Dissecting the Liberal Talking Points: Legal Tax Deductions Aren't "Loopholes"

Recently, President Obama has begun talking up his plan for reducing the deficit (hint: raise taxes as much as he can get away with, say words like "fair share" a lot).  Included in this is saying "closing tax loopholes for millionaires and billionaires."  Inherent in the statement is the assumption that "tax loophole" equals "cheating."

The truth, however, is far less insidious (actually, it isn't insidious at all).  What Obama is calling a "loophole" is really a legal tax deduction that is written into the Internal Revenue Code that reduces a person's total taxes paid.  (For those of you from Palm Beach County, FL, I can't dumb that one down enough for you, I'm sorry, just click here for some alternate amusement.  I'll try to write on a simpler topic tomorrow.) 

Some of these so-called loopholes include deducting the interest paid on your house, writing off student loan interest, and tax-free investments like municipal bonds.  Another very popular deduction is a person can deduct any charitible donations on their taxes.  Others still include the ability to have certain payroll deductions taken before tax is assessed from each paycheck, such as employee contributions to medical and their 401k plans.  Wow, these are some horrible, evil loopholes, aren't they?

Here is my point:  Every single one of these deductions are 100% legal.  Their use is legal.  They are written into the Internal Revenue Code to encourage certain activities (like buying municipal bonds) and to make certain purchases affordable (like home ownership).  When Obama calls them "loopholes" he wants you to think it's cheating the government out of money owed.  By that logic, buying peanut butter with a coupon and paying less is cheating the store.

Now you're not cheating the store by buying your jar of Skippy with a coupon, nor are you doing anything wrong by using your save $1 on two jars coupon.  Wealthy individuals aren't doing anything wrong by taking deductions specifically allowed in the tax code either nor are they doing anything wrong by accepting tax credits that are also included in the tax code.  That's not a loophole.  As a matter of fact, I would personally call someone who chooses not to take whatever tax deductions that are legally allowed in the tax code an absolute fool.

Obama's playing the class warfare game with his lines about "loopholes."  He wants you to think these legal deductions are cheating, and that is a false suggestion.  Truth is these "loopholes" are better labeled as legal tax deductions and tax credits, and anyone who calls them anything else is just playing political games.  (See: Barrack Obama.)

Dissecting the Liberal Talking Points: Warren Buffett is the Exception, Not the Rule

In Monday's Deficit Reduction speech, Obama proposed a "Buffett Rule" based on Warren Buffett's paying less taxes than his secretary. There are so many issues with that claim, and I'm pleased that the nonpartisan Tax Policy Center crunched the numbers and found the falseness in the claim. 

First and foremost, there are the facts:  Individuals who make $1,000,000 will pay approximately 29.1% in taxes after deductions, while those making $50,000-75,000 will pay 15%.  These are the IRS numbers friends.   According to an AP article on this subject:

On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government. (1)

So the wealthy actually pay significantly more taxes, both in a percentage and in net dollars. And again, before the Left starts gumming about "fair share" the wealthiest 10% pay 50% of the taxes. The only people who don't pay their fair share are the people who pay 0% in taxes and receive the majority of the benefits that are coming out of taxes from the rest of us who do pay taxes, but I digress.

The entirety of this argument is based upon a misunderstanding of taxes and tax rates. Perhaps Warren Buffett doesn't pay his full tax rate, but that's because he's pretty good at using the legal system (note: they aren't "loopholes" they are legal deductions and tax shelters) to reduce his tax payments. For the record, nothing is stopping Buffett from sending more tax money. I know I said it about a month ago, but Mr. Buffett if you want to send more money to the government, the address is:

Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

 This entire argument is centered around a fundamental misunderstanding of taxation. First off, Buffet's annual salary is currently $100,000 (2), well below Obama's $250,000 per year "millionaire." (Apparently the President has STILL not figured out how much money is $1,000,000 and whether or not $250,000 = $1,000,000. For those of you from Palm Beach County, FL, $250,000 doesn't equal $1,000,000.) Secondly, there is a major difference between income taxes and capital gains taxes. 

Income taxes are paid on salary. Salary is guaranteed to an employee from their employer as payment for services rendered. The employee contracts with the employer to provide labor in exchange for those wages. The employer then fulfills their end of the contract with wages. Unless you work on pure commission, your salary is guaranteed. There is no risk. If you are in the top tax bracket, your tax rate on income is 35%.

Now we come to Capital Gains taxes. Now there are huge differences between Capital Gains taxes and Income Taxes. One, there is no guarantee of a Capital Gains situation (that's making money on an investment, for those of you from Palm Beach.) There is also a huge chance that you lose that money. With income there is no chance of losing your money, because a) you didn't invest your money and b) you are guaranteed your paycheck, or else your employer is in breach of contract. Two, and more importantly, that money was already taxed once! It was either taxed as income at up to 35%, or it was taxed as inheritance at either 50%, or at 35%, unless it was inherited in the brief period of time when the rate was 0%, and even if it was, that money was taxed as the deceased's income or capital gains! So any money in a capital gains situation was taxed previously, and then it's taxed again at an additional 15% for being successfully invested.

In conclusion: First of all, very few CEOs are not paying less taxes than their secretary, unless their secretary's salary is more than their own (which is highly possible, since many executive assistants of Fortune 500 CEOs make more than $100,000 per year). Secondly, Capital Gains taxes are different than Income Taxes. Please write this down. Thirdly, even if Buffet does pay less than his secretary, he is the exception, not the rule. And finally, once again, if Mr. Buffet feels he isn't taxed enough that address to send the amount he feels he has under paid is:

Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

---------------------------------------------------------------------------------------------

(1) FACT CHECK: Are Rich Taxed Less Than Secretaries?

(2) Wikipedia: Warren Buffett