Tuesday, November 01, 2005

Uncomfortable truths about taxes

This silly Slate article argues that Bush's tax reform proposal is a cunning plan to hurt Blue-staters.

Basically, the AMT (Alternative Minimum Tax) is a high tax with few deductions designed to tax rich people with lots of deducations who would otherwise escape paying their "fair" share. The AMT was not inflation indexed, so it is now biting lots of folks who don't consider themselves rich and don't want to pay that much tax. Personally, I think the AMT is a better tax system than what exists now in many ways, but its seems to be the consensus that the AMT will be phased out, and the $1.2T it would have collected otherwise over the next 10 years be gathered in other ways.

And guess what -- this money will be collected from people at risk of paying the AMT anyway -- rich people. And guess what again -- this money will be raised by reducing the deductions people can take, particularly the state income tax deduction and the mortgage deduction.

It just so turns out that a mortgage deduction capped at $200K-$300K won't have much impact on poor people who live in the Midwest and the South (where housing is easy to build and cheap) and will zap the rich people who live in East and West coast (where housing is illegal to build and expensive). But all that an increase in housing tax does is create a one time transfer of value from the current owners to the government. Future owners, anticipating higher tax rates, will be willing to pay less for a house, which means that sale prices will be lower and this will fully capture the transfer in value from current homeowners to the government.

If there is a single group in the US undeserving of sympathy, it has got to be rich homeowners in the East and West coast. These folks have enjoyed 50%-100%+ increases in the value of their homes over the past 5 years and now enjoy properties worth of half a million dollars, in Boston at least, and more in San Francisco and New York. This wealth was no more earned than a scion's bequest, so why it cannot be taxed the bejeesus out of, I don't know.

Before getting involved in "red state vs blue state" nonsense, you should consider the purpose of federal taxation -- to move money from rich states to poor states. If money wasn't moving between states, why do taxes need to be Federal? And if money is moving between states, why shouldn't it move from rich to poor (do you want it moving from poor to rich?). And rich states currently happen vote Democrat.

Key quotes:
Then there's red-state myopia. Connie Mack, the Republican ex-senator who is co-chairman of the tax advisory panel, is a classic sufferer. When asked by the New York Times Magazine whether limiting the deduction could "hurt the middle class and discourage people from buying, say, a $500,000 house?" he responded: "It depends on how you define middle class. I don't think that there would be a large percentage of middle-income families that would have a $500,000 house." Mack has obviously never spent much time in Staten Island, N.Y., where Vito Fossella, one of the few remaining Republican members of Congress in the Northeast, has already come out against the panel's ideas. In the high-population, high-income states—the states that, by the way, produce a disproportionate share of federal income taxes—plenty of middle-class people live in $500,000 homes.
Ummm, no. From a federal standpoint there are no middle class families living in $500K houses. If you live in a $500K home and are surrounded by people who live in a $500K home and think you are middle class you are wrong -- you are, in fact, rich and you live in a rich neighbourhood and you will be taxed.


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