A friend recently reminded me that I predicted that this year’s election would finally hinge on taxes. Well tax issues and the national debt are squeezing out the issue that should be front and center, jobs. And in the heated exchange of insults, lies and accusations one hears about the “rich” using tax “loopholes” to cheat the taxman. But just who uses these “loopholes” and what do the rich actually pay?
As I reported some time ago the top 1% receive 20% of all taxable income and pay 40% of the total Federal income tax take. The top 10% receive 46% of all income and pay 70% of the tax take. And the top 50% receive 87% of the income and pay 100% of the tax take since the bottom 50% pay no Federal income taxes at all. It would be hard to construct a more progressive or equitable tax system. Indeed the US Federal income tax is rated the most “progressive” tax by the OECD. And compared to Western Europe the US derives a far greater share of its tax take from income taxes than does any EU member.
But what about those “loopholes” and “cheats?” Surprise, surprise the most commonly used “loopholes” are those used by our “middle-class.” And they have to do with property as an investment.
We all know that the Feds encourage home buying through some special “breaks” or “incentives.” First, buying a home as an investment is the only investment in which “middle-class” investors are allowed to use “leverage.” They are not allowed to buy stocks and bonds on “margin” but can buy a house with as little as 10% or even zero down payment.
Second, until 1986 one could deduct from taxable income interest paid on any and all loans. this “loophole” was eliminated for all but interest paid on mortgages. Enter the home equity loan which became the way to borrow to buy anything and still enjoy a tax deduction for interest paid. The “rich” don’t use this “loophole” since they pay cash for their homes. But the “middle-class” sure do.
Third, and here is the granddaddy of all “loopholes,” the sale of your home is not subject to capital gains taxes. Yes, yes there is a limit, $500,000 for a married couple and you can only take the deduction once every three years. So who does this appeal to? Certainly not the “rich” who measure their wealth in millions, not thousands. No, it is aimed squarely at the “middle-class.”
As for the most popular “loophole” look to buying and renting out a home. Properly constructed a rental property gains a rent that covers all costs except for depreciation of the property which is tax deductible. But the key here is that, unlike all other costs involved in the rental that are deductible, depreciation incurs no out-of-pocket expense. You do not have to pay anything to get this deduction since it is a calculated value based on the life expectancy of the property.
And who uses this “loophole” most, you guessed it, the “middle class.”