Tax lies? 3 myths you need to know

June 10, 2011

Although Mark Twain once said there are “lies, damn lies and statistics,” when it comes to U.S. taxes, statistics can tell the truth.

It’s been a decade since the first round of Bush-era tax cuts and it’s clear that — even in the wake of a new round of cuts late last year — employment growth is still dismal. Lost tax revenues trickled up to those who needed it the least, the deficit ballooned even more and the housing market is still punch drunk.

As Congress wrangles over whom to tax — and whom to untax — there are an abundant number of myths floating around. Here are my top three:

The Mortgage Interest Deduction promotes homeownership
It may, but it largely benefits affluent taxpayers and does little to reduce housing costs. Since most taxpayers don’t even itemize, the majority don’t even get this break. According to the Tax Policy Center, this break only saved the typical middle-income household about $215 on average last year, or the cost of a modest smart phone.

Next year, the mortgage deduction will cost the federal Treasury $131 billion, making it one of the largest tax “expenditures.”

Many economists have argued that the mortgage break inflates the cost of homes. Canada, which has roughly the same homeownership rate as the U.S. — and much higher taxes and a healthier economy — doesn’t have a mortgage deduction. The U.S. write-off can be replaced with a credit that anyone could receive or eliminated, especially on home-equity loan interest and second homes.

Lower tax rates create jobs
I have never seen any independent (of partisan think tanks, that is) evidence that this has ever been true. Congress bestowed estate-tax and income-tax breaks on the wealthiest families late last year (and throughout the Bush II years); the unemployment rate has barely budged.

Over time, the average income tax paid by the top one percent of taxpayers dropped from 34.5 percent in 1980 to 23.27 percent in 2008. Meager cuts to the middle class and low-income earners who are largely subject to payroll taxes barely benefited from these reductions.

Embedded in those numbers is the fact that the highest income brackets invested most of their wealth in real estate, stocks and other vehicles subject to the bargain 15-percent dividends and capital gains rate — but imposed only if they sell those investments in taxable accounts. They pay no taxes if they hold and don’t receive distributions.

Do lower taxes on capital gains create jobs? Since structural employment has been on a downward spiral since 2000 — the jobs lost to globalization have not been replaced — the answer is probably no.

It can be argued that in the 1990s and 1950s — when income tax rates were higher — the economy was much healthier. During the Clinton years, growth averaged 4 percent versus 2.8 percent during the Reagan-Bush years. Some 22.5 million jobs were created during the Clinton terms (a record for any presidency) — despite higher tax rates relative to the George W. Bush administration.

Unemployment was four percent when Clinton left office in 2000, versus more than nine percent today. Moreover, “between the end of the 2001 recession and the peak of that expansion (ending in 2007), the U.S. economy experienced the worst economic expansion of the post-war era,” according to the Economic Policy Institute, a think tank affiliated with organized labor. Tax cuts don’t create jobs. History is our guide.

State taxes are too high
I won’t argue that states can’t cut unnecessary spending or rein in pension benefits, or that coastal state residents don’t have a higher tax burden than North Dakota or Nevada. A much less-discussed problem looms, though:  there are far too many states that have regressive tax codes requiring working people to pay as much or more than wealthy people do.

The group United for a Fair Economy, which represents a group of wealthy taxpayers, found that if you increased tax rates on the rich, states could raise nearly half a trillion dollars. That could save innumerable cuts in human services and education.

I won’t stop there. I’d also pare the huge budgets for the defense department  — particularly the Iraq and Afghanistan conflicts — and subsidies for corporations.

Simple math does work, especially when you consider that the subtraction of trickle-up economics still doesn’t add anything to a crippled economy.

22 comments

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Lots o good sense here, by I don’t see a byline.

Posted by RichardNYC | Report as abusive

It is the one major discussion not being had almost anywhere in the media.

You hear the Right screaming about Obama’s high taxes on business and individuals, but the opposite is true.

Taxes have remained low, in spite of two wars and a record expansion of governemt under Bush. And the tax schedule on business has been nearly the same since Reagan was in office.

Deficits don’t matter according to Dick Cheney, but try telling that to the rest of the world when we stop paying our debts.

Time to raise taxes on those who can most afford them…NOW.

