In Defense of Tax Loopholes (Part 1)

We’re broke, we spend too much money, and no one in Washington is willing to shred the government credit card. The debt ceiling extension was the equivalent of you realizing your credit card debt is overwhelming, getting a new card with an introductory rate of 0% for the first 6 months, transferring your balances, and then going on a spending spree with the new card because you felt so good about “getting rid of” that debt hanging over your head.  The politicians in Washington make Becky Bloomwood, the credit card statement-hiding heroine of Sophie Kinsella’s Shopoholic series, look responsible.  Washington’s answer to our debt and overspending problems?  More taxes.  If they only had a little more of your money, they could cure cancer, make every child an “A” student and create a utopian society where no one ever went hungry, went homeless, or had to face the indignity or being called “gay” or “retarded”.  But even the most liberal of Democrats knows that raising taxes during a depression recession is stupid. So politicians have to figure out how to get more money from you without you noticing. Enter the newest stratagem: closing tax loopholes.

Loopholes in the tax code allows you to either: a) reduce the taxes you owe (tax credit), or b) reduce your taxable income (income deduction).

According to Forbes.com*, these are the 10 loopholes projected to have the highest fiscal impact for 2010-2014:

NameAmountCredit or Deduction
Employer paid health insurance$659 billionDeduction
Mortgage interest$484 billionDeduction
Lower rates for capital gains$403 billionNeither
Contributions to employer paid pensions$303 billionDeduction
Earned Income Credit$269 billionCredit
State and local taxes$237 billionDeduction
Contributions to defined benefit plans$212 billionDeduction
Step-up in basis of assets at death$212 billionNeither
Charitable contributions$182 billionDeduction
Untaxed Social Security benefits$173 billionNeither

These items aren’t exclusive to multimillionaires.  They’re available to almost any productive member of society.

For any basic task that a sentient human being should be able to perform – feeding herself, finding a job, taking her kids to the doctor – there’s a taxpayer-funded government program to do it if you can’t be bothered to. These programs are obviously popular among their beneficiaries – why pay for something if you don’t have to? – but no one in Washington seems to remember that the money to bankroll these programs comes from the toil of other people. Even if these programs were originally intended as temporary fixes, they’re anything but. The more people there are who are aware that they can get necessities courtesy of their fellow Americans, the more people will. Which means these programs require greater budgets every year. It never ends.

Take item #2 above, the mortgage interest deduction:

When you can deduct your mortgage interest payments from your taxable income, you’re more likely to afford a home, and more likely to exercise the care and diligence that comes with owning private property. With the deduction, politicians argue that they’ll receive less revenue. Revenue that will be used to subsidize public housing programs, such as Section 8.

Every neighborhood, city and state is better off with homeowners instead of renters, especially renters whom the government forces taxpayers to subsidize. Yes, when homeowners can deduct mortgage interest from their taxable income, that lowers tax revenue in the short term. But it increases property values, and thus property taxes. And it encourages stable homeowners who have a stake in their community.

We can make the same analysis with charitable deductions:

 In FY 2012, your elected representatives have budgeted $598 billion of your money for food stamps, unemployment compensation, child nutrition and tax credits, and supplemental social security for the disabled. These programs are rife with fraud. Even when the benefits are legitimate, the government’s definition of disabled can be pretty inclusive  Do you want to pay higher taxes to support someone who’s on disability because of a reckless personal choice? Although Social Security’s Supplemental Security Income program is almost insolvent, the ranks of the disabled grow.  We should be able to choose which programs to support, and get a tax deduction for doing so.  If you feel passionately about Head Start, you should be able to direct your financial support to it.  Can’t imagine a world without NPR? Send them a check.  Or, maybe even just support your own family so that they’re not a drain on the taxpayers.  If every organization getting government money was forced to answer to you and me before we’d pay the bills, fraud would decrease and accountability rise.  Choice is a good thing in ice cream, schools and charitable services.

The Earned Income Credit is a welfare program in disguise. It should be terminated:

From Gateway Pundit:

A married couple with three children and $40,000 in income can take a $9,700 standard deduction and $15,500 in personal exemptions, bringing their taxable income down to $14,800. They would owe $1,505 in taxes.
But with three children, they would get $3,000 in child credits, leaving them with no taxes owed – and a $1,495 refund check.

You just gave Mr. & Mrs. Freeloader $1,495 (via the government) for breathing.  The rationale for the EIC is to offset the Social Security and Medicare taxes the government deducted from Mr. & Mrs. F’s paychecks and didn’t refund to them.  However, Mr. & Mrs. F will still receive Social Security and Medicare benefits when they retire.

