How the Tax Code Helps Those Who Need the Least Help

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Death and Taxes

     Benjamin Franklin in 1789 wrote, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.“

     Interesting and powerful words to read from one of our most revered founding fathers. They are powerful because taxes, in  Franklin  words, affect all of us one way or another. Taxes are indeed ubiquitous.

     Taxes are fees imposed on the right to earn income. A tax deduction or favorable tax treatment is music to most citizens’ ears because it specifies income that is minimally taxed.

·                  According to the National Priorities Project, America's top earners will get an average tax cut of $66,384 in 2011 while the bottom 20 percent will realize an average tax savings of about $107.

     Seth Hanlon, director of fiscal reform for the Center for American Progress, says that while all tax breaks are well-intended, the "upside-down" nature of some miss their target

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Some Tax Regulations Effects

·       Mortgage Interest  Deduction

     A  study, by rhe Wharton School at the University of Pennsylvania, on the deductions for mortgage interest for households with incomes between $40,000 and $75,000 averages just $523, while households with incomes above $250,000 enjoy an average a write-off of $5,459 or more than 10 times as much.

·         Capital Gains Tax Rates

     Long-term capital gains tax rates for investments owned greater than one year are currently 10 to 15 percent, favorable rates when compared to earned income or ordinary wage rates which range from 10 percent to 39.6 percent depending on the amount earned. Only citizens who have money to invest beyond basic living needs can benefit from these favorable rates. The favorable capital gains rates are expected to cost the Internal Revenue Service $38.8 billion in fiscal 2012 according to the Office of Budget and Management.

·           Step up in Basis

     Usually when property is sold for more than the purchase price, the difference is taxed except when a person dies. When a citizen dies that difference between buy and sell price is reset to a price the property would fetch had it been sold at the time of death.  A Stepped-up basis benefits the wealthy the most because they hold the most property. The cost the Internal Revenue Service was $61.5 billion in 2012 according to the Office of Management and Budget.

·         Tax-deferred Retirement Savings Accounts

     Retirement accounts are special accounts like IRAs, 401ks, and profit-sharing plans designed to help people save for retirement. Only people who have extra money can save money for retirement. In 2011, American saved $145 billion in taxes from this deduction. Of that, the Tax Policy Center estimated the top 20 percent of earners received 80 percent of the benefits whereas the bottom 60 percent received only 7%. It’s safe to say those living at poverty level had no benefit because they had no money to save towards retirement.

·         Charitable Deduction

     Taxpayers who give to qualified nonprofits are allowed to deduct their donation against current income. For taxpayers, the value of the deduction increases with a person’s income. For example, someone in the lowest 10% tax bracket receives a $100 deduction for a $1,000 donation. Whereas someone in the 39.6 percent tax bracket receives a $396 deduction for the same amount. In 2011, this deduction was estimated to cost Uncle Sam $53.7 billion according to the United States budget.

  Conclusions

     Tax deductions overwhelming benefit those who make higher incomes. This translates into the higher income earners being able to keep a higher proportion of their income compounding  their wealth substantially over time pushing an ever-wider gap between rich and poor.