Ending Tax Breaks for Super-rich Can Make Tax Day Fun for Rest of Us

April 10, 2014

Dean Baker
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Tax day is always a busy day for the tax hysteric crowd: the folks who think it is outrageous that we tax people to pay for things like Social Security, Medicare, Medicaid and infrastructure.

Of course we also tax people to pay for the military budget and programs like food stamps, which amounts to 2 percent of federal spending; Temporary Aid for Needy Families, 0.6 percent of spending; and foreign aid, 0.4 percent of federal spending.

Anyhow, since these folks will already be working themselves into frenzies over taxes, let’s throw a few more items into the mix to heighten the excitement.

The first item would be a sales tax on Wall Street financial transactions like transfers of stocks, bonds, and credit default swaps. Most of us have to pay a sales tax when we buy clothes and food, but the Wall Street crew insists that even a tax of just a few hundredths of a percent would bring our financial markets to a halt. They conveniently ignore the fact that the London stock exchange has had a tax of 0.5 percent for more than three centuries and is still one of the largest stock markets in the world.

The Wall Street crew carries so much power with the Washington politicians that they have largely kept financial transactions taxes off the table.

In fact, they have assigned Treasury Secretary Jack Lew the job of lobbying the European Union to keep it from imposing a financial transactions tax on its banks. The Joint Economic Committee projected that a tax of just 0.03 percent could raise $400 billion over a decade, but the politicians are not going to buck Wall Street.

In the same vein, we can look to crack down on the private equity (PE) folks making themselves billionaires by cleverly gaming the tax system.

There are two big stories here. The PE folks get to have much of their income taxed at the lower capital gains rate of 20 percent rather than the 39.6 percent income tax rate they would pay without their political connections.

The other obvious handout to the PE crew is the tax deduction for corporate interest. One of their standard tricks is to buy out a family owned company and borrow every cent they can against its assets. Since the interest on the debt is deductible from their taxes this will make the firm far more profitable to it PE owners.

Heavy leverage imposes large risks to the firms’ other stakeholders like workers and suppliers. It also does nothing to make the economy more efficient, but by allowing this deduction it can make private equity partners like Mitt Romney very rich. If we limited the deductibility of interest we could take away this little trick.

Finally we can limit the mortgage interest deduction. There is an argument for using the tax code to provide an incentive for people to become homeowners. There is no argument for using tax dollars to subsidize the purchase of a larger home for rich people.

If we capped the amount of interest that could be deducted at $400,000, we would still be helping moderate and middle income people while giving away less money to the wealthy. We could also make it a credit so that everyone gets 15 percent or 20 percent instead of the current system under which the deduction is worth more to people in higher income brackets.

So there you have it, four simple tax changes that could raise lots of money by taking away subsidies for rich people. They all make good economic sense, but they would take Washington away from its central purpose: using the government to take money from the rest of us and give it to the rich.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

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