Did everyone serving in Congress go to public school?

The best thing to do would be to destroy our current tax code and replace it with a flat or fair tax.  Barring that, here’s what I’d change:

Let people deduct their health insurance premia.  Separating health care insurance from employment will increase competition in the health insurance market, and give people with pre-existing conditions  control of their insurance instead of leaving them at the mercy of their employers.  I’d also loosen the regulatory schemes, letting health insurers sell policies across state lines. That would open up the market to more companies, which would offer more policies.

Eliminate the passive loss rule.  Passed in 1986, this rule forbids you from deducting more than $25,000** in investment real estate losses per year, unless you’re an active real estate agent.  You do get to accumulate your losses and apply them to any gain when you ultimately sell the property, but offsetting ordinary income with real estate losses would benefit many real estate investors right now.  It would also entice new investors, which would help the economy.

*Who, in turn, dug the numbers out of here: Estimates of Federal Tax Expenditures for Fiscal Years 2010-2014 written by the staff of the joint committee on Taxation.

**Up to $100,000 of adjusted gross income . This deduction is gradually phased out for taxpayers with adjusted gross incomes from $100,001-$150,000.

**This article is featured in the Tax Carnival #91-Taxtoberfest 2011**

Are You on The Right Path?

Imagine you’re sitting in an airplane. The captain gets on the intercom and says: “Folks, we’re 2nd in line for takeoff. Where would you like to go?”

You need a plan:

A good plan executed today is better than a perfect plan executed next week.

General George S. Patton

If your perfect life is the destination, don’t you want to get there as quickly, easily and cheaply as possible? Maybe you can do so without creating a business plan, but I can’t imagine how.  A plan will help you make better and faster decisions, decide how you spend your money or time and track your progress.

Start now.

Complete your annual plan by the end of November so that you can relax and sit on your plan for a month before executing it.  Review (and revise if needed) your progress quarterly.  This is not a New Year’s resolution to be enacted in January and discarded by February.  This is an action plan that will get you to your biggest life goals.

Imagine your future life in excruciating detail: 

The best way to predict the future is to create it.

Peter Drucker

It’s time to focus your energy onto your goals and dreams. Find a place with trees and fresh air where you can concentrate on your future.

There are myriad ways to create your plan and they all start with a vision.

What do you want to do, be or have in 2-5 years?

What motivates you to jump out of bed in the morning, or work late into the night?

Your vision must be:

Specific- What will it look like once you’ve reached your goal? Where will you live? What will you do each day? Who will your friends, neighbors or co-workers be?

Vivid- Realism is the key to visualization so use all of your senses when describing your goal.  The goal is to make your mind believe your future outcome is happening now.  With consistent visualization, your mind accepts the image of success and suddenly you’re seeing inspiration and opportunity everywhere.

Compelling-How will your life (or the lives of your family members) improve once you’ve achieved your goal?

Desirable-Is this your dream or only something you think you should want?  The more you want the outcome, the more likely it is you’ll achieve it. If your goal isn’t compelling, you’ll quit at the first sign of trouble.

Realistic-Do you have enough time, energy and support to reach your goal? Have others done it before? If it’s been done, there’s a proven strategy to do it, you just have to find it.

Focused- Instead of creating a to-do list, concentrate your energy on accomplishing up to 3 bigger goals.

Flexible-There are lots of ways to get to your outcome.  If your goal is to provide your son with an Ivy League education instead of concentrating on just one way to get there (saving lots of money), brainstorm all the ways you could make it happen (scholarships, part-time work, etc.)

Easy to communicate- Can you describe your end result concisely in terms anyone can understand?

Close your eyes and imagine your future.

Having trouble visualizing?

Look for someone who’s already achieved your goal.  What does that person’s life look like?  Draw, paint a picture, or write a story as if you’re reporting on your future self.  Then distill that scene, picture or story into your vision statement.

Take Action:

Knowing is not enough; we must apply. Willing is not enough; we must do.

Johann Wolfgang Von Goethe

Step 1:  Writing your goal down makes it tangible and on those days when you’re frustrated or unfocused, you can look at what you’ve written and get back on track.

The more accountable you are, the more likely it is you’ll achieve your goal. Find an accountability partner who’s committed to her own goals. Better yet, find someone who already attained your goal.  Tell that person your goals and ask for help in keeping your commitments.

Step 2: Determine what it will take to get there. What skillsknowledge and resources will you need?

If you want to live in France, you’ll need to learn French (skill), find a place to live (knowledge) and save money (resources.)

Step 3: Break each task down into short-term goals you can accomplish in 1,2 or 3 months.

Your goals should have a deadline as well as a tangible, measurable end-result.  Set goals that are tough but realistic to achieve.

