With the all the media fuss over Mitt Romney’s tax rate, it’s a good thing I’m not running for President. Not that I’m interested in the job, or any other elective office. (But if you know of a postage stamp-sized country with a mild climate where I can serve as Most Exalted High Potentate and Dearest Leader, send your nominations to me along with the names of a dozen retired SEALS looking for some action.)
Now I can understand the media’s interest in candidates’ tax rates because the media loves anything that suggests scandal or outrage. But I do not understand why any manly, Republican one percenter wannabe would be concerned that Romney’s tax rate of 15% is more than half that of Warren Buffet’s secretary. Much of Romney’s income is from capital gains while Warren Buffet’s secretary’s income is from…well, work. And isn’t work what you do only when you’ve run out of other options?
Even a caveman knows that a low tax rate on capital gains is part of the Republican holy grail. It is their sacrosanct belief, if not empirically demonstrable, that a low capital gains tax is an essential component of the “trickle down” economic paradigm: the more money the one percenters have, the more trickles down to the 99 percenters. (Similarly, if you are not good during the year, Santa will not be visiting you at the end of the year.)
So how is it that a working class hero like me, whose income includes no capital gains, has a tax rate of 7.5%? That’s half of Romney’s!
Well boys and girls, while I view the trickle down paradigm as the economic equivalent of Santa Claus, no one can deny that the tax code has more holes than Swiss cheese. And I’ve availed myself of a few of those holes (which girlie economists call “tax expenditures” but which normal folks call “incentives”) to shield a significant amount of income. In this millennium, it’s not how many pounds you can bench press that makes you a manly man, it’s how much income you can avoid paying taxes on.
Perhaps the biggest hole I’m pouring money through is a deferred compensation account. Each month, I defer 20% of my gross salary into an account made up of five (currently) mutual funds I’ve selected and have complete control over. At any time, I can sell some portion of it and invest the proceeds into another fund or direct future income into a new fund.
Technically, however, I never received this money, so it disappears from the “taxable income” box of my W-2. That’s better than David Copperfield because what he does is an illusion but the disappearing income is real. When I retire and begin withdrawing from the account, I will pay taxes on that income but by then I’ll be in a lower tax bracket. (Don’t confuse tax bracket and tax rate or you’ll have to write “potentate” 100 times.)
About another five percent of my gross income escapes taxes because it is for “medical” expenses. This includes my insurance premiums and all my co-payments for drugs, doctors, etc.
I make those co-payments with a debit card preloaded each year with a certain amount which is deducted in equal installments over the year from each paycheck. If I don’t use the amount I set aside, I lose the balance but I’m good at projecting those health expenses. (Last year, I had eleven dollars left but I used that up during the three month grace period that extends through the first quarter of the new year.)
So at the end of the year, a good 25% of my income has disappeared for tax purposes. Besides an IRA, I don’t have any deductions other than the standard deduction and personal exemptions. But that still results in my paying only 7.5% of our “real” income to the gooberment.
Without the deferred compensation and medical accounts, my tax rate might probably be as bad as Warren Buffet’s secretary. Too bad Susie has no way to shield her retirement income or maybe I could drive that tax rate down even more.
Do I think this is fair? Does anyone think the tax code is “fair?” It is what it is.
I’ll leave it to the historians (like Newt Gingrich) to pontificate how a very simple tax code grew into a convoluted monstrosity that, like the Energizer bunny, goes on and on and on.
That’s my cue for me to segue into my philosophy about the income tax. It should be nothing more than a method to raise revenue. No one should receive special consideration.
The income tax began that way. But then it mutated into a cancer because the usual suspects (which means everyone but anarchists) decided to use the tax code for all sorts of “engineering:” economic engineering, social engineering, etc.
The tax code has become the preferred way for special interests to encourage or discourage whatever they want to through the power of gooberment. Let’s encourage home ownership by allowing a deduction for mortgage interest. Let’s encourage charity by giving a tax deduction for it. And on and on and on. I’m sick of all the do gooding and moralizing in the tax code!
I want to see a flat rate tax with no deductions for anything and which makes no distinction between types of income. Only when two folks with the same income pay the same tax will there be true tax equity because all deductions are nothing more than subjective value pronouncements no different from “I like garlic fries.”
But a flat rate tax with no deductions is too straightforward…