is also focused toward an economic landscape.

Be advised you may not wish to know.

Question A:   Are you better off than you were four years ago?

(1). Yes

(2). No

Question B:   Do you have more, less or the same level of debt from 1 year ago?

(1). More debt

(2). Less debt

(3). Same debt

(4). No debt

Question C:   How do you know, you are Better off (or Worse off if it was your answer) today than 4 years ago?
If a choice item applies assign it to a B or W grouping, if the choice item doesn’t apply ignore.

(1). Your wages

(2). Your debt

(3). You now have a job

(4). Your Net Assets value

(5). Your Cost of Living

(6). Health Insurance

(7). Your taxes

(8). Your Retirement Income or Savings

Question D:   Is the country better off than it was four years ago?

(1). Yes

(2). No

Question E:    How do you know, the country is better off (or worse off if it was your answer)?
If a choice item applies assign it to a B or W grouping, if the choice item doesn’t apply ignore.

(1). Trade Deficit is at record highs

(2). Unemployment is at record lows

(3). Inflation rate is low

(4). Stock Market at all-time highs

(5). Interest rates are raising

(6). Middle-class’s percentage of Nation’s wealth is increasing

(7). Gross Domestic Product is at all-time high

(8). More people are covered by health insurance

Question F:    If the Stock Market increases is the economy improving?

(1). Yes

(2). No

Question G:   If employment is increasing is the economy improving?

(1). Yes

(2). No

Question H:   If GDP (Gross Domestic Product) is increasing is the economy improving?

(1). Yes

(2). No

Question I:      Is wealth concentration higher, lower or the same than 4 years ago.

(1). Higher

(2). Lower

(3). Same as 4 years ago

Question J:    Can you be better off if the nation’s wealth continues to concentrate more and more to fewer and fewer people?

(1). Yes

(2). No

Question K:   Are you better off than you were four years ago?

(1). Yes

(2). No

Question L:    Will you be better off than you are now in four years?

(1). Yes

(2). No

(3). I don’t know

Question M:   What ‘tricks’, if any, did you fall prey to?

(1). Politicians’ “Promises”

(2). High Stock Market is same as good Economy

(3). High Employment

(4). That ‘trends’ that show a better economy have changed

(5). That ‘reasons’ for increases in good factors have changed

(6). I don’t know

(7). All the Above

(8). None

ANSWERS:

Answer - A:  Obviously, the answer only applies to each individual if we are describing your economic state. If you are assessing something else than please refocus.

So, Yes or No are correct if you still think they are correct when you are done; otherwise something became relevant that you hadn’t considered. I apologize for that.

Rationale - A:      Even if the question and your answer are regarding you and your situation, there are still underlying factors and requirements upon which you have made your determination. This is relevant to more than you may guess.

Answer - B:  An individual answer, whichever is yours is correct.

Rationale - B:      You have the debt that you have as an individual.

If you think more debt is bad then your answer to Question A should be consistent with that. If you think more debt is good then your answer to Question A should be consistent with that.

If the question were about the nation then the answer is also too simple to ask. The nation has more debt than 1 year ago, and has had more debt each and every year since a minor drop in 1969. The interpretation of is that good or bad is not equivalent to the situation for individuals above.

Answer - C:  B: Those items you gained on are individual to you.
             W: Those items you lost on are individual to you.
Overall, you must decide if the sum of B items outweigh the sum of W items.

Rationale - C:      So, if you are better off then it sure beats being worse off. But the economy is not simply a measure of you. Yes, I know you are very important to you; but I think even you would agree that relative to everyone else you are literally just a sample data point. Unless what’s true for you is equally true for everyone else than you have to decide if your situation warrants a judgement for the state of the next question.

Answer - D:  Yes

Rationale - D:      Remember we are in an “Economic” mindset. If you are factoring in other dimensions, then you are wandering off the trail. Now just because you got the right answer doesn’t mean that you got it for the right reasons; and if you don’t think that’s important then I can’t help you.

