Eliminating tax deductions

(The Cassandra Files)

This is the chart of "top ten individual tax breaks" shown on the Daily Show a couple of weeks ago. I thought it was interesting, so I've been meaning to write about it.

The chart is from the Wall Street Journal, but it's behind a paywall, so I borrowed the image from this blog (which looks excellent - you might check it out). Keep in mind that the WSJ is now owned by News Corp., the parent company of Fox 'News,' so it's even more rabidly right-wing than it used to be. I'm just saying, this is not a liberal presentation.

The topic came up because Mitt Romney has promised to cut income tax rates across the board by 20%, if we're actually dumb enough to elect him president.  That's on top of the Bush tax cuts for the wealthy, which he wants to make permanent.

He also promises to eliminate taxes on capital gains, to eliminate estate taxes, to cut corporate taxes, to repeal the Alternative Minimum Tax (which was instituted so that wealthy Americans would pay something in taxes, instead of nothing at all, after deductions) - oh, and to greatly increase military spending.

(After all, our only enemies are a rag-tag band of goat-herders using improvised explosives, so spending more than the rest of the world combined on the military just isn't enough, huh? Well, Republicans hate to "throw money" at a problem... unless it's in the Department of Defense. Then, throwing money really starts to make sense to them, apparently.)

Remember, in the Republican primary, all these tax cut promises were popular, because Republicans still have faith in trickle-down economics, despite the complete and utter failure of that during the Bush administration. Indeed, it's been a complete failure for at least thirty years now. But so what? Republicans are faith-based, not evidence-based. They're going to believe whatever they want.

Now that Romney has the nomination, though, it's time to shake that Etch A Sketch again. After all, tax cuts for the rich aren't popular with most of the country. So now, he promises that he won't cut taxes for the wealthy any more than they've already been cut (he'll still make the Bush tax cuts permanent, of course).

Oh, he still says he'll cut their tax rates another 20%, even from today's low rates. He'll still eliminate estate taxes. He'll still eliminate taxes on capital gains. He'll still repeal the Alternative Minimum Tax. But now - just for the general election - he promises to make all that "revenue neutral" by eliminating tax deductions.

There are a couple of problems with that. The first is simply that it makes no sense, even by Republican standards. Republicans claim that cutting taxes on the "job creators" will create a booming economy. Leaving aside the fact that George W. Bush claimed that, too - and that it failed horribly then - Romney is currently claiming that he's going to leave them paying the same amount of taxes that they do now.

So if he's telling the truth,... what's the point? Why expend the political capital to do all that if it's going to leave the wealthy exactly where they are today? Why would the wealthy be so supportive of that?

Even if 'trickle-down' economics were valid, Romney is currently claiming that he'll leave the 'job creators' paying the same taxes they are now. So how will that have any effect at all,... if he actually does what he says he'll do. (Republicans are still backing him because they just assume that he's lying. And he is.)

But the second problem is that Romney refuses to say which deductions he'll cut and that every independent fact-checker says that Romney simply can't do what he's promising. It's mathematically impossible. And there's no way he can even start to make up for the lost revenue without greatly increasing taxes on the middle class (which he also claims he won't do).

Romney keeps changing his position on this, still without giving any details, but none of it adds up. Here's another study about his latest plan. But they're all like that. His plans are all vague - deliberately so - and independent fact-checkers say that they're all mathematically impossible. All of his plans are just attempts to get votes from the gullible, nothing more.

Of course, Mitt Romney and Paul Ryan claim that the numbers are there, but they won't give anyone the numbers. Well, please remember that George W. Bush also claimed, when he was running for the presidency, that his tax cut plan wouldn't benefit primarily the rich and wouldn't increase the deficit, both of which turned out to be lies.

Frankly, I can't imagine that anyone would believe the Republicans now, when they claim the exact same thing. I mean, that's just incredible, don't you think? But that's what they're doing.

