Don’t Touch My Loophole!

I predict there will still be 172 tax-loopholes (individual and corporate) valued at over $1.1 trillion per year in 2013, regardless of what you hear to the contrary. I say this because if you lower the tax-rate by the exact same amount as you eliminate tax-loopholes, the people receiving the tax-loopholes are going to fight like hell!

A revenue neutral tax-reform plan is not a reform plan at all. It is entropy. It is nothing; not dramatic, visionary or tough. No real measurable change at all. Why bother?

Listen closely, I want the lower tax RATE because I want to pay LOWER TAXES. I also want to keep my most valuable tax-loopholes because I want to pay LOWER TAXES. This is all very easy to understand and it is for this reason I say with confidence, there will be a lower tax rate and there will still be 172 tax-loopholes. Guys like me are going to fight to get our tax-cuts and keep our loopholes; otherwise why in the heck would any high-earner be supporting the one-guy that is promising the tax-cuts and not supporting the other-guy promising to increase taxes on the upper-crust. We’re not that stupid.

Are the wealthy getting a tax cut or not? Of course, they are. It Is a silly discussion to deny the reality of a purposeful plan and we all know what the real deal is. The core principle of the supply-side mentality is that by lowering taxes – not just rates but taxes – on those most capable of investing their gains, those “makers” will drive explosive national economic growth and economic opportunity for everyone. There are many in a specific political party that accept the supply-side economic premise as an article of faith. If you accept this belief as truth then you know for an absolute fact that any new tax cut in rates can not and will not be offset by an equivalent cut in tax-exemptions or tax-loopholes. No-way, no-how that passes the House.

There is no possible way to get the economic boom that supply-siders faithfully believe would be realized by cutting tax rates, if you then turned around and gave all of the savings back to the greedy-government monstrosity by losing all of your tax-avoidance loopholes. What kind of stupid person do you think we are?

Many of those maximizing the use of tax-loopholes are saying: “Go get your budget savings somewhere else. Leave the upper-crust out of it!”

Cutting taxes at the same value as you cut loopholes so the net effect would be ZERO or “revenue-neutral” would be like telling your therapist you saw Bigfoot Riding A Unicorn! Your therapist would then say: “You’re Crazy!

When you shift your car into neutral, you don’t actually go anywhere. Neutral does not produce growth.

Therefore I believe it is more accurate to say that only some loopholes will be modified but very few eliminated. Only a person that has extensively used all of the available tax-loopholes and tax-avoidance strategies understands just how easy they are to use and how addictive they are. Tax-avoidance for the upper-crust is like crack – once you take your first hit, you will rob a bank to make sure you can get another hit. Unfortunately, guys like Samford, Ken Lay, and Bernie Madoff basically robbed the proverbial bank themselves. Easy money is a drug.

So I see some future tax-code reform but the devil is in the details. It might be respectful to the American people to show them the actual details of the reform plan now and not later so they can make an informed decision. I thought we did not trust government or politicians that say: “trust me”.

You may have heard the tax code is going to be reformed in 2013. This may or may me be very good news, especially for people that have made tax-avoidance an Olympic sport. Finding and using every conceivable loophole is an exhausting exercise. You are forced to constantly bend your tax returns to gymnastic levels just because it feels almost un-American to pay one dollar more in taxes than you have to. Frankly, if America is stupid enough to allow the ever-increasing tax-avoidance strategies, folks that can … will take every advantage of it.

Therefore, any reform plan must be good for upper income folks for it to pass the House.

Honestly, it would feel much better if every American could access the same tax-avoidance strategies. Don’t get me wrong, since we live in the land-of-the-free and in the most successful capitalistic economy in the world, it is clearly possible for everyone to achieve great riches. Every American has the opportunity to become a millionaire and even a billionaire. There are unlimited ways to achieve material riches in America; some positive and others negative.

Examples include :
1). Hard Work
2). Book-Smarts
3). Street-Smarts
4). Devious criminal intent
5). A unique skill-set
6). Great ideas
7). A willingness to take risks
8). A wealthy family
9). Unfair Competition
10). Monopolization
11). Lying & Cheating
12). Wealthy in love, family, health, and respect
13). And just pain-old good luck

What is interesting is how free Americans are to choose their path to success.

What is more interesting is how freely we use our National tax policies to elevate some of our successes. We do this through a process of tax-loopholes and tax-exemptions. There are over 172 possible tax-exemptions valued at over $1.1 trillion each year -right now. We use these opportunities to legally and proudly avoid taxation whenever possible. There is nothing wrong with doing what is legally allowable and many take full advantage of every conceivable tax-avoidance opportunity.

