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Lincoln Institute


The Unfair Tax Code

by Frank Ryan
 

The American media has successfully swallowed a tall tale and we are being force fed the catch! The fantasy surrounds the debate about the unfair tax code. Unfortunately, the questions being asked candidates demonstrate and the national debate centers on two absolutely flawed assumptions.

The first assumption is that to cure the wealth gap between the richest and poorest of society, increasing income taxes will solve the problem.

The second assumption is that the deficit can only be cured by raising taxes rather than cutting spending.

Both Democrats and Republicans in office have an incentive to keep the debate going about income inequality as being the culprit. While the public at large seems to relish getting into the debate of raising or not raising taxes on income, the very wealthiest supporters of both parties know that by keeping us distracted about income taxes their wealth will remain intact.

Increasing taxes on income is a flawed solution because by doing so it is almost impossible for average Americans to realize the American dream. The progressive tax rates keep Americans from accumulating significant wealth and keep the poorest of poor stuck in a perpetual cycle of poverty and dependency.

Taxing income only impacts those with incomes. While that may sound intuitively obvious to the most casual observer, the media has allowed the national debate to focus on that very comment rather than the cause of the problem.

In examining the United States tax code, the real inequality of the tax code becomes readily apparent but seldom is discussed because it is, quite frankly, complicated. It is designed to be complicated so that it cannot be argued against.

Warren Buffett often complains about the United States tax code and states that he pays a lower tax rate than his secretary. He does. What Warren Buffett does is to take advantage of the United States tax code. Quite simply, income is taxed differently depending upon how it is "earned".

For example, assume Warren Buffett invested $100 in Berkshire Hathaway 30 years ago and assume it is now worth $1 million. If he sold his $1 Million stock, the taxes on the almost $1 million gain would be limited significantly compared to income earned as an employee because of the tax code.

In and of itself that may be good for society since jobs would be created by Berkshire Hathaway. Unfortunately, though the story does not stop there. The next examples explain the "game".

Using the same example as before, if Buffett donated $300,000 of his Berkshire Hathaway stock to charity, he would receive a tax deduction for $300,000 yet never pay tax on the gain itself which saves him substantial taxes. In other words he gets a tax deduction of $300,000 and never has to pay any taxes on his almost $300,000 gain in the investment.

Going a step farther, with that $300,000 charitable deduction he would be able to sell the remaining $700,000 in stock and use the $300,000 deduction to offset a major part of his gain on the other $700,000 with taxpayers footing the bill.

But the story does not stop there. With that $300,000 contribution, Mr. Buffett is able to put that in a charity he controls and then employ family members and friends in that charity while still controlling the $300,000 that he "donated".

By keeping control of the charity, Buffett continues to wield considerable power because he controls funds that other taxpayers (or future generations) have subsidized while at the same time providing employment opportunities for family and friends.

In one final sleight of hand, should Buffett leave $1 million of his stock at his death to his family, the family receives a new "basis" in the stock of $1 million and never has to pay any tax at all on the increase in value from $100 to $1 million. With exceptional estate planning, you can add multiple zeros to any one of these numbers with even more significant tax savings for the super wealthy.

Liberals and conservatives, better yet anyone of substantial wealth, uses these tax shelters, just ask Donald Trump. If this very wealthy population can keep us distracted on income inequality they never have to be concerned about their ruse been uncovered. One way to keep us distracted is to make the tax code so complicated that no one can understand the discussion. Candidly, it is simpler for the media to describe the argument as "taxing income".

I am a free market economist. I firmly believe in limited government. What I object to is unrestrained public sector spending paid for by people merely trying to make ends meet.

Quite frankly, I am tired of subsidizing Warren Buffett, Bill Gates, and the Koch Brothers and then have them lecture to me about how much they do for our society.

To truly put an end to this charade, our tax code must be revised and governmental spending must be sharply reduced.

On the tax code side, all that needs to be done is to limit charitable deductions on donated stock to the cost basis of the person who makes the donation. In the Buffett example, his tax deduction would have been $30 not $300,000. Additionally, charitable contributions should be deductible only when "control" of the donation has been completely surrendered to an independent charity.

Finally in the tax code, an estate should be required to keep the same cost basis as the person the property was inherited from.

On the spending side, all that Congress needs to do is to follow Sections 8 and 9 of the United States Constitution which outlined the responsibilities and limitations of government.

It is all quite simple if we merely understand the problem and solve it.

Col. Frank Ryan, CPA, USMCR (Ret) and served in Iraq and briefly in Afghanistan and specializes in corporate restructuring and lectures on ethics for the state CPA societies. He has served on numerous boards of publicly traded and non-profit organizations. He can be reached at FRYAN1951@aol.com and twitter at @fryan1951.


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