Four Words You Need to Know for the 113th Congress

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Four Words You Need to Know for the 113th Congress

[Note: This essay is one in a continuing series by ICCFA executive director Bob Fells focusing on various issues in our federal government. Although the subjects are political in nature, the approach is bipartisan in outlook, at least so far as that is humanly possible. The goal of each essay is not to persuade the reader to adopt a particular political viewpoint or party, but to illustrate why an understanding of the system is important to protect our businesses, our homes, and our families.]

You’ve probably seen this movie before. Certain tax breaks are about to expire so the question is whether Congress will act in time to prevent them from being repealed. If we ran our businesses the way Congress runs the government, we’d have closed down long ago – and probably be in jail. The federal government can’t close down because: 1.) it has no competitors, and 2.) revenue it collects from its customers (as IRS refers to all of us) is under penalty of law and imprisonment. Best of all are the prices the government charges for providing services. It charges nothing and we wonder why the deficit is so high. It is significant that nobody uses the federal government as a business model.

I suspect that the “fiscal cliff” will be averted because Congress will turn it into a ski slope. That is, it will extend the Bush-era tax cuts for another couple of years and time them to expire with the next election in 2014. A mere coincidence no doubt. The “rich” won’t care if they are excluded because by now they have already taken steps to shield their income from increased taxation in 2013. People don’t become rich by being stupid.

The new Congress, number 113, will convene in January 2013 to finally get serious about tax reform. This is fitting because the federal income tax was first enacted a century ago in 1913 (I hope you’re not superstitious). Those of us who are a certain age can remember when Congress reformed the tax code in 1986. Then, the announced goal was tax “simplification” but once it was realized that some beloved tax deductions and exemptions would be lost, the goal of tax reform was changed to tax “fairness.” By the time the dust settled, tax deductions on interest paid on credit card debt and car loans were abolished. I’m not sure who benefitted from that dose of fairness.

So early next year, we will be hearing lots about four words that many members of Congress will misuse and abuse for their own purposes.  The ignoble four are closing “loopholes,” ending “subsidies” for mortgage interest “deductions,” and “rights” as in the right to own a home and even the right to a job. At least this time they’ve already jettisoned “simplification” and we’ll start with talk about “fairness.” The goal among those jockeying for position will be to make sure the new tax code is fairer for some people than for others. To pull that off, it is crucial to persuade the public that certain terms – our fabled four - no longer have their intended meaning but really mean something quite different.

For example, and you’ve already heard this a million times, we must close tax “loopholes.” The so-called loopholes that our favorite politicians are referring to are perfectly legal exemptions, deductions and credits that Congress itself enacted into law. True, many of these were added to voluminous bills, tucked in so that most members of Congress didn’t even notice them. But this doesn’t make them into loopholes. A loophole is an unintentional oversight that should be against the law but isn’t. Our friends in Congress intended each and every “loophole” in the tax code.

Next, we have been told that we must consider ending or at least curtailing the subsidy for home mortgage interest deductions. You don’t have to be Noah Webster to know that a subsidy is when the government takes money from one person and gives it to another person. The second person is being subsidized by the first. On the other hand, a deduction is when the government allows a taxpayer to keep more of his own money. Nobody is subsidizing the home mortgage interest deduction, including people who can’t claim this deduction. But homeowners will be put on a major guilt trip that renters are paying for their Cape Cods with this loosey-goosey newspeak.

Also, beware of the siren call for phasing out the interest deduction. That will work the same way all state sales taxes have worked. First, the proposed sales tax is a mere 1% and the proceeds will go for education or to improve roads. We might call that getting the foot in the door. Once enacted and the public has become used to paying it – it’s for schools you know – then the legislature will hike it up every few years. No state sales tax started out at 5 or 8 %. I think this is the same method for boiling a frog in a pot of water so it doesn’t jump out – turn up the heat slowly. Anyway, support will grow for curtailing the home mortgage interest “subsidy” by phasing it out for – you guessed it – the rich. You perhaps noticed by now that the fastest way to get new taxes imposed is to say it will just affect the rich. Class envy and divisions has been a reliable method of getting unpopular legislation passed.

The classic case is the Alternative Minimum Tax that was supposed to ensure that those rich so-and-sos would have to pay some income taxes. But Congress “forgot” to index it for inflation and never got around to doing so ever since the ATM became law – back in 1969! So an increasing number of middle class taxpayers are getting zonked with the AMT. This year, “rich” people who make $48,450 are subject to the AMT. If we hurdle over the fabled “fiscal cliff” and pay more taxes in 2013, then the AMT will hit individuals who earn $33,700. Never before has being treated as rich been so affordable.

This same incremental approach will be used to begin the end of the home mortgage interest deduction. When will Americans learn that soaking the rich always backfires? This reminds me of a slapstick movie where a guy throws a pie at another guy, but the fellow ducks and the poor slob standing behind him gets the pie right in the puss. The pie thrower is Mr. Government; the guy who ducks is Mr. Rich, and the guy who gets hit is Mr. Middle Class. The pie of course is a tax hike. Ironically, Mr. Middle Class was all in favor of Mr. Government throwing the pie when thought he thought that it would only hit Mr. Rich.

The fourth word to watch out for is “right” as in having a legal or a constitutional right. Today, we are told that we have lots of “rights” that we never knew about. Politicians are conveniently confusing a right with a privilege. A privilege is a special benefit conferred by the government on people who qualify for it. For example, there is no such thing as a right to drive a car. We must qualify for this privilege by passing a written and road exam, then we receive a license that can be revoked if we drive badly. A blind man has no “right” to drive because he doesn’t qualify. You can think of other examples such as marriage. We are told now that there is a right to marry, but if that’s true then why does the government still require marriage licenses?

In the last few years we have been told by countless politicians about the right to own a home. True, nobody needs a license to buy a house but we still have to qualify for a mortgage as if it were a license. Having a right to own a home means that we have a right to get a mortgage. Some say the housing collapse in 2008 was caused in large part by political pressures put on banks to grant mortgages to people with incomes that would not have qualified them in earlier times. I personally know people today who are struggling to pay jumbo mortgages they obtained because they assumed the bank would have never approved them if it felt they couldn’t handle it. I’m not sure how eliminating or just reducing the home mortgage deduction will help more people to buy homes. But I suspect that members of Congress hope we won’t trouble ourselves to find an answer until the change becomes law.

In sum, as the tax reform debate grows more voluminous just remember that a lawful tax break is not a loophole; that a subsidy is money that we give to another person; a deduction is where we get to keep our own money; and a right is something that nobody has to qualify for.  We will be challenged to forget these minor distinctions in order to make the tax code fairer. No doubt, if tax reform is handled properly we will all share in the pain of lost deductions, exemptions and credits. But we’re not off to a very good start when our leaders tell us that up is down and front is back.