Tax lies? 3 myths you need to know | Reuters Wealth

 

Although Mark Twain once said there are “lies, damn lies and statistics,” when it comes to U.S. taxes, statistics can tell the truth.

It’s been a decade since the first round of Bush-era tax cuts and it’s clear that — even in the wake of a new round of cuts late last year — employment growth is still dismal. Lost tax revenues trickled up to those who needed it the least, the deficit ballooned even more and the housing market is still punch drunk.

As Congress wrangles over whom to tax — and whom to untax — there are an abundant number of myths floating around. Here are my top three:

The Mortgage Interest Deduction promotes homeownership
It may, but it largely benefits affluent taxpayers and does little to reduce housing costs. Since most taxpayers don’t even itemize, the majority don’t even get this break. According to the Tax Policy Center, this break only saved the typical middle-income household about $215 on average last year, or the cost of a modest smart phone.

Next year, the mortgage deduction will cost the federal Treasury $131 billion, making it one of the largest tax “expenditures.”

Many economists have argued that the mortgage break inflates the cost of homes. Canada, which has roughly the same homeownership rate as the U.S. — and much higher taxes and a healthier economy — doesn’t have a mortgage deduction. The U.S. write-off can be replaced with a credit that anyone could receive or eliminated, especially on home-equity loan interest and second homes.

Lower tax rates create jobs
I have never seen any independent (of partisan think tanks, that is) evidence that this has ever been true. Congress bestowed estate-tax and income-tax breaks on the wealthiest families late last year (and throughout the Bush II years); the unemployment rate has barely budged.

Over time, the average income tax paid by the top one percent of taxpayers dropped from 34.5 percent in 1980 to 23.27 percent in 2008. Meager cuts to the middle class and low-income earners who are largely subject to payroll taxes barely benefited from these reductions.

Embedded in those numbers is the fact that the highest income brackets invested most of their wealth in real estate, stocks and other vehicles subject to the bargain 15-percent dividends and capital gains rate — but imposed only if they sell those investments in taxable accounts. They pay no taxes if they hold and don’t receive distributions.

Do lower taxes on capital gains create jobs? Since structural employment has been on a downward spiral since 2000 — the jobs lost to globalization have not been replaced — the answer is probably no.

It can be argued that in the 1990s and 1950s — when income tax rates were higher — the economy was much healthier. During the Clinton years, growth averaged 4 percent versus 2.8 percent during the Reagan-Bush years. Some 22.5 million jobs were created during the Clinton terms (a record for any presidency) — despite higher tax rates relative to the George W. Bush administration.

Unemployment was four percent when Clinton left office in 2000, versus more than nine percent today. Moreover, “between the end of the 2001 recession and the peak of that expansion (ending in 2007), the U.S. economy experienced the worst economic expansion of the post-war era,” according to the Economic Policy Institute, a think tank affiliated with organized labor. Tax cuts don’t create jobs. History is our guide.

State taxes are too high
I won’t argue that states can’t cut unnecessary spending or rein in pension benefits, or that coastal state residents don’t have a higher tax burden than North Dakota or Nevada. A much less-discussed problem looms, though:  there are far too many states that have regressive tax codes requiring working people to pay as much or more than wealthy people do.

The group United for a Fair Economy, which represents a group of wealthy taxpayers, found that if you increased tax rates on the rich, states could raise nearly half a trillion dollars. That could save innumerable cuts in human services and education.

I won’t stop there. I’d also pare the huge budgets for the defense department  — particularly the Iraq and Afghanistan conflicts — and subsidies for corporations.

Simple math does work, especially when you consider that the subtraction of trickle-up economics still doesn’t add anything to a crippled economy.

Tax lies? 3 myths you need to know | Reuters Wealth

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