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Coming Tax Reform
The IRS Taxpayer Advocate Service’s Annual report to Congress stated that the vast majority of taxpayers in the U.S. benefit from particular exclusions from income, deductions from income, and/or tax credits. They estimate that these tax breaks reduce average tax liability by about $8,000 per return.

Since personal tax is computed as a percentage of income, any taxpayer who pays a 25 percent tax rate could be enjoying a benefit from deductions or exclusions from their income worth $32,000. The report finds that a fairly typical taxpayer which faces a 25 percent marginal tax rate on their taxable income ends up paying an average of 9 percent on gross income because of tax breaks.

In regards to pending tax reform efforts, “if tax rates are to be substantially lowered, many existing tax breaks will have to be eliminated immediately and others will be phased out,” National Taxpayer Advocate Nina E. Olson said in early January. “But I believe most taxpayers will conclude this is a worthwhile trade-off. If tax reform proceeds on a revenue-neutral basis, the average taxpayer’s liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate.”

I partially agree with her. The one area I disagree with her is that I think that taxpayers will fight any tax code changes which erodes any exemption, tax credit (mostly a type of welfare payment for the middle and lower income groups paid for by higher income earners). I think there will be class warfare (upper income earners vs. everyone else) and age warfare (seniors vs. everyone else).

No one will want to give up anything they presently receive – whether it’s the farmers getting free money, or corporations getting welfare, or “poor” folks getting tax credits.

Call me a cynic, but once a person, or company, gets their their snout in the public trough it’ll be nearly impossible to get them out. The only thing that would motivate folks to give up a tax break is if they thought the recession wouldn’t improve until they took action, or if they thought the recession would get worse if they didn’t take action.

I’m not sure we’re at that point yet.

Until next time,
Jeff Fouts

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