I've long (20+ years) advocated a consumption tax with either no income tax or a lower and flatter income tax structure with no or very few itemized deductions. That's basically the European approach. Their income tax rates aren't appreciably lower than ours on the individual side--although they are generally significantly lower on the corporate side--but that's because they are taking a much bigger tax bite out of the economy in total--10% to 20% bigger. If they were trying to raise our tax revenue requirement with their tax rate structure, both individual and corporate rates would be much lower than ours.

Look at it this way. We are taking a total tax bite of somewhere around 30% (roughly 20% federal and 10% state and local) here, while they are taking more in the range of 40%-50%. And yet their top individual rates are generally in the same range as ours, and overall slightly lower (OECD average top individual rate around 43%, US rate including average state taxes around 46%), and their corporate rates are significantly lower (OECD top corporate rate averages 24%-25%, while US top corporate rate is highest in developed world at 39% including average state taxes). Obviously they are getting the revenue somewhere other than taxing the "rich" and corporations.

I first became aware of this when I was working on some plant location investigations in the mid-1980s. I was fascinated that "socialist" Europe had a much larger total tax bite to support much larger government sectors, but at the same time could offer companies seeking to locate business operations a more tax-efficient proposition. And of course, that time frame was the height of "Reganomics" here. We were supposedly doing supply-side economics, but Europe had a more "supply side" tax structure than we did. We became significantly more supply-side with the 1986 Bradley/Gephardt/Reagan tax reform, but Europe moved more onto the consumption tax and lowered their rates significantly around 2000. Interesting factoid that illustrates that European shift--When Bill Clinton got through RAISING taxes, our rates were among the LOWEST in the developed world; when George W. Bush got through LOWERING taxes, our rates were among the HIGHEST. That's how quickly the world shifted around us.

A bit of an oversimplification, but not misleadingly so, essentially Europe tried to make the "rich" and corporations pay for their social welfare states in the 50s and 60s, resulting in massive capital flight. Ultimately they shifted to a lower and flatter rate structure to save their economies, as they discovered in the 70s and 80s that a consumption tax was an efficient way to make up the tax revenues needed to make such an approach revenue neutral. The consumption tax has a significant impact on the trade deficit because not only can it be collected on imports, it can also be rebated on exports. That gives countries with consumption taxes a huge competitive advantage in the global marketplace.

In Europe there generally is no charitable contribution deduction and no mortgage interest deduction, nor any of the myriad other deductions. It's an approach that I think we should give strong consideration, particularly as we are now dealing with massive annual federal deficits and cumulative federal debt.

(02-07-2015 06:23 AM)Owl 69/70/75 Wrote:  I've long (20+ years) advocated a consumption tax with either no income tax or a lower and flatter income tax structure with no or very few itemized deductions. That's basically the European approach. Their income tax rates aren't appreciably lower than ours on the individual side--although they are generally significantly lower on the corporate side--but that's because they are taking a much bigger tax bite out of the economy in total--10% to 20% bigger. If they were trying to raise our tax revenue requirement with their tax rate structure, both individual and corporate rates would be much lower than ours.

Look at it this way. We are taking a total tax bite of somewhere around 30% (roughly 20% federal and 10% state and local) here, while they are taking more in the range of 40%-50%. And yet their top individual rates are generally in the same range as ours, and overall slightly lower (OECD average top individual rate around 43%, US rate including average state taxes around 46%), and their corporate rates are significantly lower (OECD top corporate rate averages 24%-25%, while US top corporate rate is highest in developed world at 39% including average state taxes). Obviously they are getting the revenue somewhere other than taxing the "rich" and corporations.

I first became aware of this when I was working on some plant location investigations in the mid-1980s. I was fascinated that "socialist" Europe had a much larger total tax bite to support much larger government sectors, but at the same time could offer companies seeking to locate business operations a more tax-efficient proposition. And of course, that time frame was the height of "Reganomics" here. We were supposedly doing supply-side economics, but Europe had a more "supply side" tax structure than we did. We became significantly more supply-side with the 1986 Bradley/Gephardt/Reagan tax reform, but Europe moved more onto the consumption tax and lowered their rates significantly around 2000. Interesting factoid that illustrates that European shift--When Bill Clinton got through RAISING taxes, our rates were among the LOWEST in the developed world; when George W. Bush got through LOWERING taxes, our rates were among the HIGHEST. That's how quickly the world shifted around us.

