Does The Tax Code Favor The Rich?

New taxes in 2014 brought in an additional $23 Billion from the wealthy, but the tax code still heavily favors the 1%
New taxes in 2014 brought in an additional $23 Billion from the wealthy, but the tax code still heavily favors the 1%

Where the federal government is concerned, taxing the public is pretty much equivalent to federal spending. Don’t get lost in the legal language associated with taxing—tax credits, tax deductions, exemptions, and exclusions are colorful words that describe adding money to bank accounts, not subtracting money from them.

In 2013, the Corporation for Enterprise Development conducted an analysis of tax subsidies for education, housing, savings, and retirement. The organization discovered that of $340 billion in tax subsidies issued by the government, $95 billion wound up being distributed to the top 1 percent of income earners. By comparison, approximately $90 billion was divided among the bottom 80 percent.

On top of that, the Congressional Budget Office’s 2013 report analyzed the top 10 tax subsidies. These subsidies have a combined value of $900 billion. Congress found that more that 50 percent of these subsidies were issued to those in the top 20 percent of earners. Moreover, the extremely wealthy 1 percent of Americans, with a median income of $7.6 million annually, received an average tax return of $33,391. Meanwhile, those earning less than $65,000 per year make up 60 percent of the population and received an average income tax return of less than $1,000.

For example, in 2014, retirement tax spending in the United States totaled $146 billion. This was an increase from 2013’s spending budget of $128 billion. The Corporation for Enterprise Development found that these subsidies also unfairly favored high income earners. Of the total retirement tax spending, the top 1 percent received an average return of $13,088 while the lower 60 percent of income earners received an average of just $200.

The Push for Change

In recent years, conservatives have been applying pressure to reduce government spending. Because of this pressure, the federal tax code has become the main source of influence over social policies relating to retirement, housing, and education. Consequently, the budget for federal spending through taxes in these areas has been increasing steadily. For instance, federal tax spending in these combined areas totaled $540 billion in 2013, then increased to $640 billion in 2014. Nevertheless, combined federal tax spending in 15 other areas, such as health and human services, transportation and labor, totaled $464 billion.

Anti-Tax Advocates

Several anti-tax advocates have argued against the federal government’s notion that reductions in taxes are equivalent to public assistance. In fact, the Tax Policy Director of Americans for Tax Reform spokesperson Ryan Ellis stated “That’s just stupid and dishonest. Letting people keep their own money does not increase the size of government in any way.”

Many advocates for tax reform would like to see more tax dollars spent in areas that help the 27 million low-wage workers in need of assistance just to make ends meet rather than lining the pockets of the nation’s wealthiest taxpayers. The Earned-Income Tax Credit and the Tax Saver’s Credit are good examples of programs being highlighted by such advocates. Some argue that subsidies such as those mentioned above are the most effective anti-poverty measures in place at the moment and represent the direction that tax code reform should take.

The Obama administration has responded to current tax spending concerns by adding a $500 tax credit for working parents with children into the budget for 2016. The White House approximates that the majority of this credit will benefit workers earning less than $120,000 per year, while some credit will benefit households that earn up to $210,000 annually.

All Is Fair?

According to some economists, tax code spending is fair, at least from an accountant’s perspective. These economists argue that low-wage workers who use vouchers to help make rent payments are benefitting from the same incentives as a high-income earner deducting mortgage interests so that they can take a vacation. In fact, each of these incentives is derived from the federal tax budget. But this ignores the much larger issue of income inequality in the United States, and the role that the current tax code plays in perpetuating that inequality.

The Results Are In

Tax policies often lean in favor of the rich for a number of reasons. For instance, high-income earners are much more likely to receive passive income, which is taxed differently. High-income earners are also overwhelmingly more likely to be in a position to take advantage of corporate tax shelters and loopholes. Furthermore, wealthy households have more assets, such as houses and retirement accounts. As a result, wealthy households are able to capitalize on a greater amount of tax subsidies. The question isn’t whether the tax code favors the rich. In its current form, it does. The question is what we as a nation will do about it.

Will the New Congress Be Able to Make Any Progress on Tax Reform?

Tax Reform?  Really?
Tax Reform? Really?

After the November 4th elections this year, it was widely expected that Republicans would take a majority in the House and Senate. Republican leaders campaigned toward victories on promises of change, though it is unclear just how much change will actually be accomplished. While the Obama administration has for years been interested in tax reform, particularly concerning American companies using a technique called “inversion” to repatriate their profits, given the GOP’s track record, it is not surprising that many think major changes like a tax reform bill has little chance of reaching the President’s desk. Chances may be slim that real reform is going to get passed, but small-scale reform may still be possible.

The Tax Code’s Just Too Big

While many politicians have a lot to say about a “simplified tax code” on everything from foreign taxation to the Affordable Care Act, chances are slim that any reforms of substance will be passed by the new Congress. Why? Because any attempt to gut the President’s healthcare legislation through the tax code will most certainly be vetoed, and many Republicans quietly like what “Obamacare” has brought to the table.

Add to the threat of veto a general distaste among voters for re-arguing issues (like Roe V. Wade) that have already been settled, and it becomes clear that there will be no grandiose simplifications of the code that many have long clamored for. As a result, any type of innovation regarding the tax code will likely be more incremental reform.

