Taxes and Hard Truths

Weekly WastebasketTaxes and Hard TruthsGames tax accountants play

Budget & Tax,  | Weekly Wastebasket
Oct 1, 2020  | 7 min read | Print Article

Word came out that President Trump hardly paid any taxes in his first years in office, and many years before that didn’t pay a dime. First let’s leave aside the bad optics and some questionable accounting, and get to the heart of the matter. Tax avoidance (lessening your tax liability) is completely legal while tax evasion (cheating) is not. Problem is, avoidance has gotten too easy in many cases and particular provisions are ripe for abuse.

Let’s rewind, shall we? To 2017, before the biggest tax code revision in 30 years. We were quick to loudly say that the tax cut was far from tax “reform.” What we had was a rare opportunity to make real, lasting, substantive change to a tax code that everyone agreed was broken. What we got was a rush to pass legislation that, among other things, blew a hole in the budget, and of all things, wanted to open up the Arctic for drilling to partially plug that hole. (Dear Reader, the projected revenues from trying to drill in one of the most remote parts of the planet was a fool’s errand even then, much less now.)

We were also quick to point out the extent to which the bill was going to do nothing in the way of simplifying the overly complex tax code. The tax extenders, carveouts, tax breaks, and cabooses that riddle the code remain issues. In the end the bill represented the worst of legislative sausage making – replete with closed door negotiation, special interests, thousands of pages that drop with few hours to read through (much less analyze), and no transparency whatsoever. The result is a still complicated tax code that keeps a lot of tax lawyers and specialist accountants employed – if you can afford them. The classic example is FedEx, which, upon being called a tax cheat pointed out that they didn’t evade taxes so much as follow the law, which allowed them to pay nothing.

The tax code’s tilt toward corporate interests wasn’t some accident, it was designed that way. The 2017 tax cuts are just the most recent example. The good news for individuals is the law included an increase to the standard deduction and child tax credit. But the boon is short-lived: both are set to expire after 2025. However effective increases to individuals’ taxes, like the repeal of the personal exemption, and a cap on the state and local tax deduction, are permanent.

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On the corporate side, the headline reduction of the tax rate from 35 percent to 21 percent is permanent, as is the elimination of the corporate alternative minimum tax. And just to make sure non-corporate businesses benefited too, the measure introduced a new deduction for passive income, that, as you can guess, will stay on the books until repealed. In fact, it’s a safe guiding principal for the whole law that any individual provision is temporary, while businesses get their taxes lowered indefinitely. One of the scant provisions that attempted to offset the costs, an end to the business practice of carrying back operating losses to prior years, was subsequently reversed in the CARES Act this spring.

And in the case of taxes and the Treasury, an escape-riddled tax code doesn’t just allow major players to get away without paying their fair share – something the rest of us with less resources and legal representation never get away with – it’s incredibly confusing for law-abiding taxpayers who want to do the right thing. Case in point: the “surprise” of the 2017 tax cut that had town halls and local government offices overwhelmed in the last week of the calendar year while taxpayers flooded them in order to prepay real estate taxes. It’s also inefficient, ineffective, and ultimately wasteful.

In the end, it’s not just about revenue required to fund a government that taxpayers, and their elected officials, want. It’s about fairness and the voluntary compliance that comes with faith in a system where every pays their fair share. Take that away and you have only resentful taxpayers feeling their being played for suckers, who will eventually rebel. A situation not helped by the gradual de-funding of the IRS, which is then further unable to go after the biggest tax-cheats.

We can rage against those who game the system to get away without paying their fair share. But it would be better to demand that lawmakers make tough choices. Because that’s what’s needed to stare our national finances squarely in the eye, better invest in national priorities, and serve all taxpayers well.

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