Who loves taxes? Almost everyone who gets a special break from them, that's who. And it's an unpleasant reality that all would-be tax "reformers"...
WASHINGTON — Who loves taxes?
Almost everyone who gets a special break from them, that’s who.
And it’s an unpleasant reality that all would-be tax “reformers” who want to simplify or eliminate major taxes have to face.
For almost as long as there have been taxes, lawmakers have used them not only to raise revenue but also to encourage or discourage various activities.
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Some of these preferences are more defensible than others, but the fact remains that around every special advantage built into the tax code is now a constituency that depends on it and will defend it to the bitter end.
This is one reason for the quotation marks you often see around tax “reform.” One person’s greatly simpler, fairer and better tax system is another person’s blight on society (and himself).
With President Bush’s commission considering some kind of fundamental overhaul — maybe even abolition — of the federal income tax, and Republicans on Capitol Hill pressing on to end the estate tax, these constituencies are gearing up to defend their special place in the law.
For example, the American Society of Pension Professionals & Actuaries recently released a study concluding that “many of the reform options under consideration [by the commission] would provide greater tax preferences for general saving” than for retirement saving.
The study pointed to consumption taxes, which tax spending rather than income, and sharp cuts in capital gains and similar taxes as particular threats. Its reasoning: The current tax system provides “a strong incentive for taxpayers to save for retirement” because of the deductions and deferrals now built into the system to favor retirement saving.
But if the value of that special treatment is sharply reduced or eliminated, employers may prefer to drop their retirement plans, which do cost money, and pay their workers a little more in cash, figuring the workers could save on their own and pay little or no tax.
The pension professionals figure, though, that lower-income workers wouldn’t save, and that would be bad for the country — not to mention the services of pension professionals.
They are not the only ones worried about the idea of universal low-tax or tax-free savings. The life-insurance industry can envision its profitable annuity business going down the drain if its tax advantage is reduced or eliminated.
Annuities are contracts under which, in exchange for a payment or payments, an insurance company promises to provide a stream of income. There are many variations on this theme, but much of this business requires the consumer to invest over a period of years before getting the income, and during those years the investment earnings — the “inside buildup” — in such contracts is not taxed.
If you can save tax-free anyway, why buy this kind of annuity?
Another industry that could be threatened by tax reform is residential real estate.
Right now, someone who builds or owns a house has two things to sell: real property and tax benefits. Take away the tax benefits — particularly the mortgage-interest deduction — and what happens to the house price?
Charities and nonprofits also are decidedly unenthusiastic about certain kinds of tax “reform.” Since the value of a tax deduction is a function of the taxpayer’s bracket — donating a dollar saves 15 cents for someone in the 15 percent bracket but 35 cents for someone in the 35 percent bracket — lower tax rates reduce the incentive a taxpayer has to make gifts.
Worse for many charities would be repeal of the estate tax. The estate-tax rate is lower than it used to be, and right now somewhat larger estates than in the past go untaxed. But still, charities and colleges can say with more than a grain of truth, “If you don’t leave it to us, the government will take it.”
The moral from all this is that once a tax benefit gets into the law, it’s extremely difficult to get rid of it.
So the next time you hear a politician offer a clever new tax break for some cause or other, stop and think: Every one of these pushes the simpler, easier-to-understand tax code that most Americans say they want further than ever from reality.