I just finished doing my taxes. And my mother’s taxes. And the tax returns for a small philanthropic organization whose Treasurer I am.
If I had not waited so long, I would not have squeezed hours of filling out forms into just these last few days. But that concentrated my mind on our tax system: how much time it takes, how complex the paperwork can be, how much money is at stake.
It’s hard to find out how many people do their own taxes with pencil and paper and calculator, as I do, but I found a couple of online “polls”, one of which proclaimed “This is not a scientific poll.” They both showed that only 4% of filers do it that way. Most people use some tax software and file electronically.
I don’t mind paying my taxes, exactly the amount that comes out at the end of lots of calculations. I don’t want to pay more than I have to. I don’t begrudge what I do pay to fund our public goods.
I think the forms are a nightmare of poorly explained instructions. The difficulties mostly lie in the forms that allow you to take advantage of the loopholes written into our tax code. The biggest loopholes for most Americans are listed on Schedule A, Itemized Deductions. With that form, the taxpayer can deduct from taxable income many kinds of expenses: interest paid on a mortgage, state income taxes, charitable contributions, money spent on the job. Some income is not taxable at all. For a widow living only on Social Security, the first $50,000 in benefits is not taxable. All Medicare benefits are excluded from taxation.
The fancy phrase for these loopholes is tax expenditures. This is what the Joint Committee on Taxation of the US Congress, with 5 Republicans and 5 Democrats, said in a 2011 report about these “special tax benefits to particular taxpayers”: “Tax expenditures are similar to those direct spending programs that are available as entitlements to those who meet the statutory criteria.” They are just like unemployment benefits or free school lunches, except they tend to go to different people. We all benefit from some form of government-created welfare. That’s a bipartisan judgment.
There are hundreds of different tax expenditures that are designed to benefit certain people. The Joint Committee on Taxation takes 7 pages just to list the tax expenditures enacted into law since 1986. A recent one from 2007 is the “exclusion from gross income of benefits provided to volunteer firefighters and emergency medical responders”. An older loophole which comes at a much bigger cost is the medical savings account, allowing people to shelter money used to pay medical expenses. That concept was a major plank of the Republican Party's health care agenda in the 1990s.
The same report explains which of the many tax expenditures are the largest. For middle-class taxpayers, the second most important exclusion from income is the home mortgage interest deduction. But saving us even more money is the exclusion of employer contributions to health care insurance and health care. We don’t even have to declare that income on the 1040 form. Each year that provision costs the federal government over $100 billion in lost tax revenues.
Millions of American families benefit from these two loopholes. The third largest loophole is much more narrowly focused: the much lower tax rate on capital gains. Anyone with money in stocks could benefit from this loophole, but how much income does the average taxpayer gain from the stock market? It mainly affects the very wealthy, people for whom a large portion of their income can be considered capital gains. Like Mitt Romney, nearly all of whose 2010 income of $21 million was taxed at the special low rate for capital gains.
Republicans like Romney are proposing a major overhaul of our tax system. They want to lower tax rates by doing away with many of the big deductions, although they refuse to specify which ones. They are sure about one thing, though – they want to keep the tax expenditure on capital gains. In fact, the Congressional Republican tax plan put forward by Paul Ryan, and supported by Romney, would eliminate all taxes on capital gains. That would make it the biggest tax expenditure ever.
Eliminating the deductions I use would make it much easier to file my taxes. I would no longer get a special break as a homeowner, which might seem fair to those who rent their dwellings. The special breaks would all go to the wealthiest Americans. I would pay taxes on every penny I earn. But the millionaire next door might not pay anything. Good for him. But is that fair to the rest of us?
published in the Jacksonville Journal-Courier, April 17, 2012