Fixing this nation: Taxes …

Tax policy is the open cesspool of American politics. 

Our Federal tax system is a fetid swamp tended and nurtured by hordes of lobbyists, special interests and big campaign contributors, aided and abetted by elected politicians.

Most of the public only see the tip of the iceberg – what they as individuals have to pay in taxes. What lies below the surface is a labyrinthine maze of subsidies, credits, special tax treatments and exemptions that hardly anyone understands fully.

The only ones who do are the lobbyists and politicians who are on a never-ending quest to use tax policy for their own narrow purposes.  They try to manipulate tax policy to punish their perceived enemies, reward their patrons, and curry favor with key voting blocs.

Consequently, our current tax system is far from fair, by design. 

The public battles over tax policy typically center on Federal income tax and the need to either raise or cut Federal income tax on key constituencies.  Some want across-the-board tax cuts; others, tax cuts for the “middle class” and “the poor” although neither of those groups pays much if any Federal income tax; almost nobody is willing to propose across-the-board tax increases.     

Ironically, the people who usually rail about having “the rich” pay their “fair share” of income taxes aren’t paying much if any Federal income tax themselves. Meanwhile, “the rich” are actually paying most of the Federal income tax the Treasury takes in. 

When Romney said that almost half of all Americans aren’t paying any Federal income tax he was crucified. But he was right.   

Between all the credits, subsidies and exemptions, almost half of all Americans don’t owe any Federal income tax; many actually get money “back” from the government without paying any money in through programs like the Earned Income Tax Credit (EITC) – a program plagued by rampant fraud.  

And most of this is perfectly legal, thanks to Congress. All those credits, subsidies and exemptions exist because members of Congress have over the years used tax policy to win votes, push causes, and, of course, reward their friends and sometimes punish the enemies of their friends.    

But while the media and politicians constantly focus on “the rich” and “the poor” and the “middle class” both the media and politicians conveniently ignore all the tax breaks given out to certain businesses and industries, consumers who are incented to buy certain products and services, and others in the general public – depending entirely on where they live.   

Trump and Republicans like to say our corporate taxes are among the highest in the industrialized world. Technically our corporate taxes are among the highest, but the truth is hardly any major corporation here pays that rate. Many of our largest corporations make billions in profits and pay zero or close to zero in corporate taxes.  Again, it’s all perfectly legal. 

And for the same reason so few ordinary Americans pay Federal income taxes. Congress has provided so many tax breaks and credits to specific businesses and industries that when corporate accountants are done almost nobody owes anything.

So what’s the point of lowering a corporate tax rate nobody pays? It’s about as useful as lowering the Federal income tax rate on poor or middle-class people who also aren’t paying anything.

It’s all about optics. 

In a perfect world, there would be no Federal corporate income tax. 

There’s really no point to it if you eliminate all the subsidies, credits, exemptions and other special tax treatments; these only exist to favor one business or industry or another, to reward organizations that do what politicians want, and provide leverage to politicians seeking campaign funds. If you wiped these all away and eliminated the Federal corporate income tax very little would actually change in the long term. 

Trump and Republicans say they will enact major tax reforms to benefit ordinary taxpayers, too. 

Good luck with that. Watch carefully as the Republicans tiptoe around simplifying and making the tax code more rational so that everybody pays some taxes. Even more telling will be how they deal with provisions that actually subsidize wasteful spending by some state and local governments at the expense of taxpayers in more fiscally responsible states.   

They should start by getting rid of all the subsidies, credits, exemptions and other special tax treatments for the rest of us as well. Like the corporate tax breaks, many of these simply reward dumb behavior, or incent people to do what they should do anyway on their own dime. 

Get rid of all of these and people might start doing things for the right reasons.  Or, at the very least, understand that subsidies inevitably raise the price of whatever is subsidized, and cause some people to make poor choices they would never consider making with their own money.  

If they could do that, and that is a very big if, they could rethink what our tax policy should be, philosophically and ethically, to make taxpayers real participants in our government.       

The ultimate goal of a responsible Federal tax policy should be that every person has some skin in the game so they have a vested financial interest in how government spends their money.  The only way to do this equitably is for every bit of income a person received – whether from interest on savings, from salaries, or from distributions of profit to employees, bondholders or shareholders, or whatever – to be subject to Federal income tax at the same rate.

This is what a true Federal flat tax would be; not the wishy-washy mish-mash often proposed where certain groups would still be exempt from taxes, or would pay a lower or higher rate. Or a different rate, or exempted from tax altogether, based on where the income was derived or how that income was spent.

Not going to happen. 