A bit of an oversimplification, but not misleadingly so, essentially Europe tried to make the "rich" and corporations pay for their social welfare states in the 50s and 60s, resulting in massive capital flight. Ultimately they shifted to a lower and flatter rate structure to save their economies, as they discovered in the 70s and 80s that a consumption tax was an efficient way to make up the tax revenues needed to make such an approach revenue neutral. The consumption tax has a significant impact on the trade deficit because not only can it be collected on imports, it can also be rebated on exports. That gives countries with consumption taxes a huge competitive advantage in the global marketplace.

In Europe there generally is no charitable contribution deduction and no mortgage interest deduction, nor any of the myriad other deductions. It's an approach that I think we should give strong consideration, particularly as we are now dealing with massive annual federal deficits and cumulative federal debt.

The related questions that then should get asked - - - - is the work done by charitable foundations here done as well, or is funded as well as the work done here? And are the outcomes better? Do you want to be treated for cancer here or in Europe? Do their poor live 'better' than our poor?

Is home ownership achieved by a higher percentage of the population there or here? Is the median income required to own a home higher in the U.S. or Europe?

I wonder whether people who have objections to mortgage interest as a deductible expense view home (or maybe property?) ownership as generally desirable or not? That's a fair point, but it certainly is a factor in someone's position on the matter.

The median income at which a person or family can afford a house is impacted by the mortgage deduction.

While a different tax structure might move that median income point higher or lower, simply removing the mortgage deduction will only move it higher. I generally don't view that as desirable.

(edit - my comments about the mortgage interest deduction are aimed not really at Owl69, but more at the short posts above his, which potentially implied advocating elimination of charitable and mortgage deductions in and of itself, without necessarily replacing the tax structure in its entirety. That can also potentially imply that the government take on larger levels of responsibility in taking care of all of us. It's a goal advocated recently to the extreme in Venezuela. Obviously that's a few orders of magnitude difference than Europe.)

Rick, I don't want the government to take over ANY of the tasks that charities currently perform. I want people to actually be charitable! Give because it's right, not because you get a tax break.

Am in general agreement with Owl 69+, and advocate a complete replacement of our current income tax system with a consumption tax.
This would have many effects, most of which are desired by a lot of people.

1. Not neccesarily the main effect, but one that has been the focus of this conversation, it would eliminate the subsidies of various things through the tax code, specifically charitable giving. sure we would then find out how much charity is real charity, and I would expect giving levels to remain high, but there would be some reduction. of course, it would affect the housing indutry and others, too.

2. it would eliminate the 53%/47%split in America. regressiveness could be handled with a few exemptions, as groceries, medicine and gasline, etc.

3 It makes the politicians more responsive to the electorate, as they will need to be solid footing to raise taxes when EVERY voter in America is impacted. Way too much of the "no skin off my teeth" attitude now.

4. Get every voter involved.

5. Simplifies collection procedures and auditing. Forty-two States already have collection procedures. he Fed could just piggyback on those, and audit the collection process.

6. takes the criminal burden of reporting off the citizens.

And so forth.

(02-07-2015 10:04 AM)InterestedX Wrote:  Rick, I don't want the government to take over ANY of the tasks that charities currently perform. I want people to actually be charitable! Give because it's right, not because you get a tax break.

Well, obviously people already give to charity, etc., because it's right and because they want to.

You don't get back dollar for dollar on donations, you get back a percentage of what you donate, whatever your marginal tax rate may be. For most people it's less than $0.25 on the dollar.

You still are 'better' off (financially) if you keep the money and spend it on yourself, even with a tax break.

(02-07-2015 10:55 AM)Rick Gerlach Wrote:  

(02-07-2015 10:04 AM)InterestedX Wrote:  Rick, I don't want the government to take over ANY of the tasks that charities currently perform. I want people to actually be charitable! Give because it's right, not because you get a tax break.

