Taxes

Milton Friedman made his living arguing that the Federal Reserve caused the 1929 stock market crash and thus the Great Depression by jacking around discount rates.  Economic argument is difficult. We cannot even prove that the stock market crash caused the Great Depression. But his point that the Fed should be considerate, respectful and measured is well taken. As any driver can tell you, when you don’t know what you are doing, it is better to do it slowly.

Fiscal policy should be deliberate as well.  When there is uncertainty it is difficult to plan or invest. The new tax law dumps everything into the chipper. People keep talking about individual effect or ethic. The real problem is that we have no idea what the cumulative impact will be. That is bad. What will be the systemic impact on America? This law assumes instability. It was passed in the belief that many issues will be addressed in subsequent legislation. What a wonderful fetcher, how can Congress not shake that money tree? We have no idea as to impact or what the law will be a year from now. Previous tax law represented all the various interests that lead to it. Those interests remain. They will demand satisfaction.

There is a recent example. Ronald Reagan, a Hollywood actor, was incensed that he paid taxes at 90%. Obviously there were ways for him to reduce that burden. He invested in real estate and took advantage of depreciation and all the rest. What upset him was that his employers, the studio owners, had the capital gains deduction. When they bought and sold the studios to each other they then started from 50% times 90% or 45%. It wasn’t fair that he had to start higher because he did the work. When he was elected he got the maximum down to 28% from 70% and eliminated the capital gains deduction.

Since everyone started from 28% a lot less tax was collected. This combined with the savings and loan fiasco left George HW Bush with a hot steaming mess. Fortunately class tells and Bush, the statesman, lied and saved our country. He wasn’t reelected, but Clinton was smart enough to keep things as Bush left them. The Clinton recovery began under Bush. Bush really had a 12 year term. Of course once Bill Gates wanted to sell his stock, the capital gains deduction was restored in 1997. The new maximum tax rate is at 37% down from 39%.

I despise tax deductions. Just as we shouldn’t tell people how to invest, we shouldn’t tell them how to live either. The state real estate tax deduction is the worst. It is wrong to subsidize social segregation. But this reform has already led to a state tax windfall soon to be followed by a state tax drought.

It appears that Republicans want to end everything Obama, including the recovery. I hesitate to ascribe motive to anything so mindless, but everyone wants to sell out.  What opportunity is driving this smash and grab? It must be China.

The tax bill will fail in the courts. As venal as Republicans are they have left an out. Double taxation on earnings and income is forbidden. This is fundamental tax law and is used to justify foreign tax credits.  Including state income tax in the tax cap will be changed. It would be reasonable for the courts to simply specify that state income tax is a separate deduction and is not capped. Perhaps the adults will create the tax form that way. Then the states will move taxes from real estate and sales to income. The change in state policy could be beneficent, one might expect state legislatures to more fairly apportion services. More likely we will become southern, charter schemes and vouchers. The Supreme Court has two principle values: expediency and privilege. Faced with a difficult law that threatens privilege the court will remove the cap. Then they will throw out the whole law to give themselves cover. It will be a close decision but judges own houses.

This is a cruel charade to shake down investors who want to own Chinese assembly plants. Can Senators look investors in the eye and claim that they don’t understand double taxation of income?

If you wind up paying 37% in taxes, you should throw a party. You have more money than you know what to do with. Most people know what to do with their money. The current idea is that you should have about 120,000 in walking around money. If you need more than that you should check in and make use of the medical deduction. The rest of your money should be in a corporation, profit or nonprofit, stock or pass through. Just as every poor person needs a church every rich person should have a business. There’s a lot of ways these things are structured but the point of the tax law is to limit your spending money and keep you invested.