Just in time for tax day, I wrote a post on my Yahoo! Finance contributor page about the biggest tax mistake you can make as an investor. Put simply, the spread between short- and long-term capital gains tax rates is so giant now, you’re better of lighting your wallet on fire than taking profits on investments you’ve held for less than a year. At least all that burning cash might be pretty to look at.
Speaking of taxes and stupid ideas, the New York Times asked a bunch of experts about the worst tax breaks. Their answers should be familiar to regular readers of this blog. I’ve written on just about all of them at some point.
We will be hearing a lot about tax reform in the months ahead, as every presidential candidate will crow about their plans to rein in, reduce, and simplify our country’s insanely complex tax code. The chances that any of these ideas will amount to anything but empty promises on the campaign trail are close to nonexistent, of course, but it can’t hurt to dream, can it?
The simple mantra “lower rates, fewer breaks” should be the holy grail of tax reform. First and foremost, the mortgage interest deduction is awful policy. No other country allows it, and for good reason. It’s a useless sop to the rich. As the NY Times piece points out, the standard deduction exceeds the interest on modest mortgages. That means only about a third of homeowners deduct their mortgage interest, the ones who need a tax break the least. The same goes for deductible retirement plans. They help reduce the tax obligations of the folks who can afford to pay the financial advisors needed to understand and utilize them. The fact that health care premiums are deductible for employers, but are not considered income for employees, is another tax fact that benefits the well off (who have jobs). Lastly, allowing state income taxes to be deductible on federal returns is seriously unfair. Why should taxpayers in zero income tax states like Texas and Florida subsidize the services and state bureaucracy in other states?
Not all taxes are evil. As Supreme Court Justice Oliver Wendell Holmes said, “taxes are what we pay for a civilized society.” Certain services, like national defense, police, education, and transportation infrastructure, are funded with tax dollars. But some taxes make more sense than others. Most economists agree excessive capital gains taxes can discourage investments. And excessive taxes on income hamper consumption. The inheritance tax, from an economic growth perspective, is probably a “good” tax, as recipients of sizable estates are often ill equipped to invest or spend that money wisely. And sin taxes might discourage Americans from damaging behavior (like smoking) that the rest of us wind up paying for.
Possibly the worst tax in American history, from a jobs and growth perspective, is the “territorial” tax on offshore profits earned by American corporations. Only America does this and it’s killing us. When an American company repatriates offshore profits back to the US, the IRS collects taxes calculated as the difference between the offshore tax rate and the current 35 percent corporate tax rate. Not surprisingly, almost all US corporations choose to leave offshore profits offshore. Today almost $2 trillion is parked offshore. That money should be welcomed back into our country, tax-free, so that American companies can build plants and hire workers here. If anything, we should be giving tax incentives to do so.