Spreading the tax pain around

Comment: Two articles on taxes.

The five dumbest parts of the U.S. tax code

The List:

1. Ethanol credits: Ethanol was pitched as a kind of energy panacea back when President George W. Bush signed the Energy Policy Act of 2005, mandating an increase in the use of the corn-derived biofuel. Generous credits doled out to manufacturers and producers accelerated industry’s initial embrace of ethanol, but the skeptics have gained the upper hand in this argument. Ethanol production has been fingered as one of the culprits in the spike in food prices a couple of years ago (tariffs kept the United States from using sugarcane-based ethanol from Latin America), and it turns out that making the stuff consumes a lot of the nonrenewable fuel its use was supposed to conserve. Nonetheless, alcohol-fuel credits will burn through some $12 billion between 2007 and next year.
   
2. Exemption for inherited stock-gains: Say, like Forrest Gump’s buddy Lieutenant Dan, you had the foresight to buy Apple stock when it went public in 1980 at $22 a share. If you died last week when the stock was at $230.90 a share, whoever inherited it wouldn’t have to pay capital gains on the increase, even if they turned around and sold it on the way to your funeral. To economists, this makes no sense, because if you’d sold that stock the day before your death, you would have had to pay capital gains. Tax planners even encourage elderly investors not to sell stock solely for the tax benefit it confers to their heirs.
   
   This exemption isn’t chump change; it’s predicted to total about $280 billion between 2011 and 2015. Proponents of the exemption counter with that the estate tax takes care of these windfalls; in reality, though, the estate-tax exemption is large enough that it misses a lot of these capital gains.
   
3. Mortgage-interest deduction: This one is almost universally decried by economists. The bigger the homeowner’s mortgage, the bigger the deduction. This has the effect both of tacitly encouraging people to buy as much (or more) house than they can possibly afford, and it rewards McMansion owners far more richly than it does those who own more modest abodes. The wealthy get a windfall, while renters, whose median income is half that of homeowners, according to 2007 Census Bureau data, aren’t even invited to the party. From a macro standpoint, economists also fret that the deduction leads people to invest more heavily in housing than they otherwise would at the expense of other sectors of the economy.
   
4. Exemption on employer-provided health insurance: This one is not without its share of controversy, as evident by the term “Cadillac plans” and the intensely heated rhetoric around the health care reform bill. Why would anyone want to tax what we have collectively come to think of as a national right?
   
   For starters, there’s a ton of cash at stake. This exemption is the largest by far in the federal tax code. According to White House budget projections, it’s going to cost the government more than a trillion dollars between 2011 and 2015 alone. (While the new health care plan does call for taxing some employer-provided insurance, it doesn’t kick in until 2018 and won’t apply to all plans.)
   
5. Municipal-bond-interest exclusion: Unlike the mortgage interest or health care plan exemptions, the big cheerleaders of this loophole are state and local governments. Groups like the Government Finance Officers Association hate the idea of letting the federal government tax municipal bonds, and so far their view has prevailed. Unfortunately, the perception of big savings is a shell game that benefits bondholders more than the local municipality, while the federal government takes it on the chin.
   

Comments (on just one of these): The Federal government should eliminate the employer-provided health insurance exemption. And the provide every American a $ 5000 credit (really amount to be determined!) to buy one's own health insurance. It would level the playing field and make the system more efficient. Of course Obamacare cancels this idea!

For Top Earners, Tax Bite Is Likely to Be Worst

Excerpt:

A January study by the nonpartisan Tax Policy Center provides the worst-case scenario. It found that to reduce the federal budget deficit to a sustainable 3% of gross domestic product, the government would have to find an average of about half a trillion dollars each year in new revenue (or spending cuts). That's roughly how much the federal government spends now on the giant Medicare program.

To cover that amount through tax increases on the top two brackets—roughly, families with more than $209,000 in taxable income—top rates would have to go from the current 33% and 35% to 72.4% and 76.8%, the study found.

Comments: Check out the chart with this article. The net of it is that "the rich" are already paying a lot of taxes. The top 10% of wage earners are paying 73% of the taxes. It will be hard to squeeze them more. A V.A.T. tax just buries taxes into all products and services ... raising prices and in effect just devalues the purchasing power of the dollar.