In On WritingStephen King compares writing to telepathy. Even though he writes every novel, short story, and magazine article in a certain place and at a certain time, you can be miles and decades away and still receive his communication clearly.

If writing is telepathy, planning and envisioning are clairvoyance. Planning your tomorrow today will bring your vision of the future to fruition.

Cash in on Your Dreams

“If you don’t know where you are going, any road will get you there.”

Lewis Carroll

Imagine you’re sitting in an airplane. The captain gets on the intercom and says: “Folks, we’re 2nd in line for takeoff. Where would you like to go?”

If your perfect life is the destination, don’t you want to get there as quickly, easily and cheaply as possible? Maybe you can do so without creating a business plan, but I can’t imagine how.  A plan will help you make better and faster decisions, decide how you spend your money or time and track your progress.

Start now.

“A good plan executed today is better than a perfect plan executed next week.”

General George S. Patton

 

Complete your annual plan by November so that you can relax and sit on your plan for a month or so before executing it.  Review (and revise if needed) your progress quarterly.  This is not a New Year’s resolution to be enacted in January and discarded by February.  This is an action plan that will get you to your biggest life goals.

It’s time to focus your energy onto your goals and dreams. Find a place with trees and fresh air where you can concentrate on your future.

There are myriad ways to create your plan and they all start with a vision.

 

“I love it when a plan comes together.”

Hannibal Smith-The A-Team

What do you want to do, be or have in 2-5 years?

What motivates you to jump out of bed in the morning, or work late into the night?

Your vision must be:

Specific- What will it look like once you’ve reached your goal? Where will you live? What will you do each day? Who will your friends, neighbors or co-workers be?

Vivid- Realism is the key to visualization so use all of your senses when describing your goal.  The goal is to make your mind believe your future outcome is happening now.  With consistent visualization, your mind accepts the image of success and suddenly you’re seeing inspiration and opportunity everywhere.

Compelling-How will your life (or the lives of your family members) improve once you’ve achieved your goal?

Desirable-Is this your dream or only something you think you should want?  The more you want the outcome, the more likely it is you’ll achieve it. If your goal isn’t compelling, you’ll quit at the first sign of trouble.

Realistic-Do you have enough time, energy and support to reach your goal? Have others done it before? If it’s been done, there’s a proven strategy to do it, you just have to find it.

Focused- Instead of creating a to-do list, concentrate your energy on accomplishing up to 3 bigger goals.

Flexible-There are lots of ways to get to your outcome.  If your goal is to provide your son with an Ivy League education instead of concentrating on just one way to get there (saving lots of money), brainstorm all the ways you could make it happen (scholarships, part-time work, etc.)

Easy to communicate- Can you describe your end result concisely in terms anyone can understand?

Close your eyes and imagine your future.

Having trouble visualizing?

Look for someone who’s already achieved your goal.  What does that person’s life look like?  Draw, paint a picture, or write a story as if you’re reporting on your future self.  Then distill that scene, picture or story into your vision statement.

Once you’ve articulated your vision, make it real.

Step 1:  Writing your goal down makes it tangible and on those days when you’re frustrated or unfocused, you can look at what you’ve written and get back on track.

The more accountable you are, the more likely it is you’ll achieve your goal. Find an accountability partner who’s committed to her own goals. Better yet, find someone who already attained your goal.  Tell that person your goals and ask for help in keeping your commitments.

Step 2: Determine what it will take to get there. What skills, knowledge and resources will you need?

If you want to live in France, you’ll need to learn French (skill), find a place to live (knowledge) and save money (resources.)

Step 3: Break each task down into short-term goals you can accomplish in 1,2 or 3 months.

“Set your goals high and don’t stop until you get there”

Bo Jackson

Write down your top 5 values in order. If your goal conflicts with your values, you’ll never achieve it.

If you’re not sure what constitutes a value, this list can help. When you commit to your values and have written goals, choosing between competing demands gets easier. As does making decisions.

Sally’s top value is family, followed by financial independence.  A single mother with 2 kids, she’s been offered a job that doubles her salary but requires her to leave town every weekend. She has to either decline the job, or rerank her values.

Acknowledging your values, prioritize your short-term goals.  Your goals should have a deadline as well as a tangible, measurable end-result.  Set goals that are tough but realistic to achieve.

In On Writing, Stephen King compares writing to telepathy. Even though he writes every novel, short story, and magazine article in a certain place and at a certain time, you can be miles and decades away and still receive his communication clearly.

If writing is telepathy, planning and envisioning are clairvoyance. Planning your tomorrow today will bring your vision of the future to fruition.