Well, obviously people already give to charity, etc., because it's right and because they want to.

You don't get back dollar for dollar on donations, you get back a percentage of what you donate, whatever your marginal tax rate may be. For most people it's less than $0.25 on the dollar.

You still are 'better' off (financially) if you keep the money and spend it on yourself, even with a tax break.

Getting back to the particular item of this discussion, colleges use various incentives to get people to make or increase their giving levels. If a parking space or priority in CWS tickets doesn't float your boat, maybe the tax deduction is what makes a given donor move from the $500 level to the $1000 level.

Moving away from colleges to other charities, and from micro to macro, maybe the tax break is a factor in getting somebody to donate $20,000,000 for a cancer ward instead of $15,000,000. Or nothing.

(02-07-2015 10:04 AM)InterestedX Wrote:  Rick, I don't want the government to take over ANY of the tasks that charities currently perform. I want people to actually be charitable! Give because it's right, not because you get a tax break.

On the plane yesterday, JetBlue ran an ad on its TVs that stated more or less, "For every Brand Whatever snack bar you buy, we feed a hungry child." I think that's an outrageous approach to incentivizing charitable contributions.

(I think the "we" was the maker of the snack bar, not JetBlue, FWIW.)

(02-06-2015 09:57 PM)OptimisticOwl Wrote:  

(02-06-2015 09:18 PM)InterestedX Wrote:  If you're donating for the deduction, you really aren't being charitable. You're just doing it to get some financial benefit. There shouldn't be any charitable deductions from taxes.

sometimes, the deduction can be the selling point that triggers a decision. more often though, it influences level of giving. people who are now $1000 Owl Club members may decide to drop to the $500 level.

still no amswer on whether it is subsidies that bother you, or just this subsidy. How do you feel about the deductibility of contributions to Muscular Dystrophy, or the March of Dimes, or to the general fund of a university? How about the deductions for mortgage interest, or investment advice, or ....well, all of the ones on the Form A.

Speaking only for myself, I'm OK with deductions for charitable contributions, just think the definition of 'charitable' has become too, well, charitable in some cases.

Agree with the post below about the mortgage interest deduction. Benefits go primarily to the affluent, and it reinforces the destructive (IMHO) cult of home-ownership. But that's a different subject.

I don't disagree that our tax code could use a lot of simplification. Getting enough people to agree on the specifics of that simplification is another story...

(02-10-2015 11:42 AM)JustAnotherAustinOwl Wrote:  

(02-06-2015 09:57 PM)OptimisticOwl Wrote:  

(02-06-2015 09:18 PM)InterestedX Wrote:  If you're donating for the deduction, you really aren't being charitable. You're just doing it to get some financial benefit. There shouldn't be any charitable deductions from taxes.

sometimes, the deduction can be the selling point that triggers a decision. more often though, it influences level of giving. people who are now $1000 Owl Club members may decide to drop to the $500 level.

still no amswer on whether it is subsidies that bother you, or just this subsidy. How do you feel about the deductibility of contributions to Muscular Dystrophy, or the March of Dimes, or to the general fund of a university? How about the deductions for mortgage interest, or investment advice, or ....well, all of the ones on the Form A.

Speaking only for myself, I'm OK with deductions for charitable contributions, just think the definition of 'charitable' has become too, well, charitable in some cases.

Agree with the post below about the mortgage interest deduction. Benefits go primarily to the affluent, and it reinforces the destructive (IMHO) cult of home-ownership. But that's a different subject.

I don't disagree that our tax code could use a lot of simplification. Getting enough people to agree on the specifics of that simplification is another story...

Ah, yes. Well, I stated my preference.

As for the mortgage interest deduction, it was probably meant to stimulate home buying, which would stimulate home building, which would stimulate construction borrowing, and so the dominoes go. The ones helped by the deduction are not limited to McMansion owners. Bricklayers, carpenters, plumbers, even the illegal alien carrying lumber from one place to another are indirect beneficiaries of the "tax break for the rich", as the subsidy influences the building of more and bigger houses. The banks making construction loans benefit, and who doesn't benefit from a healthy banking system? In a former life, I was one of the people who benefitted from a rise in housing starts. To the extent that some of those were influenced by the tax break, I benefitted, even though I only bought one house and built one house in my life, and still live in the latter.

