Wednesday, July 20, 2011

Ransom Rates May Decline, but Deductions will too...

I'm all for rates going down, but when deductions start to selectively disappear I smell trouble.  I haven't seen any detailed releases about the supposed Gang o' Six deal, but don't count on it being a good deal for us super wealthy people who make $250,000 a year and fly corporate jets and own oil companies.  The problem is that they won't do it right.  Maybe it's a start, but count on these growing pains lasting for another decade at least. 

What I think they'll do:  A nominal cut in the marginal tax rates, but still leaving better than 40% of Americans not paying any taxes at all; Striking deductions that apply to us tycoons; Cap other deductions (such as the mortgage interest deduction) to an income level that probably can't afford homes; Leave in tax incentives for having large #'s of children you can't afford to raise.

What I'm Afraid this will mean:  I'm afraid they'll try to label this as a flat tax, much in the way that the aborted fetus of deregulation was labeled "deregulation of the energy markets" in California.  It will not spur growth because it doesn't offset the cuts in deductions with an equal cut in the overall rate of taxation.  People will then point to the "flat tax" as a failure. 

For years now the government has been trying to determine who wins and who loses in the market by granting favorable tax treatment to offset a lack of market interest.  When the market demands energy star appliances, they were built, without government incentives, but when appliance makers lobbied congress, they got tax incentives to help them be more competitive than traditional appliances.  Many of these same companies lobbied again, and now the government is mandating that you use a certain type of lightbulb, but we're talking taxes.  Tax breaks are given to ethanol producers because they make an inferior product and have to be given subsidies to continue to make it.  If ethanol was a product worth producing, their would be plenty of producers willing to do so WITHOUT the government paying them for it.  Another great example in the government trying to influence production through tax policy is in the electricity markets.  Massive tax subsidies and grants given to producers of wind energy, directives that local resellers of electricity have to use a certain percentage of "green" energy sources have done 1 thing only.  Increase the price of electricity for you and for me. 

For those interested in this green energy debate, read the excellent op-ed by Robert Kennedy, Jr. in the Wall Street Journal from Monday July 18.

Bottom line, ladies and gentlemen is this:  When the government tries to influence the market via tax policy, you should beware.  When what they want to support is efficient and/or important enough to you to make you a buyer then you'll become a buyer, but by supporting an inefficient producer, the government doesn't encourage the innovation necessary to make that product successful.  In today's environment it's probably more useful to hire a lobbyist than spend that money on R&D.

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