April 20, 2005
We have just completed another painful tax cycle.
Personally, it was the most difficult filing I ever encountered.
A year ago, I bought a hybrid car. Some legislators assumed this was socially desirable, so they
added a tax credit to the purchase. Legislators
do that a lot. That is why very
unusual tax outcomes occur for households that appear to have similar
The tax code was not clear where that hybrid credit
should go. If it is a separate
credit on form 1040, then all eligible hybrid cars get credit. If, instead, it goes to the combined credit schedule, then it
is subject to how much your tax payments clear those required by the
alternative minimum tax.
In other words, the hybrid may give me the opportunity
to get a credit, but I must know before I buy the car what my tax position
is. If a store had a sale but
subsequently took the discount off your account if you bought too many
things on sale during that year, cries of unfairness would be dramatic.
Yet our government does the equivalent through our tax codes with
hardly a peep.
The Georgia Legislature just passed a corporate tax
change that will benefit Georgia companies who also have plants outside the
state at the expense of those who only produce in Georgia. This might attract headquarters to Georgia, but what does it
do for the small Georgia business that struggles to compete with the large
Some years ago, I invested in some Georgia apartment
partnerships. Because I was not
actively managing the apartments (and never want to), the income was
passive. Recently, low mortgage
rates encouraged renters to become homebuyers.
My investment no longer is profitable.
Despite the fact that I paid taxes on the earnings from
these investments for many years, now that they no longer generate taxable
income, they have become tax shelters.
If so, their shelter is very poor.
I have a lot of passive loss carryforwards in case my apartments ever
earn income again.
However, these apartments are competing with others
that are directly owned by their managers.
Those managers get immediate write-offs of their losses against other
income. Guess what complexes
are more aggressive in pricing their properties.
As most of the industrialized world uses consumption
based taxes more aggressively than we do in the U.S, they are able to
provide tax advantages for their producers.
(If you are raising most of your taxes through consumption, this
allows revenue targets to be met without harming your producers).
I was in Munich last week.
The McDonald’s near the major train station had a menu that looked
very familiar to one you would see in Atlanta.
However, their prices reflected euros which are almost 30 percent
more expense than dollars. Using
the Big Mac test of currency values (Big Mac’s should have the same price
after currency adjustment throughout the world as they are made the same
everywhere with ingredients
that are traded internationally), this means that German goods are 30
percent over-valued in comparison to the U.S.
Then how do the Germans maintain their strong position
in world exports (even if exports did fall 2.7percent for Germany in the
latest month)? Can we say
corporate tax advantages and subsidies?
How did our tax code become so Byzantine?
Instead of complaining about the unfairness of what is, many
industries and interest groups have lobbied for equivalent (or more)
unfairness favoring them to offset problems of unfairness that crept into
It does not take long for a seemingly simple tax code
to get very complex. That is
how households that acquired millions of dollars in purchasing power
sometimes pay almost nothing in federal income taxes.
Some corporations with rising market valuations in the tens of
billions of dollars have hardly paid any income taxes over many years.
Indeed, one of the great fictions of our tax system is
that at least it is progressive. That
means the wealthy pay proportionately more of their income to the government
than the poor. However, tax
studies show that except for those who do not know how to “game” the tax
system, usually the middle class, tax burdens are almost proportional.
Some wealthy have the opportunity with their
accumulated capital to take advantage of investment incentives through the
tax codes that those without wealth cannot. (And
some low income households have learned to hide taxable income so they can
maintain the rent, school lunch, and medical programs that would be lost to
them if their incomes rose). Many
wealthy lower their taxable income even if their tax rate is higher on those
dollars that are taxed.
When are we going to say enough is enough and demand a new system that is simpler, fairer, and reflects the conditions of our international competitors?