The political controversy about raising, lowering or flattening the marginal rates of income tax seems to be the primary focus of this election season.
One side of the argument says that to get more tax, the government should raise the tax rates on the rich. The other side argues (using the Laffer Curve as the basis) that for the government to increase revenue, then the rates should be lowered. And to "reform" the tax, the marginal rates should be flattened.
What is poorly understood by the experts on the TV news programs, professional financial-investment and money managers, and the taxpayers (and not overly appreciated by a good part of the tax professionals) is that a substantial part of the tax system doesn't involve the rates of tax at all.
Rest assured, our politicians, who know little to nothing about the details of the tax code do appreciate the opportunities the tax law gives them to benefit themselves without being seen to crassly exploit the political system for their own benefit.
This underworld of tax is the realm of tax expenditures. A shadowy netherworld of special exclusions, exemptions, deductions, special credits, preferential rates of tax and schemes for favored business, groups, or persons to have a deferral of tax liability.
Exceptions, exclusions, denial of benefits other taxpayers are allowed — and the most egregious of all — tax credits are Washington's favorite methods to avoid making overtly public their direct spending to appease special interest voting blocs or campaign contributors.
This is the discrete way that our elected politicians expand spending entitlements or otherwise increase taxes in secret.
Giving a refundable credit is no different than doling out money. Eliminating deductions on certain groups effectively raises both the tax rates and as well the amount of tax that actually must be paid.
Our government in Washington, D.C., has an even bigger playground from which they can pull tax games on the unknowing public.
Excise taxes, employment taxes, and estate, gift, and generation-skipping transfer taxes are treated as not being part of the income tax system. But they play a role for the government to manipulate the tax burden and governmental handouts without the public neither knowing nor understanding that is happening.
Let's take an example of how the tax law attempts to impact free-market forces in favor of the latest governmental preferred choices. Ethanol is entirely dependent on the federal government subsidies. Hybrid cars are allowed a tax credit. Electric cars are also granted a tax credit. The tax on gasoline is less than on diesel.
That is how easy it is for the government to change behavior, the culture, and the economy.
Consequently, the government can pick winners and losers among available forms of investments while rewarding campaign contributors and special interest voters who are the intended beneficiaries of the handouts and entitlements which are disguised as being part of the tax system.
Federal income and other taxes have moved a long way from being a method to efficiently raise revenue to pay for the legitimate expenses of the government.
They have become the least-efficient and least-effective means to raise revenue. Any thought of spending tax dollars for only legitimate expenses is long forgotten as Washington, D.C., has transformed itself into the nation's pig trough.
This has all been made possible by the use of both a tax system meant for public debate in campaigns, and one which just lurks out of taxpayer view.
These hidden taxes and their equally camouflaged manipulations are a major factor in raising the spending deficit, increasing the Federal Reserve's use of the money-printing presses, undermining the economy, and silently impacting all investment choices.
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