As April 15 approaches, some of us experience a short-lived obsession with, and resentment of, taxes. For fairly obvious reasons, those of us who put off sending in the old 1040 until the last minute tend to be those who need to accompany our returns with checks made out to the Treasury. Folks entitled to checks going the other way tended to file weeks ago.
Having to fill out lengthy government forms is bad enough. Capping off the process with a savingsectomy is enough to turn anybody into a grumpy Republican. For me, this is like being an Irishman on St. Patrick’s Day. I enjoy the company of my temporary compatriots, even though I know it won’t last long.
Pandering to this grumbling constituency this week was The Big Money, which shared a list of the five worst parts of the tax code. The fact that they could come up with only five tells me they are only seasonally grumpy. A year-round resident would have come up with at least ten.
Without further ado, here are their five nominees and my comments.
Ethanol Credits: I don’t think of this as a tax code issue so much as just really bad government policy, but that policy is enacted mostly via tax breaks, so I guess it’s fair game.
And it is truly bad policy, making nobody happy other than the farmers who benefit from what is essentially another agriculture subsidy. Even most global warmists don’t think it helps save the planet and it has the unforgivable side effect of making food more expensive.
Stepped Up Basis: A person who inherits an asset, shares of stock or a farm, for example, and who then sells that asset will pay capital gains tax on the difference between what they sold it for and what it was worth the day they inherited it, not what it was originally purchased for. So if Old Uncle George bought a hundred shares of XYZ Co. in 1950 for $100, and left it to you when it was worth $1M, the gain between $100 and $1M never gets taxed.
I guess I agree this doesn’t make a whole lot of sense, but I would have a hard time putting it in the top 5. It often comes up in discussions of estate taxes. If we ever abolish the estate tax (I’m in favor but not holding my breath) doing away with stepped up basis would make sense too.
Mortgage-Interest Deduction: Right on, dude. I wrote about this just the other day.
Exemption for Employer-Provided Health Insurance: Just about everything your employer gives you is considered a taxable part of your compensation. Exceptions include 401k contributions, uniforms, and healthcare.
The problem with healthcare is that it is asymmetric. Money an individual spends on it enjoys some tax advantages, but nothing like the blanket exemption that employer-provided payments do. The result is that the government subsidizes a system that encourages waste. Last year the Wall Street Journal called this “the original sin of our health-care system.”
Dropping it was discussed during the Great Healthcare Debate, but it didn’t get far. Partly this was due to the objections of employees, particularly unionized ones, who didn’t want to pay more in taxes. But what really sank it was that it was suggested by McCain in the 2008 election.
Municipal Bond Interest Exclusion: Interest paid on munis isn’t taxed by the Feds. I guess I would prefer not to subsidize states and municipalities to borrow money, but other than that I really do not see a problem here.
The author of the Big Money piece seems to believe that the subsidy bit is okay, but that the US government could do a more efficient job of funneling money to states and cities. Her view is that owners of muni bonds are getting too good a deal and are receiving much of the subsidy.
That does not make logical or economic sense. The market for munis is reasonably competitive. Issuers do what they can to pay as little as possible in interest. Buyers pay what they do for the bonds based on balancing the risk with the after-tax reward. If interest on the bonds became taxable it seems pretty obvious to me that the rates would rise to the point that bond owners got the same after-tax return as before.
The money “lost” to the federal government in not taxing munis is exactly the same money “saved” by the issuers of munis in lower interest costs. How could it not be? I think it would be cleaner to have the federal government simply directly subsidize local borrowing, for example by just picking up the tab for some percentage of the interest paid, but I don’t think it would save any money.
All in all, I am a little disappointed at this list. It’s a good try for a part-time grump, but we full-time curmudgeons can name a few problems in the tax code that are at least as bad as muni bonds and stepped up basis. The AMT comes immediately to mind. Differing tax treatment for married and single people is another obvious, if controversial, example. The long list of things that are not indexed to inflation, including most especially the basis for calculating long-term capital gains, always raises my ire.
And then there is possibly the most obvious of all, the sheer soul-crushing complexity of the tax code itself. Can there be a better example of government caused waste than the billions of hours spent by Americans complying with the tax rules?
Still, I’m glad for the cynical company, if only for a few days.