What Trump is teaching us about taxes

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Last week Donald Trump uttered something that businesspeople often think, but rarely say. During the presidential debate, he boasted that not paying taxes is “very smart.” The resulting conversation and outrage is important for us to understand, because the system is faulty.

Let’s not beat around the bush here. Americans are driven by a sense of fairness, and the burden of taxes is no exception. The reality is that many Americans do not feel that the tax system is fair. According to Pew Research Center only 54 percent of Americans think they pay a reasonable amount in taxes, while six out of 10 think “rich people and corporations do not pay their fair share.”

In the 1950s, taxes paid by corporations funded as much as a third of the federal budget. Last year, that portion was approximately 10 percent. During the same period, the portion of the government supported by taxes automatically withheld from wages dramatically increased. Something has changed the tax base and where the money comes from.

There are many ways to look at taxes, and data can be found to support many arguments. It can be very confusing, particularly when issues of ideology are added to the conversation.

Trump has essentially highlighted something Americans already suspect: the federal tax code has far too many tax expenditures. Tax expenditures are deductions from an individual or corporation’s tax bill and are intended to subsidize specific behaviors. They end up reducing a taxpayer’s overall tax bill. Examples of tax expenditures include the residential mortgage tax deduction, child care credit, energy exploration subsidies and business entertainment. In fact, last year’s federal budget itemized 169 specific tax expenditures.

Politicians love tax expenditures because their cost is not easy to measure. Specific expenditures are usually linked to a tangible item or outcome, for example a bomber or school lunch program. Their cost is clearly seen.

Tax expenditures are harder to quantify because they do not show up in a budget as a spending item. Their true cost can only be seen after the fact, and quantified if at all as a “but for” number — the amount of tax that would have been paid were the tax expenditure not in place.

Because of the broad range of tax expenditures now in use, just about every American taxpayer benefits from at least one of them.

However, it is only the very poor and very wealthy who are most likely able to use tax expenditures to reduce their tax liability to zero. These savvy tax filers are merely applying the deductions and subsidies available to them under the law. That is how Trump can claim to be smart.

By raising this issue, he brings to light a more important truth: tax breaks…

Read entire column at WashingtonPost.com.

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