Most deductions are to benefit some group. I am sure the lawyers and CPAs benefit from the deduction for tax prep and investment advice. Fishermen benefit from special provisions just for fishermen. I wonder what the Deadliest Catch captains have to say about their special treatment. I wonder if their crewmen think that elimination of the special treatments would affect them.

I am not defending the tax code but just pointing out that the beneficiaries of the various deductions go far beyond just wealthy people.

All of this reminds me of the discussion in law school tax class about deductions being tax expenditures - the underlying theory being that all income belongs to the government and it gets to decide what you get to keep. While some of us appear offended by various deductions, I am more offended by outrages on the spending side. Until we get some rationality in the process, it will be special interests seeking and getting money on both sides.

(02-10-2015 05:53 PM)NolaOwl Wrote:  All of this reminds me of the discussion in law school tax class about deductions being tax expenditures - the underlying theory being that all income belongs to the government and it gets to decide what you get to keep. While some of us appear offended by various deductions, I am more offended by outrages on the spending side. Until we get some rationality in the process, it will be special interests seeking and getting money on both sides.

Absolutely. The only sure way to reduce the influence of money upon government is to reduce the role of government in the distribution of money. As long as one insists on a large role for the latter (with tax deductions for particular purposes being just one example), the former will inevitably be large as well.

(02-07-2015 07:48 AM)Rick Gerlach Wrote:  The related questions that then should get asked - - - - is the work done by charitable foundations here done as well, or is funded as well as the work done here? And are the outcomes better? Do you want to be treated for cancer here or in Europe? Do their poor live 'better' than our poor?

Is home ownership achieved by a higher percentage of the population there or here? Is the median income required to own a home higher in the U.S. or Europe?

I wonder whether people who have objections to mortgage interest as a deductible expense view home (or maybe property?) ownership as generally desirable or not? That's a fair point, but it certainly is a factor in someone's position on the matter.

The median income at which a person or family can afford a house is impacted by the mortgage deduction.

While a different tax structure might move that median income point higher or lower, simply removing the mortgage deduction will only move it higher. I generally don't view that as desirable.

(edit - my comments about the mortgage interest deduction are aimed not really at Owl69, but more at the short posts above his, which potentially implied advocating elimination of charitable and mortgage deductions in and of itself, without necessarily replacing the tax structure in its entirety. That can also potentially imply that the government take on larger levels of responsibility in taking care of all of us. It's a goal advocated recently to the extreme in Venezuela. Obviously that's a few orders of magnitude difference than Europe.)

More homes are owned here than in Europe, I believe.

The mortgage exemption is basically built into the prices of homes here. Take it away, and all home prices go down a bit. It will affect everyone across the board.

The mortgage interest excemption will NEVER go away. There's too much built upon the idea that owning a home is the greatest investment possible.

It goes something like this:
1. You go to school and learn the American Dream is to go to college, get a job, buy a house, work for 40 years, buy a couple more houses along the way, retire to a life of leisure.
2. Realtors (plus title agents, mortgage brokers, insurance agents, inpectors, appraisors, etc) lobby to keep houses churning to take a cut of every transaction.
3. 30 year mortgages keep you working your entire life, giving the IRS a steady flow of tax income
4. Your mortgage interest is deductable so you pay just a little less taxes annually (this assures you of the brilliance of your home buying decision)
5. Property taxes on your home pay for public education
6. Public education tells kids about the American dream.

(02-17-2015 10:51 AM)lou Wrote:  

(02-07-2015 07:48 AM)Rick Gerlach Wrote:  The related questions that then should get asked - - - - is the work done by charitable foundations here done as well, or is funded as well as the work done here? And are the outcomes better? Do you want to be treated for cancer here or in Europe? Do their poor live 'better' than our poor?

Is home ownership achieved by a higher percentage of the population there or here? Is the median income required to own a home higher in the U.S. or Europe?