There Isn’t Enough Time, But There Is Opposition

In order to have enough time to enact meaningful tax reform, the new Congress will have to begin almost immediately. Republicans will need to be very quick to lay out their key points for change, any of which could easily ignite Democratic opposition and lead to pushback.  However, many Republicans are eager to show voters that they can indeed govern, which could potentially lead to compromise on these types of issues.

In an ideal world, the subsequent debate would be enough to begin work on a bill that could take until the next election to craft. Before the bill could be passed, however, lobbies benefiting from the status quo would push to delay a vote, or even move political money to opponents to get the innovators out of office. This jockeying won’t affect the president during the final months of his second presidential term, but it would likely cast a pall over any incentive from Congress to proactively push for tax reform.

In short, unless the a President is committed to tax reform in partnership with a willing Congress and had a four-year term (at the least) to outlast entrenched lobbyists focused on keeping things as they are, meaningful tax reform remains a long shot.

So What Chance of Change is There?

Ultimately, it will be up to the Republican majority and the president to set the tone for any potential talk of tax reform. The real question is whether either sides is willing to consider their common ground and take a stand for the greater good, even when that stance might prove to be unpopular. When outgoing Representative Dave Camp (R-MI) brought up tax reform earlier this year, his attempts to bring the focus back to tax reform were dismissed by Speaker John Boehner, who was heard to say “blah blah blah” in response.

In short, if small reform measures can attract the attention span of the new Republican Congress, they might pass. Otherwise, the chances of real tax reform over the next two years are slim.

IRS Answered Only 61% Of Calls In 2013

IRS Did Not Answer 4 Out Of Every 10 Calls
IRS Did Not Answer 4 Out Of Every 10 Calls

In a recent report by National Taxpayer Advocate Nina Olsen, the IRS was only able to answer 61% of phone calls made by taxpayers to the agency. Just 10 years ago, the IRS was able to address 87% of calls.  The reasons cited were the increasing complexity of tax questions unable to be answered by automated systems as a result of the overall increasing complexity of the tax code.  This coupled with budget cuts to the agency resulted in nearly 4 out of 10 calls being dropped or unable to be addressed.  As a result, the IRS is requesting an immediate increase in funding:

“The I.R.S. has been chronically underfunded for years now, at the same time it has been required to take on more and more work, including administering benefit programs for some of the most challenging populations,” the report says. “Without adequate funding, the I.R.S. will fail at its mission.”

Furthermore, the report goes on to cite bad “tax moral” continuing to build if this trend is not reversed soon, as well as a need for greater protection of taxpayer data to prevent identity theft as well as assisting taxpayers who are victims of identity theft, doing a better job in cases where the I.R.S. inappropriately bars taxpayers from receiving the earned-income tax credit, and more oversight of paid income tax preparers.

Read the the report here.

5 Reasons To Call Your Tax Pro Today!

Start Your Tax Planning Now

Kelly Phillips Erb–better known as the Taxgirl (@taxgirl) lists 5 reasons why you should contact a tax professional today:

  1. Corporate extensions are over but individual returns on extension are due in a little over three weeks. Individuals who timely requested a extension – about 10 million taxpayers – have until October 15, 2012 to file their 2011 federal income tax returns. Don’t wait until the last minute: the whole point of getting that extension was so that your return wouldn’t be sloppy, right?
  2. Estimated tax payments were due earlier this week. September 17, 2012, to be exact. The whole point of making estimated payments is not to owe too much at tax time (and end up paying a nasty penalty), especially for those folks who rely on income not subject to withholding (generally, independent contractors and those that are partners in an LLC, LLP or LP or members of S corporations). Now that most of the year has flown by, it’s a good chance to run those numbers to make sure that you’re withholding enough – or too much. You don’t want to err on the side of paying in too much, either. If 2011 wasn’t as banner a year as 2010, you might be paying the IRS too much. A tax pro can help you sort this out in advance so that April 2013 isn’t quite so painful.
  3. The Tax Code is constantly changing. Credits expire, deductions shrink and rates can fluctuate from year to year. For planning purposes, it’s best to know what to expect ahead of time. If you’re trying to plan, knowing when tax breaks for hiring certain employees or making energy efficient improvements to your house expire is useful. A good tax professional can point you in the right direction (with the caveat that Congress is still wont to undo it all at any second).
  4. End of the year planning opportunities are just around the corner.Many taxpayers start thinking about their options in January but many tax savings plans have to be completed in December in order to count for that tax year. If you want to save tax dollars for tax year 2012, in most instances (retirement plan contributions being an exception), you have to act before December 31, 2012 – including the really big ones like getting married. And this doesn’t just apply to individual income taxes: planning for estate and gift taxes, as well as most corporate and partnership taxes, is focused on the same year end: December 31. If you have moves to make by year end, get things going now – and get some help.
  5. Finally, business slows down a little (just a little) at the end of the year for many tax professionals. This might be the best time to get some personal attention if there’s something you’ve been concerned about. Maybe your bookkeeping isn’t terrific and you want to change software packages… or maybe the pencil on your old green ledgers is too hard to read these days and you’re thinking about diving in and trying online accounting. Maybe you’re thinking about contributing to an IRA for your spouse or a 529 savings plan for the kiddos. Maybe you just want to find a new preparer. The very best time to do those things is January 1. But that’s the worst time to start thinking about it – just after the holidays can be hectic. Ask now. Get the facts. Organize. Fill out the papers. Resolve to start fresh.

Contact an R&G Brenner Tax Professional today to discuss your tax strategy for the upcoming tax season.

Source:  Forbes