Saturday, October 15, 2011

Easy Tax Reform

It is very hard to raise taxes.  Much easier to close loopholes.  So here are bunch of expensive loopholes we can close, all of which make little sense to keep open.  Some are tax deductions that seemed like a good idea, but turned out to be easy to abuse.  Others are simply government give-a-ways that never made financial sense - even if they made political sense.

  1. Payroll tax limits 
  2. Mortgage deductions for second homes/yachts (yes YACHTS)
  3. Real estate Tax deductions
  4. Business deductions for SUV over 3 tons. 
  5. Capital Gains tax (buffet rule)
  6. Oil
  7. Agricultural

Payroll tax limts.  You only pay social security tax on your first  $106,8000 of income.   So someone that makes $107,000 and someone that makes $5,000,000 a year, both pay the same amount into social security.    If we eliminate this limit, so that everyone pays the same 6.2% (and their boss pays another 4.2% - which may be the same person if you are self-employed), that solves our Social Security funding problem without cutting benefits a single penny or raising the retirement age, ever.

Mortgage Tax Deductions.  You get a tax deduction for all mortgage interest you pay for anything that qualifies as a home. That includes a second home as well assuming you live in it 14 days a year / 10% of the days you rent - whichever is greater.  Even if one of your home is a houseboat - or a 200 ft yacht with a bed, kitchen and bathroom in it.  If we limit this to a single home and also limit it to no more than $30,000 tax deduction a year (adjusts for inflation) and the IRS gains a lot of cash.  I am being very generous with that $30k deduction, you

Real estate tax deductions.   Property tax you pay to the state is also tax deductible.  Why? We don't let the poor deduct that taxes they pay on food?  We don't want to affect the main housing market, so, again, make it only for your primary home (6 months+/year), and again a limit of  no more than $30k a year.  

SUV deductions.  Here we give a tax deduction for any SUV that is purchased for business purposes if it is over 3 tons.  The idea was to let business deduct their business related expenses.  But it got abused by a lot of small business owners for vehicles they use personally.   The problem was they made a category too big and let people buy the low weight (6,000 lb vehicle) and get the tax deduction that would be appropriate for the high weight (14,000 lb vehicle).  Keep the deduction, but scale it.   $1,000 deduction at 6,000 lbs, + another $1,500 deduction per 500 lbs. lbs base vehicle weight above the 3 tons. Still tops off at the $25,000 deduction for a 7 ton vehicle, but to get that they need to own a real truck, not just a heavy SUV that they once used for business purposes.

Capital Gains Tax.   Here I propose a simple rule.  You can pay the 15% capital gains tax - but only on the first $50,000 of capital gains you make.  After that, it jumps up to the same tax rate you pay for regular income.  Put in an exception for selling your primary home at the 15% rate as long as you have lived in it for at least 40% of the time you owned it.

Oil Loopholes.  They get a lot.   Tax credits for 'enhanced oil recovery' -  needs the newest, expensive, tech to get = tax break.   Production credits for marginal wells - poor well with little oil/gas = tax break.  Intangible drilling costs - you get a bad reputation for spills = tax credit for propaganda.  Plus a bunch of weird accounting rules that only they (no other business) gets.  Remove all of that crap and make them play by the same rules everyone else gets.

Agricultural tax benefits fall into two types - direct subsidies for corn based ethanol and the classic pay people not to farm.  Neither of these make much sense.  Ethanol is perfectly profitable - if you limit it to waste agricultural products as Brazil does.  Then the fuel is cheap - the leaves, stalks, etc. that would otherwise be thrown away.  But it makes zero sense to put perfectly edible corn into the mix.   Same goes for the paying people not to farm.  We don't need to socialize farming, it has become a big business - the payments get rid of ALL risk for farming and it has in fact KILLED the family farm.  Because of the lack of risk, all gets done by big corporations.     In 2005, the government spends more on farm aid than it pays to families that receive welfare.  "The cash comes with so few restrictions that subdivision developers who buy farmland advertise that homeowners can collect farm subsidies on their new back yards." (Source of quote and data = Washington post )

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