Consider the answers to Questions: E through J

Answer - E:  B: 6, 7  ;  W: 1, 6

Rationale - E:      On the Better side: Item 7 -GDP is a highly used and accepted standard for measuring the state of the economy. So, an all-time high should indicate a good economy. Item 6 measures the degree that the bulk of the population is benefiting from economic conditions. Unfortunately, if you put Item 6 in your reason for the economy getting better then you would be in error. It has not increased it has decreased.

On the Worse side: Item 1 - Increasing Trade Deficit is a problematic condition. If it keeps increasing the Trade Deficit becomes a larger drain on the economy until it becomes unsustainable. But a Deficit now and again can have a reason that is good under the appropriate situations, but it can’t last forever.

Now all the other items may sound Better or Worse, but for each it just isn’t that simple.
Item 2: Unemployment if high is clearly bad; but low unemployment need not be because the economy is good. Besides employment, wages and income must be at a level that also indicates a robust economy. If everyone is employed earning only minimal wages, the economy is unlikely to be in good shape.
Item 3: There is a desired level of inflation, so if it’s too low that’s not necessarily good for the economy, and if it’s too high we know it’s not.
Item 4: We all like a high Stock Market, but that doesn’t actually mean that the economy is doing well. It means that everyone thinks it is doing well. Can you remember any Stock Market crash that didn’t occur when the market was high?
Item 5: Like inflation, there’s good increase in interest rates and there’s bad increase in interest rates.
Item 8: Health insurance may change by economic conditions, but it doesn’t only grow when the economy is good or decline when it is bad.

You may have put one or more of the above items into the B or W group based on you view that its current state justifies it. This intelligence test requires more justification.

Answer - F:  No

Rationale - F:      See explanation in Question E above for Item 4.
This is not saying that an increasing Stock Market may not reflect an improving Stock Market, only that it doesn’t have to be the case.

Also, consider that the value of the Stock Market could be doubled if people just refused to sell their shares for less than double the current values. This would not mean the economy has actually changed, and as soon as someone started to sell it would collapse, again without changing the actual economy.

Answer - G:  No.

Rationale - G:     See explanation in Question E above for Item 2.
More employment is generally better, but not the only requirement for the economy to be better.

Answer - H:  Yes

Rationale - H:      GDP increasing is an indication of the economy getting stronger. Since GDP is used as a measure of economic robustness, it is somewhat of a circular reference.

We should be cognizant of the possibility that GDP could increase yet the nation’s economy might be declining. There aren’t absolute hard and fast rules here that cannot conflict with reality.

Answer - I:  Higher

Rationale - I:        See Item 6 in Question E. The trend has been toward more and more wealth in the ownership of fewer and fewer citizens. This isn’t a sign of a stronger economy but of a more and more vulnerable one.

Answer - J:  No

Rationale - J:       As wealth and income concentrate the economy is either declining or is becoming more and more unstable and subject to catastrophic failure.

Answer - K:  If you changed your mind, well that is hopefully useful for you. If you think the nation is better off also than your answer should be Yes; if not, it should be No.

I would also advise that if the nation isn’t really doing better, you transitive improved situation could quickly and radically change.

Rationale - K:      The economy is the aggregate of the nation. You are just a data-point. Sorry.

Answer - L:  I don’t know.

Rationale - L:      You are guaranteed much more than ‘Death and Taxes’. You also have to factor in the status of the nation as a whole (see Rational K).

Answer - M:  There is no right answer, not even Item 8.

Rationale - M:     Let’s deal with Item 8 first. Do you believe the economy has gotten better because the trends have changed? Or, that the reasons for increases have changed?
Then you should be able to show that trends and reasons both changed and are consistent. You also have to reconcile answers that conflict. By the way, the test didn’t ‘trick’ you; it was self-imposed.

All others have been explained in previous Answers and Rationale.