The reason is simple: too many special interests have their hands in the process, all clamoring to retain whatever tax treatment they have now.  And they always want more. 

I’ll pick just a few of the more egregious examples.

Residents in several high-tax states such as New York and New Jersey can deduct many of their state and local taxes from their Federal taxes. This alone cost the Federal Treasury almost $80 billion in 2013. But that’s not the worst part – it hides the true cost of out-of-control spending on the state and local level. Without the offset, even more people who could would be fleeing New York and New Jersey in droves.  

So when Republicans from low-tax states like Florida and Texas start discussing which tax breaks to cut, expect Senators and House members from high-tax states to fight tooth and nail to preserve this nonsense for their constituencies. 

Getting rid of the mortgage interest deduction would also save a bundle for the U.S. Treasury – between $70 and $100 billion a year.  Realtors will, as always, fight to the death to defeat any attempt to eliminate it.  It’s a fundamental part of some realtors’ sales pitch to get potential home buyers to buy a more expensive house than they planned.  The mortgage interest deduction doesn’t really make that more expensive house more affordable, and contrary to what some realtors pitch, it only – at best – temporarily lowers the buyer’s gross income for tax purposes. 

It’s a variation of the car dealer con when he or she asks a first-time car buyer “How much of a monthly payment can you afford?” Conveniently forget the cost of insurance, maintenance, gas and every other expense associated with that car and, sure, it looks like a deal.     

Remember when Congress eliminated the ability to deduct credit card interest on personal purchases from your income? The banks and credit card issuers howled. But it really didn’t make any difference in how consumers used credit cards. Neither would eliminating the mortgage interest deduction, except to make home buyers a bit more realistic about what they could afford. 

Next, you’ve probably heard about generous tax credits for installing solar panels. In some cases you can deduct up to 30% of the cost of installation and qualifying equipment from your Federal tax bill. This has done absolutely nothing except help solar panel manufacturers and installers sell more stuff at a fat profit. Much like the pitch from realtors, the solar industry makes it seem like the government is helping you save even more on your utility bills.  It’s not.

By the way, the top residential uses of solar power in this country are to power attic ventilation systems (photovoltaic panels) and to heat swimming pools (passive solar panels). Neither of these seems to me to fall into the category of absolutely essential applications that promise to wean America from its dependence on fossil fuels.  But that’s just me. 

The real problems with subsidizing solar panels and installations are that these are a waste of our taxpayer dollars for almost no benefit whatsoever to consumers or the nation. The payback – if ever – on photovoltaic solar panels the green energy lobby is so enamored of can take as much as 20 years.  Next, because these panels and their installation are so expensive, the credits mainly reward the affluent who could afford to pay for the solar panels anyway without the credits, or make enough taxable income to make it worthwhile to get these credits to lower their tax bill.  

Think about it – how many poor or middle income families could afford to spend from $10,000 to $30,000 on something that’s breakeven in about 20 years or more? 

But what about all the American jobs making and installing green energy solutions? 

Well, despite squandering hundreds of millions of dollars in grants and loan guarantees to now-bankrupt companies like Solyndra, most solar panels now come from China.

Is that helping put Americans back to work on green energy?

The tax credits to consumers are set to expire in 2019. But don’t count on it.

There are so many of these. I earlier mentioned the EITC where low-income families get paid extra money from the government based on how many dependents they have. Please note this is not a conventional tax credit – offsetting the taxes someone paid – but is really an outright grant; checks are sent to recipients from the government despite what they paid in. 

However, while some politicians see the EITC as a valuable anti-poverty program, it’s also a program that has experienced major fraud. It’s been estimated that as much as $2 billion has been fraudulently claimed by illegal immigrants alone. Perhaps many billions more have been fraudulently claimed by people working the system claiming fictitious dependents or multiple people claiming the same dependents within the same household.

Is EITC fraud just the result of a poorly written law with unexpected consequences?  Nope, I believe it’s a matter of nobody wanting to enforce the rules. And why not? Well, because it would mean cracking down on the poor and illegals.  Also, like most government giveaways, it’s hard to pull back something people are used to.  

That’s the point.  Nobody will willingly give up their special tax breaks, credits, or subsidies. Whenever talk of tax reform comes up, everybody wants to eliminate or scale back the breaks for others, but they don’t want their own touched.

Parochial politics consistently override doing the right thing; politicians want to protect their home-state industries and residents and keep the support of key special interest groups.  

That’s why there’s always a huge fight over reforming the tax code. And why real reform of the Federal tax code almost never comes.

For the record, the last time was in 1986. More than 30 years later it’s still a mess.