The problem is this: although it is possible for every American to become the kind of millionaire that could take advantage of every single loophole, unfortunately only 2% ever reach the level of success that will allow them to ever have access to these advantages.

Here are a few examples of tax-exemptions and credits 98% of the American people did not have an opportunity to take advantage of:

A). Life Insurance coverage: Your company can pay 100% of your premium and name your company as beneficiary or your family. You pay nothing for the policy yet your family or your company can benefit from your passing. Actually, in a truly odd-twist, you will benefit from your death. The policy can then earn “accumulated cash-value”. As time passes, the policy could be transferred into your name. You may have to pay some taxes on a portion of the original premium paid but probably not at the 35% individual tax rate. Later, you can pull out the cash value as a non-interest loan and pay no taxes. Upon your death, the loan will be deducted from the value of your death benefit. Not a bad deal.

B). Corporation: As an S Corporation, you do not have to pay yourself a salary. You only pay a single tax rate on your earnings, not both the Corporate tax rate and an individual tax rate. Wages that are paid are normally taxed at a 35% tax rate. However, as an owner that chooses not to pay yourself a wage, you can pay yourself through “Dividend Disbursements”. These disbursements are normally taken quarterly based on accumulated profits forecasts.

Here is how you might benefit from Dividend disbursements versus salary. If your business looks like it will earn $1 Million dollars before your fiscal year-end, you might take $500,000 in Dividend Disbursements early. By doing this you avoid paying 35% of $500,000 which would be $$175,000 and instead pay a dividend rate of 15% of $500,000 which would be $45,000. You just realized tax-avoidance of $130,000!

C). This concept works just as well for people that live off the income or interest earned from their investments without having a job that pays them a salary. In this case 100% of their investment income is taxed at 15%. Keep in mind, some people that earn income from investments may have just been fortunate enough to win the lottery, were given stock from a rich relative, or maybe were left a farm or an apartment building that throws off passive revenue from a dearly-departed.

D). As a matter of fact, if you have a job as a Hedge-Fund manager, a special exemption exists in the tax-code that allows you to never be taxed at a rate of more than 15%. Not bad, eh?

E). $500,000 Capital Gains tax-exemption on the sale of a residential property: Not every American owns a home. Many homeowners tend to be at a higher income category. Any home that could have the possibility of $500,000 in gain when you sell it is definitely a home owned by someone in the high 90 percentile. Therefore if you bought your home for $1 Million and the sold it for $1.5 million a few years later, instead of paying taxes n the gain at 35% or $175,000, your gain is considered “Capital Gain”. The tax-rate for Capital Gain is not 35%, it is 15%. This would mean the taxes paid on the $500,000 in gain on your sale would be $45,000 and not $175,000. You would normally have realized a savings of $130,000!

F). Yet this is not the actual tax you would pay with the Capital Gains Tax-Exemption for residential real-estate. With this exemption, the first $500,000 in gain is 100% exempt from all taxation as long you purchase a home that uses the entire $500,000 as a down-payment. This is thereto a tax-avoidance of $175,000 and you get to either buy a bigger house with the extra dough , pocket the savings, invest in something, buy something cool for yourself like a Ferrari, or just laugh at the fact that you got a screaming deal because you could.

These are the simple exceptions available to a special group of tax-payers.

I could go on but I think I have made my point. If you are a person with a job working for someone, the tax-avoidance strategies are not available to you. Even if you are a micro-sized, sole-proprieter business owner with a company that barely earns a profit, these exemptions are not yours to take.

Let me conclude by restating my premise: there will be no tax cut that will be offset by the elimination of enough loopholes to make it revenue-neutral. Not a chance. When you shift your car in neutral, you don’t go anywhere. Neutral can’t produce any growth and everyone knows it.

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This entry was posted in "We-the-People - 1 Business Dude's Perspective on Current Political Theatre, Conventions, employment report, flip flops, Jobs, Politics, Presidential Debates, Republican Convention, tax avoidance, tax loopholes, Tax Rate Discussion, truthfulness, Uncategorized, Vice Presidential Debate and tagged , , , , , , , , , , , , , , , , , , , , , , , . Bookmark the permalink.

One Response to Don’t Touch My Loophole!

  1. btg5885 says:

    Vincent, I think you have summarized what will happen. What needs to happen is a totally different matter. At some point somebody has to pay the fiddler. Thanks, BTG

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