Anyway, I thought it would be interesting to look at these tax deductions. These are the top ten individual tax breaks for 2014. Obviously, if you're going to eliminate tax deductions in order to make up the billions of dollars lost in Romney's other plans, you're going to have to eliminate these big deductions, not little ones which won't raise much money.

(Disclaimer: Please keep in mind that I'm not an economist, an accountant, or any kind of tax professional. I might get the specifics wrong about some of these deductions, and if I do, I hope you'll correct me. If I make a mistake, I always want to know it.)

The top two deductions, which make up more than a quarter of tax expenditures, are the tax breaks for employer-provided health care and pension plans. In a way, it's true, these aren't fair. Why should a person lucky enough to work for an employer who provides health insurance and a pension plan pay less in taxes than a person who's not so lucky?

Most of those people make more money, too. Jobs at those kinds of companies - union jobs, many of them - tend to be much better jobs. Yet, we make the poor bastards who aren't so lucky pay a higher tax rate? It's not fair. So maybe we should eliminate these deductions.

But these are middle class deductions. They're certainly not going to affect the wealthy, which is what Romney claims he wants to do. And unions negotiated for those benefits in part, at least, because they weren't taxable. Given our tax laws, it just makes sense to get some of your compensation in benefits, rather than just take-home pay that's fully taxable.

And union or not, if you have a health insurance benefit at work, or if you have any kind of pension plan (defined benefit, 401-k, 357 plan, etc. - I'm not sure if this includes IRAs), you probably won't be happy about paying more taxes. Well, maybe that's one reason why Romney is being so secretive about it.

But whether it is or not, eliminating these deductions will primarily affect the middle class, not the wealthy. Cutting the top two deductions will do almost nothing to make up for his many tax cuts which benefit them.

The next biggest deduction is the mortgage interest deduction, and you know how unhappy people would be about losing that! The real estate industry alone would have kittens!

And again, it's primarily a middle-class deduction. That's not entirely the case, I suppose, but the deduction is capped for mortgages - on first or second homes - of $1 million or less. The average person probably doesn't have a million dollar mortgage on a second home, but the super-rich probably can't take advantage of this deduction, either, since it's just one million dollars. (Lucky for them, they have so many other ways to avoid paying taxes.)

This might be the third biggest tax deduction, but I can't see any politician seriously attempting to eliminate it. Even if Romney did propose that, it would never get through Congress. And as I say, it's mostly a middle-class tax deduction anyway. This won't help him do what he claims he's going to do.

To be honest, I'm not sure about the fourth biggest deduction on this list, "exclusion of Medicare." When you're working, Medicare taxes aren't tax deductible. Afterwards, Medicare premiums for Part B (out-patient services) and Part D (prescription drugs) are deductible, but only if your medical expenses exceed 7.5% of your adjusted gross income.

I can't imagine that's one of the biggest tax deductions, and if it were, it wouldn't affect the wealthy at all. So I just don't know. Maybe this category includes Social Security, too? Social Security taxes are only deductible for the self-employed. However, Social Security benefits aren't taxed - which would add up to quite a bit, I'm sure - but that's only for people making less than $25,000 a year ($32,000 for couples filing jointly).

Oh, maybe that's it. Maybe this category just means that Medicare benefits aren't taxed. And there's no income limit on that, either. I guess that's possible, if you really think that Romney would try to tax seniors' Medicare benefits! Heh, heh. He'd be better off angering real estate agents!

But I really don't know about this one. Still, either way, it can't possibly be a deduction which primarily affects the wealthy. And note that Mitt Romney also wants to repeal Romneycare Obamacare, which action would, among other things, cut the Medicare taxes of high-earners. So when it comes to Medicare, he seems to be going in the wrong direction!

And speaking of wrong directions, the fifth biggest tax break is the low tax rates on capital gains. I'm not sure if that category includes qualified dividends, which are also taxed at that low capital gains rate, or not. But either way, Romney plans to eliminate taxes on capital gains entirely! So not only won't he eliminate this tax break, he's going to make it far, far worse!