Posted by NobleKin | Report as abusive

I am not saying you are wrong, but your methodology of comparing Bush to Clinton would not hold up in a freshman level Chem or Physics course. You need a control and clearly, Bush and Clinton had to different economic circumstances around them, that were out of there control. Clinton did not create the dot.com boom, which largely led to the economic expansion and job creation. The economy. That ended around 2001 when the dot.com bubble burst. Nothing to do with Clinton or Bush. What it did show was that when you have *businesses* creating jobs, the economy flourishes. Bush had to deal with 9/11 as well. Argue as you may about mistakes in Iraq or Afghanistan, but the fight against terrorism, the world economy having troubles, and other things led to a shrinking economy.
Again, your myths might be correct but your arguments simply do not hold water. To claim taxation, alone, can have a direct tie to the economy without the inordinate amount of other complex factors included, is simply wrong.
If I had handed my thesis in with that type of argument process, I would have been laughed out of the room as I tried to defend it.
And I’m sorry, but comparing Canada (33 million people) to the USA (375 million or so and a target to terrorists and the chief supplier of money to the UN) is just annoying to me. But I’ve written enough …

Posted by Vortmatts | Report as abusive

That’s odd. I pay about $25,000 in mortgage interest, which I deduct, which saves me about $7,000 in the tax bracket I’m in. Are they referring to homeowners in states where the average home is worth $50K? In my neck of the woods the average home is worth $400K (in a modest working class neighborhood).

Posted by DisgustedReader | Report as abusive

So governments destroy wealth? Government policies create the environment necessary to create wealth FAIRLY (joke all you want about the EPA, OSHA or FDA…but where would we be without them?) NASA spending lead to the semiconductor and solar cell; DARPA created the Internet; the Federal Interstate system and FAA make transportation affordable. Development of nuclear power and regulation. Federal court system. FEMA. But I guess these are services that some good natured wealth creating corporation would do even more efficiently. Now adventures in Iraq, that’s wealth creation…if you are a Halliburton shareholder. Why is it that more wealth has been created in the last 75 years (with larger government spending) than in the last 3,000 (less government spending)?

Where would Las Vegas be without Hoover Dam? The only man-made objects visible from space (which we got to by government spending) were built by government spending? Those are some really big ‘nothings’ produced by reallocating tax dollars, which certainly have lead to the creation of wealth.

Stop paying the Army Corps of Engineers to sandbag the Mississippi and watch the real destruction of wealth begin.

Posted by Mike_s1 | Report as abusive

John, what changed in the last 20 years is the competition from China, South Korea etc… where corporate taxes r much lower and wages r much lower.

So instead of protecting us from from unfair competition where labor laws, environmental laws and taxes are much more advantageous, u r just proposing to tax us more, pretending it will not make a difference?

Sure it will!

Perhaps not for u and me that are above 50, but for the new generations it will be of a great detrimental effect.

Improve efficiency as a country, regain the lost production jobs via better infrastructure and supporting taxation, invest more in the US instead of spending $ abroad and u will see our economy finally prosper one more time.

Posted by robb1 | Report as abusive

Good article, well written…. A well informed and educated populace is a scary thing to Republicans (and Tea Party folks), so I’m confident they’ll find your article offensive…

Posted by edgyinchina | Report as abusive

edgyinchina,

OH Contre mon ami!!!

It is the Democrats who love “IGNORANT” American voters! How can anybody say with a “straight-face” that printing and spending more than “in-coming” revenues is actually GOOD for our “ECONOMY”???

Our government is our largest EMPLOYER!

Does’nt that SCARE YOU?

Posted by Middleclassman | Report as abusive

[…] Tax lies? 3 myths you need to know – Reuters Blogs (blog) Posted by   Easy AdSense by Unreal […]

Posted by A Collection of Myths » Post Topic » Tax lies? 3 myths you need to know – Reuters Blogs (blog) | Report as abusive

This thought piece certainly is an argument for comprehensive tax reform. I’d like to see a byline, too.

Posted by Sarasota | Report as abusive

middleclassman, no the GOP scares me.

Posted by seattlesh | Report as abusive

Taxes kill jobs and rob people of their ability to improve their lives – no poor person ever wrote out a paycheck. Hoping the author of this article goes back to whatever socialist country he comes from. You cannot give to one person what you do not take from another………….. (Thomas Jefferson)

Posted by iowafarm | Report as abusive

@Middleclassman: nope. Some of the best service work I did was in a public job. It was also the fairest employer I’d ever had. My bosses treated me with dignity, respected and listened to my suggestions, and I got regular pay raises for more performance. Paperwork was a bit heavy, but that respect isn’t anything I’ve seen private-side. I’d rather work for a democratic institution than one run like a feudal kingdom. Also, every soldier and intel-op is a public employee – are they exempt, enshrined in some hallowed sense of war-lust, or should we privatize the military-intelligence complex by your reasoning?

What edgyinchina was saying is that one can only force expenditures down so far without raising revenue – any public services and basic necessities collapse. Don’t say privatize it all when there’s no evidence to suggest that private companies have handled public utilities responsibly – name one place that hasn’t privatized its water and had a rate spike and resultant civil unrest. We need to raise revenue and stop expenditures that really don’t get us anything – like an eternal crawling land war about Afro-Eurasia, through intelligent taxation. The middle and lower classes pay disproportionate amounts of income on non-income, non-service taxation compared to the wealthy, and the wealthy already pay next to nothing in income taxes anyway because they seem to not be beholden to law.