I wonder whether people who have objections to mortgage interest as a deductible expense view home (or maybe property?) ownership as generally desirable or not? That's a fair point, but it certainly is a factor in someone's position on the matter.

The median income at which a person or family can afford a house is impacted by the mortgage deduction.

While a different tax structure might move that median income point higher or lower, simply removing the mortgage deduction will only move it higher. I generally don't view that as desirable.

(edit - my comments about the mortgage interest deduction are aimed not really at Owl69, but more at the short posts above his, which potentially implied advocating elimination of charitable and mortgage deductions in and of itself, without necessarily replacing the tax structure in its entirety. That can also potentially imply that the government take on larger levels of responsibility in taking care of all of us. It's a goal advocated recently to the extreme in Venezuela. Obviously that's a few orders of magnitude difference than Europe.)

More homes are owned here than in Europe, I believe.

The mortgage exemption is basically built into the prices of homes here. Take it away, and all home prices go down a bit. It will affect everyone across the board.

The mortgage interest excemption will NEVER go away. There's too much built upon the idea that owning a home is the greatest investment possible.

It goes something like this:
1. You go to school and learn the American Dream is to go to college, get a job, buy a house, work for 40 years, buy a couple more houses along the way, retire to a life of leisure.
2. Realtors (plus title agents, mortgage brokers, insurance agents, inpectors, appraisors, etc) lobby to keep houses churning to take a cut of every transaction.
3. 30 year mortgages keep you working your entire life, giving the IRS a steady flow of tax income
4. Your mortgage interest is deductable so you pay just a little less taxes annually (this assures you of the brilliance of your home buying decision)
5. Property taxes on your home pay for public education
6. Public education tells kids about the American dream.

A lot of home-as-investment was based on high and increasing inflation and interest rates, fueling a better-get-in-now mentality.

When I bought my first house, (1970), I remember the salesman telling me that we would never see 7% interest again.

The big lump deduction for mortgage interest usually makes a lot of other expenses deductible on Schedule A that normally would have to be covered under the standard deduction

(02-17-2015 11:12 AM)OptimisticOwl Wrote:  The big lump deduction for mortgage interest usually makes a lot of other expenses deductible on Schedule A that normally would have to be covered under the standard deduction

This is the big impact that many people don't realize. You have a bunch of potential itemized deductions that do not get taken because the standard deduction is higher. Once the mortgage interest "eats up" the standard deduction, those other deductions are available where they weren't before. Makes a huge difference. When I bought my first house, I went from a $300 rent payment to a $500 mortgage payment and absolutely never felt it.

(02-07-2015 01:29 PM)OptimisticOwl Wrote:  

(02-07-2015 10:55 AM)Rick Gerlach Wrote:  

(02-07-2015 10:04 AM)InterestedX Wrote:  Rick, I don't want the government to take over ANY of the tasks that charities currently perform. I want people to actually be charitable! Give because it's right, not because you get a tax break.

Well, obviously people already give to charity, etc., because it's right and because they want to.

You don't get back dollar for dollar on donations, you get back a percentage of what you donate, whatever your marginal tax rate may be. For most people it's less than $0.25 on the dollar.

You still are 'better' off (financially) if you keep the money and spend it on yourself, even with a tax break.

Getting back to the particular item of this discussion, colleges use various incentives to get people to make or increase their giving levels. If a parking space or priority in CWS tickets doesn't float your boat, maybe the tax deduction is what makes a given donor move from the $500 level to the $1000 level.

Moving away from colleges to other charities, and from micro to macro, maybe the tax break is a factor in getting somebody to donate $20,000,000 for a cancer ward instead of $15,000,000. Or nothing.

To me, the tax deduction is merely 'the government' letting people vote (for charities) with their own money... and then the government vicariously supporting those same entities. I don't have a problem with this. There are other ways to do it that would be simpler as owl(numbers) points out... and that would avoid what is essentially a debate over whether donating to a Harvard Athletics is 'more worthy' than donating to UH athletics... or whether the scholarship given to the football player at Rice is 'less worthy' than the scholarship given to the musician at Rice. THOSE are the arguments we could do without.