Indeed, Romney supported Paul Ryan's tax plan, which also did this, and studies showed that would have led to Romney himself paying less than 1% in federal income taxes. Yes, that would be a huge giveaway to the wealthy, and especially to the super-wealthy. Right now, capital gains and qualified dividends are taxed at a very low rate compared to wages, but Romney wants to cut that to zero. So yes, he's definitely going in the wrong direction on this one!

And note that estate tax breaks (#8 on the list) are the same way. Right now, you can receive an estate of more than $5 million and pay no federal tax on that. That's a big tax break, and it does affect the wealthy. (If you expect to receive a $5 million inheritance, you're probably not hurting too badly.)

But far from eliminating this tax break, Mitt Romney plans to remove the cap entirely. Yes, you'll be able to receive your full $100 million inheritance, or $1 billion inheritance, or even more,... entirely tax-free. What, you don't expect to get a $1 billion inheritance? Well, poor you, huh?

Yes, this is another example of Romney moving in the exact opposite direction. You know, he's really going to have to cut deductions to make up for that stuff. (Admit it. You know that this is just talk, right? He has no intention of actually doing what he says.)

The Earned Income Tax Credit, the sixth biggest tax break, applies specifically to low- and moderate-income, working Americans (you must have less than $3200 in investment income), especially those with lots of children. So eliminating this deduction certainly won't affect the wealthy!

But there's something really ironic about this. The Earned Income Tax Credit has long been a favorite of Republicans. Although supported by many Democrats, too, it has really been their plan. It's been expanded many times, most notably in the Reagan Tax Reform Act of 1986.

But one of the results of this has been that many low- and moderate-income Americans pay no federal income taxes at all, and Republicans have recently been screaming about that. Yes, their own plan has resulted in working families with lots of children getting enough tax credit that they pay no taxes. Gee, you never hear Republicans point that out, do you?

(I don't mean to imply that these are the only Americans who pay no federal income taxes. Many senior citizens don't, because Social Security payments aren't taxed, if you don't make a lot of money elsewhere. The combat pay of our soldiers is exempt from federal income taxes. Students and other part-time workers who don't make much money often have no tax liability, because of standard deductions. And the tax rate on capital gains and qualified dividends has been zero in recent years, for the lowest tax brackets - and only 15% maximum at the highest.)

I know that this is getting really long, and I apologize for that. But you're getting the point, I hope. Look at those last three tax breaks on the list - the deductions for income tax paid at the state and local level, child credit allowances, and the deduction for charitable contributions. How likely do you think it will be that Congress would actually eliminate those deductions, even if Romney did push for that (which he won't)?

Mitt Romney and Paul Ryan refuse to give specifics about their plans, because they know that (1) the biggest tax deductions are very popular, (2) most of them affect the middle class more than the wealthy (except those which they specifically plan to keep and even expand), and (3) their numbers don't add up - can't add up.

Look at it this way: If their numbers did add up, they wouldn't be so secretive about it. If the math really did work, they'd be plastering America with the details. That's obvious, isn't it? How could you possibly believe otherwise? They are lying to us, just like George W. Bush did. It worked for Bush, but doesn't anyone in America learn from experience anymore?

But OK, if Romney still claims that his plan will work, let him show us. Mitt, pledge to cut these deductions first, and then - if you really do accomplish what you claim - you can cut tax rates after that. After all, cutting deductions is the hard part. Cutting tax rates is easy. So show us that you actually mean what you say by doing the hard part first.

And if we make a little extra money in the meantime, well, you can start to pay off the deficit (like Bill Clinton was doing, before George W. Bush took over). How does that sound?

Yeah, you hate it, don't you. You hate that plan because you're lying. You're just lying. You know the numbers don't add up, and you have no intent of doing what you claim, anyway. It's just another shake of that old Etch A Sketch, just another way to try to get elected. That's the only thing that really matters to you, isn't it?