Just remember, it was Reagan that set the precedent for massive overspending relative to GDP, and Bush Jr that thought it was a good idea to slash revenue everywhere but keep spending to current levels, and it was under Clinton that we eliminated our debt. Every time progressive taxation has been used in the USA the economy rebounds – that’s what the article is saying.

Posted by John_the_Lad | Report as abusive

“COSTS the treasury”?? NOTHING “costs” the Treasury – EVER. This is OUR MONEY that comes beck in the form of refunds and credits. THIS IS NOT COSTING THE TREASURY.

Posted by stacylaw | Report as abusive

Taxing the rich doesn’t start at $250,000 as Obama and others are saying. $250K in income is usually 2 income earners in one family where one income pays for the kids education, the other maintains a middle class life style.

Your article is one of the first to mention the state and local tax burden on the middle class. If I include all my federal, state, local, sales, real estate, and various excise taxes (telephone, utilities, etc.) I pay about 55% of my gross income in taxes (I make a low six figure income and live in a major metro area). On top of that I must pay about $4000 to $6000 for health insurance and copays. Though I don’t have children in school, many of my colleagues are spending $30K a year to educate their kids.

Yet in the US tax code, you can have $20 million in dividends and capital gains and pay only 15% in taxes. Option traders can get away with 10% in taxes. Investors in real estate can defer taxes entirely just by buying another piece of property!! Many of the largest US corporations have an effective federal tax rate under 5%.

So, the US has probably the most regressive tax system in the developed world where the middle class family is paying tax rates 2x to 3x what the upper 1% pay.

Posted by Acetracy | Report as abusive

[…] 3 myths you need to know about taxes John Wasik […]

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Iowafarm says “no poor person ever wrote a paycheck.” How brainwashed and ignorant can you be hayseed? Demand and purchasing creates jobs, not the wealth of the employer. As a businessman, I hired to meet demand. Republican idiots don’t know that on a multiplier basis, $ to the rich have a multiplier of under .6 while unemploymyment benefits have a multiplier effect of 1.6X?
Reagan’s trickle down theory sure worked when there were the Tax Cuts for the rich in 2001/2003? Why are you not embarrassed to spread your “soundbite lies”.
What we need is a Jacobin Party who understands the value of Dr. Guillotines invention and has the courage or desperation to use it. Hold on to your head Iowafarm, stop listening to liars ad losers like Palin and Bachman and the Tea Party innocent, but economically ignorant fools like yourself.

Posted by dc2ndtest | Report as abusive

I agree with the three. 100% Take a look at were Texas stands in education. Take a look were it stands in standerd of living. Now take take a look what they pay there teachers. In fact take a look at what there over all wage and benefit level for all working class people. Men and women. For a state that has the most millionaries it should be ashamed. But you know it is a state that is still fighting the Civil War. Like a lot of those south states. You here it often we want to opt out of this or that. Even droping out of the Union. brainless bunch!!

Posted by touch128 | Report as abusive

The tax code is a travesty. Any discussion about marginal issues like mortgage-interest deductions is wholly irrelevant while the bulk of the code is a cesspool. Time for a wholesale simplification of the tax code, i.e. a flat tax. Replace thousands of pages with this tax code: (income-deductible)*tax rate = tax owed.
Yes, it can be that simple. Yes, most CPAs will have to find another profession.

Posted by mheld45 | Report as abusive

Mr. Wasik, the Treasury is essentially the checking account of the US gov’t. Hence, allowing Americans to keep more of their money cannot be described as “costing” the Treasury anything. That’s like when Easterbrook describes tax cuts as “giveaways”. The only party giving anything is the American people.

Posted by mheld45 | Report as abusive

The repeatedly stated ratio of government vs. factory jobs says a lot more about corporations offshoring every chance they get than it does about any government expansion. In many cases government jobs have actually decreased or rely on private companies. In other cases they had to have headcount increased to deal with the additonal workload of unemployment and social nets triggered by the mass layoffs of corporations who’d rather pay out huge executive bonuses and additonal offshoring than invest in any of their domestic operations.

Posted by mikemm | Report as abusive

For those of you looking for a byline, and somehow missing the giant picture of John Wasik on the upper right, try this link: http://blogs.reuters.com/john-wasik/

Posted by jweroy | Report as abusive

The problem with this is that it is presented like an article on basic tax information (3 tax myths) but instead it is an opinion piece about taxing aligned with a specific ideology (OBAMA liberalism). Poor placement by Reuters. I am disappointed in teh organization on this one.

Posted by TWE49 | Report as abusive

I sat down to refute the author’s Swiss cheese logic and found “Vortmatts” had already done that quite convincingly. Well done!

Posted by Realist99 | Report as abusive

[…] Internal Revenue Service’s Offers in Compromise program — in which taxpayers negotiate down the tax debts that they owe — has a long and tumultuous history. Critics have long complained about the […]

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