The dust is now settling over the wreckage of Republican “efforts” to address the Health Care Crisis.
So, we now look to ways in which the Washington Establishment and the Political Class can – and probably will – bungle “Tax Reform.”
As I have said before, the point of Government taxation is to raise money to fund legitimate Government operations.
We got in the mess we are in for one main reason. Government has far exceeded its Constitutional mandate. It has taken on a host of “operations” that are illegitimate. Not only illegitimate but that dangerously encroach on individual liberty.
The current Tax Code imposes financial penalties on anything the powerful deems socially or politically unacceptable. It also benefits those who seek favor with influence buyers: friendly factions, industries and various deep pockets.
What the Tax Code Does
The Tax Code does two things.
One, it establishes Tax Rates on “Income.”
Two, it has a lot of “rules” that help a few people. Exemptions, exceptions, conditions, deductions… All “rules” that reduce favored taxpayers’ “income tax liability” and actually provide for “refunds” to people who pay no income tax at all.
The first thing accounts for about 1 percent of the Internal Revenue Code, and the remaining 99 percent is dedicated to the second thing.
So, if you are going to “reform” the “Tax Code,” you can do it by addressing the first thing, the second thing or both. President Trump addressed both and has already hit his first roadblock. A roadblock thrown up, naturally, by Republicans.
(Now, I’m a “flat tax” guy myself, so I’ll save the discussion of a “progressive income tax” and “brackets” for the next Lesson.)
The first big squawk is over Trump trying to eliminate the federal income tax deduction for “State and Local Taxes.”
The minute anyone proposes eliminating ANY “income tax deduction,” EVERYONE who has ever benefitted from it will raise hell. Duh, it’s human nature.
So, Who Benefits?
First, it’s important to understand the difference between an “income tax deduction” and an “income tax credit.” A “deduction” is applied to one’s “taxable income” and lowers the amount of income that gets taxed. A “credit” is applied to the total amount of income tax due and comes “off the top.”
For years, taxpayers have been allowed to take a “deduction” for STATE and LOCAL income taxes. That means they have been allowed to subtract from their otherwise “taxable incomes” the same amount they have paid to their State and Local governments as “income tax.” It means at the end of the day, less income is taxed. So they pay less federal taxes.
Who wins? Taxpayers with higher state taxes.
Who loses? It provides absolutely NO benefit to taxpayers living in states with no income tax.
What does this mean for you? If you live in a state with low taxes or NO income tax such as Texas or Florida (or like me in Tennessee), it means you foot the federal income tax bill for anyone living in high-tax states.
Wait… I’m Paying for What?
Think of it this way. A California resident and a Tennessee resident each pay $20,000 total in “income taxes” to one Government or another.
The Tennessee resident pays ALL his money to the FEDERAL Government. The California resident pays ALL his money to the STATE OF CALIFORNIA, which uses it to fund their own liberal agenda.
Obviously the California programs benefit Tennessee residents not at all. And yet the California resident benefits in all sorts of ways from “federal Government operations,” which are paid for IN THEIR ENTIRETY by residents of states like Tennessee, Texas or Florida.
So, which states do you think are resisting President Trump’s proposal to eliminate this deduction? Leave a comment below and let us know your thoughts.
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