Select Page

The New Tax Law: Politics Over Reform

I am very glad the new Tax Cuts and Job Act is now law. With ongoing work reforming and reducing regulations, the tax bill will spur economic growth, and get people to understand the importance of reducing marginal rates. On the corporate side, the huge rate reduction (from 35% to 21%), move to territorial taxation, and expensing of equipment, is a home run. However, on the individual side, Congress allowed politics to get in the way of real reform, and that is inexcusable.

Without any discussion, Congress eliminated the deduction for miscellaneous itemized deductions. This is truly the only legitimate deduction, and it is absolutely necessary to maintain the integrity of the tax code. It gives people the chance to write off expenses incurred to allow them to earn the income they are taxed on. For instance, under current tax law, a person who earns $100K in a venture but had to pay $30K for legal fees to get it,  would be able to pay taxes on only the $70K net that was actually made. With the new change now removing the miscellaneous itemized deduction, the person will have to pay taxes on the full $100K!

Another deduction Congress removed summarily is the moving deduction. Similar to the miscellaneous itemized deduction, this is a real and actual expense that is incurred when moving to get a new job (in order to earn the income that will be taxed.) It was removed from the tax code without discussion, and should not have been.

The casualty loss deduction was also eliminated. This enabled you to deduct a loss that was due to a  sudden, unexpected event, such as a fire, hurricane, or robbery. Now, if your house burns down, you can no longer write it off. The exception to this change is if your loss is in a federally-declared disaster area. So if your house burns down, you get no deduction. But if it burns down in a large wildfire that was declared a disaster, you can claim the deduction. This is egregious; the effect on the individual — the loss of a house — is absolutely the same. This deduction elimination is unacceptable.

Furthermore, the alimony deduction was thrown out. The alimony deduction is a mechanism that prevents an inequitable tax burden to be created when a married family unit is split into two. It is inequitable and mean-spirited to create a targeted tax burden on people who suffered a family breakup.

While eliminating these important and equitable donations, Congress left in place a number of purely political, social engineering deductions and credits. Congress left in a substantial part of the mortgage deduction, which is really nothing more than a government subsidy to the real estate industry. They left in energy credits, rehabilitation and low income housing credits, and the Alternative Minimum Tax (AMT). It’s disappointing to see Congress talk about simplicity, efficiency, and equitability, and then remove good provisions from the tax code while leaving in parts that are merely political.

Happy Birthday Frederic Bastiat!

Frederic Bastiat, one of the brightest and most eloquent economists and authors France has ever produced, was born on this date in 1801. Some selections of his wisdom:

“The State is the great fiction through which everyone endeavors to live at the expense of everyone else.”

“[T]he bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil.”

“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.”

“Life, liberty, and property do not exist because men have made laws. On the contrary, it was the fact that life, liberty, and property existed beforehand that caused men to make laws in the first place.”

“If the natural tendencies of mankind are so bad that it is not safe to permit people to be free, how is it that the tendencies of these organizers are always good? Do not the legislators and their appointed agents also belong to the human race? Or do they believe that they themselves are made of a finer clay than the rest of mankind?”

“[A]t whatever point on the scientific horizon I begin my researches, I invariably reach this one conclusion: The solution to the problems of human relationships is to be found in liberty.”

If you haven’t read “The Law”, start there to get a good introduction to Frederic Bastiat. The Foundation for Economic Freedom (FEE), has a free download, as well as many other economic writings available.

Happy Birthday Bastiat!

Bastiat on Legal Plunder

“But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.” ~ Bastiat’s “The Law”

bastiat-quote-picture_thumb[2]