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.