Keeping Up With The Jones’s

July 20, 2011 § Leave a comment

After I posted my angry reaction to Cornyn’s and Diamond’s dishonest claims about the alleged inequity of our federal tax system, I had a moment of self-doubt:  Suppose I was factually wrong? ” After all, Bob (I lectured myself) it wouldn’t be the first time you got angry and popped off about something you knew little about and lived to regret it.   And you get angry a lot.”

So, belatedly, I called a friend of mine, a CPA who has been helping me with tax issues for twenty or thirty years.  I sent him a copy of my blog post and asked for his assessment.  He is about my age  and is not given to emotional outbursts.  He said (and I’m paraphrasing) “I read your blog.  You were venting, but what you wrote was accurate.”

He then surprised me.  He said, “If you really want to bring your blood to a boil, just get on my website and do a couple of simple calculations.”

I invite the readers of this blog to do what he suggested:

Go to  Click on “Financial Tools”.  On the next screen, click on “tax calculators”.  Then click on “1040 calculator”.  Use the drop-down menu to change the “filing status” to “married filing jointly”.  Click on “exemptions” and put check marks in “personal exemption” and “spouse exemption”.  Click on “income” and delete the default “50,000” from the “wages” blank and put 75,000 in both  the “ordinary dividends” and “qualified dividends” blanks.  Click on “deductions” and just click on “okay” (claiming the standard deduction).  You will learn that the income tax liability is zero, nada, zippo, hooray!.   The hypothetical Mr. & Ms. Jones, who spent a year clipping coupons that netted them a $75,000 lifestyle, made no contribution to their federal government.

Then make one change.  Leave everything else as it is, but delete the two entries in the “income” screen and put $75,000 in the “wages, salaries, tips, etc.” blank.

You will learn that it’s really hard to keep up with the coupon-clipping Jones’s because, if you work for a living, you owe your government $6,808.  Oh, and by the way, that’s in addition to the payroll taxes (FICA) that have been withheld from your paychecks.

How’s your blood pressure now?

When I did this exercise I was truly baffled.  I thought, “How could any group of rational people design a system so crazy?  Even politicians have some vestigial brains.  How can this be?”  I fired up my copy of TurboTax to check my friend’s calculator and found it to be absolutely accurate.

After calming down, I came up with a possible rationalization:  The dividends result from stocks whose purchase price was taxed when the purchase money was acquired, so taxing the dividends might amount to double taxation, at least to some extent.  That theory does not apply, however, if the stock is held by inheritors of the stock because, not only did the inheritor not purchase the stock, but also the stock acquires a new “basis” when it is inherited.  So, the heir of the original purchaser not only gets a freebie on income tax while he lives on the dividends, he pays a much reduced tax when and if he gets really greedy and decides to sell the stocks.

And, if the inheritance tax is repealed, he really makes out like a burglar.  Even if it is not repealed, the exemption is so high that it is a problem to him only if he inherits more than a million dollars (and rising).

Nope.  There is no way I can think of to justify this.  The mystery to me is that no one is talking about it.   The only noise out there are  jackasses braying about “50% of federal taxpayers pay no taxes.”   A lie.

Go figure.

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