How To Make It Work

A friend of mine...an accountant and CPA posted this on my church's web board.

There is a reason why Romney won't get specific on his budget plans. They won't work, and he knows it. He also knows that, like with GW Bush, if Republicans are in power, they go back to the famous Dick Cheney quote that "deficits don't matter." They certainly won't reduce military spending, indeed, they want to increase it.

On tax reform, the real money in tax deduction/tax credit removal is in:

1. Mortgage interest deduction. Democrats would love to limit this on high-value mortgages, but no one will touch middle class mortgages with a ten-foot pole. Republicans won't touch it at all.

2. 401K deductions. Killing this kills the viability of the whole voluntary savings system. If Social Security gets cut, then we rely more on this program. As it is, this means nothing to lower-middle-class people. One large company with a dominance of retail workers that my wife worked for until recently had an average employee savings rate of 2% of income.

3. The earned income tax credit. This is what keeps poor people from having to pay federal income taxes (though they still pay payroll taxes at a rate 10 times or more higher than Mitt Romney's payroll taxes). Cutting this creates a huge tax burden on the bottom of the socioeconomic ladder.

4. Exclusion of employer contributions for medical insurance. If you cut this, millions of people likely get dumped off employer-provided health insurance.

5. Step-up basis of capital gains at death. This means that the $100 million IRA that Romney established with stock passes tax-free to his heirs, with no tax ever paid on any of its growth. Republicans won't touch it. Democrats might means-test it, applying it only to the richest Americans.

6. Deduction of charitable contributions. No one wants to touch this, although I can make a very good argument that only a small amount of people's contributions to their church is really "charitable." For us, most of it goes to pay for a warm place for you to worship, and pays the salaries of the World Church staff. For protestants, it pays for their building and their full-time minister. For Mormons it funds huge investments in land and businesses.

7. Deductibility of state and local taxes. No one will touch this.

8. Accelerated depreciation of business equipment. This has turned into a huge tax hole. Business can treat major purchases as if they were ordinary expenses and get an immediate tax savings. Republicans will never touch this. It is so bad as an accounting practice that companies cannot use this on their financial statements.

9. Tax-favorability of capital gains. This made Mitt Romney rich and keeps his tax rate below 14%. Republicans will never touch it.

10. Thousands of small special-interest tax deductions. These are deductions and credits that less than one in 1000 individuals or companiess are allowed to take. These were usually snuck into the tax code by lobbyists and Jack Abramoff-style crooks. Republicans will never touch most of these. In total, they are worth quite a lot of money, and would reduce the complexity of the tax code by a huge amount if they were gone. Individually, they are small enough to escape most reform plans.

My proposal has been to put all of #10 en masse into the hands of a "military base closure-type" commission where they are all sunsetted automatically unless they come back up individually before congress. By definition, these are "special interest" and the best examples we have of bribery working in congress.

Means-test the rest, and you have a decent tax system.