Presently, married taxpayers filing a joint tax return can either itemize their tax deductions or instead get a standard tax deduction, which was $11,600 in 2011 and $11,900 in 2012. So, let's assume it will be $12,200 in 2013, under current law.
Let's compare two households in two completely different economic environments.
First, there is the Caucasian married couple living in
the very wealthy Highland Park, TX, where the husband is an Oil & Gas executive, making total compensation of substantially more than $500,000 per year, and a stay at home wife. This couple also has substantial amounts of dividend income, taxable interest income, non-taxable interest income, and net capital gain income.
And second, there is the financially-strapped Latino couple, living in Miami, FL, where the husband works 1,300 hours per year for minimum wage at Walmart, and also works a like number of total hours in construction as an independent contractor, and makes a total gross income of $25,000 per year. The Latino mother works full time at
Costco and makes $40,000 per year. They have no dividend income, no interest income and no capital gain income.
The Highland Park couple have total itemized tax deductions of $140,000 in 2013. Thus, the tax benefits received in 2013 for these itemized tax deductions are $55,440, or 39.6% marginal income tax rate X $140,000.
The Miami couple, who owns a modest home and also gives a significant amount of their take home pay to the church in weekly cash contributions, have total itemized tax deductions of $13,000 in 2013. Since these total itemized deductions exceed the $12,200 standard deduction, the tax benefits received in 2013 for these itemized tax deductions are $1,950, or 15% marginal income tax rate X $13,000.
The Highland Park couple should be receiving substantially more in total tax benefits from their itemized deductions than the Miami couple since they have substantially more of itemized deductions. That's only fair.
But why in the world would the US Congress give the Highland Park couple a substantially higher income tax benefit rate (39.6%) on their itemized deductions than the income tax benefit rate (15.0%) it gives the Miami couple?
Does it make any sense that the mortgage interest paid, the property tax paid, and the amount given to various charities by the Highland Park have a massively more lucrative 24.6% (39.6% minus 15.0%) income tax benefit rate than the Miami couple gets for its mortgage interest paid, its property tax paid, and the very healthy amount it contributes to the church each week?
There is something way wrong with this.
Now let's compare another two couples on two distinct economic scales, neither of whom own homes, nor do they itemize their deductions.
First, there is the younger Caucasian married couple, with no children, renting a large, luxurious, choice lakefront location in Chicago, where these two University of Chicago MBAs make substantially more than $200,000 each, and thoroughly enjoy traveling the world on exotic vacations, and also frequently shop at expensive boutiques. Their Total Adjusted Gross Income is substantially higher than $500,000.
And
second, there is the financially-strapped African-American, middle-aged married couple, with three children, renting a home in the smaller Chicago suburban city of Robbins, IL where the husband works 1,200 hours per year being paid just above minimum wage
at Walmart's Sams, and also works a like number of total hours each year in construction
as an independent contractor, and makes a total gross income of $30,000
per year. The mother works full-time at the nearest Costco in the Chicago area and makes $40,000 per year. They have no dividend income, no
interest income and no capital gain income.
Both of these families take the standard deduction.
The Chicago jet-setters receive a total tax benefit from this standard deduction in 2013 of $4,831, or 39.6% marginal income tax rate X $12,200 standard deduction.
On the other hand, the Robbins couple receive a total tax benefit from this standard deduction in 2013 of a much lower $1,830, or 15.0% marginal income tax rate X $12,200 standard deduction.
So, why should the wealthy Chicago younger jet-setters receive a tax benefit from their standard deduction which is 2.64 times that of the Robbins middle-aged couple?
There is something clearly wrong here too.
To correct for the above two tax policies legislated by the US Congress, which some could view as racist, and all would view as clearly biased against all lower middle income taxpayers, both white and of color, I
recommend that the US Congress use the same income tax benefit rate for all itemized tax deductions for all taxpayers and also turn the standard deduction into a much fairer standard tax credit, which is the same for all taxpayers.
I would set as a goal a certain amount of Total Tax Revenues you want
raised by the US Government on this issue.....and the Total Amount of
Tax Revenues should be substantial, given the dire financial situation
the country is in.
Then, I would set the same income tax benefit rate for all itemized deductions for all taxpayers, and also convert the standard deduction to a standard tax credit, such that the desired amount of Total Tax Revenues raised
by the US Government on this issue reaches the desired amount of Total Tax Revenues.
The end result would be a substantial reduction of the tax benefit for
itemized deductions for wealthy taxpayers and an increase in the tax benefit for
itemized deductions for many of those in the middle class.
And the end result would also be a reduction in the tax benefit from standard deductions for wealthy taxpayers and an increase in the tax benefit for standard deductions for many in the middle class, and also for many trying to get into the middle class.
And what would also very fairly happen here is that there will be more middle income taxpayers, and particularly more in the bottom half of the middle income taxpayers, who will be getting a higher tax benefit for their itemized deductions under this proposal.
Why?
Well, let's say that the end result is that a 25% income tax benefit rate for itemized tax deductions is that one that yields the overall result you want for Total US Government Revenues raised from this issue.
Under this 25% income tax benefit rate assumption, many married couples, who previously would have taken the standard deduction, will now instead itemize. Assuming they are at a 15% marginal income tax rate, their total tax benefit if they take the standard deduction in 2013 is $1,830, or 15% X the $12,200 standard deduction. Thus they would only need total itemized deductions of roughly at least $7,400, to be better off itemizing than taking the standard deduction.
Given the substantial amount of US Government Tax Revenue raised here by this proposal and also to make it even more equitable, I would take it one step further by also increasing substantially the tax credit equivalent of the present standard deduction. In addition to being fairer to all US citizens, it also would reduce the administration burden caused by the increase in the number of taxpayers itemizing.
So in summary, in addition to wisely reducing the US Debt by a substantial amount,
these recommendations will also reverse US Congressional action, sometimes
done unintentionally, which has pretty much consistently resulted in
legislation that has expanded the substantial wealth gap between the
wealthy and every one else.
If you want to build the US middle class out, the above recommendations are steps that get you there.
