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 incomes.

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 corporations? 

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 the codes. 

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?

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