StanCollender'sCapitalGainsandGames Washington, Wall Street and Everything in Between



The Tax Reform Mandate

03 Nov 2012
Posted by Clint Stretch

On Tuesday, the electorate will get to the end of a very long political process, during which they have been promised a better tax system without any real discussion about the sacrifices such a system would demand.

Regardless of the winner of the presidential election, the expectations of the typical voter are pretty much the same. Here’s what I think the voters have heard on taxes and, therefore, what they think will happen in the next Congress:

  • Deficit reduction accomplished largely or completely through spending cuts and reforms rather than tax increases,
  • Middle class tax cuts,
  • Something called “tax reform”  
  • Preservation of key tax benefits, such as the deductions for charitable contributions and mortgage interest for most taxpayers, and
  • Continued preferential treatment of capital gains income.
The only glaring difference on taxes seems to be that President Obama would raise taxes on high-income individuals and Governor Romney would not. 

No matter who is President, it is pretty obvious to me, that when you translate these promises into politically realistic terms, they are impossible to keep. This is how I see them:
 
“Deficit reduction accomplished largely or completely through spending cuts and reforms rather than tax increases” would require that the same politicians who are in near hysteria at the prospect of a $1 trillion, 10-year sequester will find a way to cut between $5 and $10 trillion from spending over the same period.
 
“Middle class tax cuts” would add to the number of taxpayers who do not pay income tax. It also would require even deeper cuts in the huge array of federal programs that benefit ordinary Americans. 
 
A real “income tax reform” would require inflicting pain by taking away deductions, credits and exclusions that people regard as their rights.  It does not mean simply cutting taxes by lowering rates.
 
Preservation of key tax benefits, such as the deductions for charitable contributions and mortgage interest for most taxpayers” means “we are not really serious about reform.”
 
Continued preferential treatment of capital gains income” would require keeping high top rates on ordinary income if high income tax payers were to pay roughly what they do now. 
 
When the President submits his budget next year, voters will get their first real chance to see what it was they missed during the election journey.  The President, and then Congress, will have to balance the desire to cut, or at least not raise, taxes for the middle class, against a reluctance to cut the federal programs that benefit those same taxpayers.   Although the discussion will be difficult, it should at least be more informative on taxes than the campaign has been.


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