A Voice in the Wilderness In Defense of "Mere Conservatism"

The Plumb Line: Taxes and the American Way

By: Caitlin Doemner, Contributor

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

After being hounded by the media for his “low” tax rate (he only paid $1.94 Million in taxes because he had given away a third of his income to charity), Romney and the President went back and forth on tax policy throughout the debate last night. The main thrust of Romney’s tax plan focuses on lowering the tax rate, but he expects to increase revenue in two ways: first, by closing loopholes and deductions, and second, by allowing the lower tax rate to encourage business growth in the United States. Obama’s rebuttal was “there aren’t enough loopholes”.

For those of you unfamiliar with the tax code, think of it a 5800 page block of Swiss cheese. Only 30 pages focus on raising taxes -- the remaining 5,770 pages are devoted to REDUCING your taxes.* So when Romney says he can find $5 trillion worth of deductions in the tax code, he probably isn’t joking. In fact, looking at his 14.1% effective tax rate, I’d say he’s personally very familiar with them.

But what most people don’t understand -- and the problem Romney’s going to face in Congress -- is that our tax code is the culmination of decades of well-meaning politicians desperately trying to incentivize “good behavior” among its citizens. For example, the government wants to encourage home ownership, so you’re allowed a deduction for the interest you pay on your mortgage. There are also “credits” (N.B. “deductions” reduce your taxes, but become null when your burden reaches zero; “credits” are monies given to you by the government regardless of your tax burden). When the government wanted to encourage us to have children, it started paying us a $1,000 credit for each dependent we had.

The easiest way for the government to empower the private sector (something I’m a fan of) is by offering tax deductions to citizens for taking positive action. The two biggest areas of the economy where the government wants to encourage private growth include job-creation and housing development. Thus, we see huge deductions available for real estate investors and business owners.

As Romney pointed out, the biggest business owners get the biggest deductions and the small businesses are left paying a ridiculously high rate. In fact, sole proprietorships have it the worst because they get hit with a 15% “self-employment tax” -- payroll and welfare taxes that are normally split with one’s employer. If Romney can actually reduce taxes to 25% for those small businesses and make up the difference from their larger corporate brothers, he has my support.

Caitlin Cogan Doemner, MBA, is the CEO for Lifestyle Livelihood, LLC which focuses on building wealth through business development.

-----------------
(*For more on this topic, check out Tom Wheelwright’s new book “Tax Free Wealth” published by BZKPress.)