Taxes and technicalities

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I’ve never followed politics that closely, so I’m not super familiar with the stuff that is happening related to taxes right now. But even if I were to research it, I’m not sure I’d understand it. To be honest, I never understood how taxes got to be so complicated. Why are there deductions and loopholes? Why is this so complicated–why not just take a fair percentage of everyone’s income, not allow any exemptions and tax breaks, and just leave it at that? I know you guys don’t get political, but I was hoping the experts could give me some background on this.

Taxes are a controversial topic. Nobody wants to pay too much in taxes, but the government needs money to function–and, of course, there’s plenty of disagreement on who, exactly, is paying too much or too little! One good way to see just how complicated this can be is to imagine you’re building a new tax system from scratch, so let’s do that.

Let’s start by talking about the different things that can be taxed. The first, and most obvious, is income: when you earn money in a given year, most people agree that you should pay some amount of tax on that money.

But already things are complicated. The federal government uses a “progressive” income tax. That means that people who make more money pay a higher percentage in taxes (the higher percentage only applies to the money they make above the specified amount–so there’s no way that making more money can result in them keeping less). But that’s not the case with every tax: Pennsylvania’s state tax, for instance, is a “flat tax” in which everyone pays the same percentage.

And consider for a moment a small business owner. Let’s say that person made less this year than he or she lost in business costs. They had a net loss, not a profit. Should this business owner be able to deduct his or her business losses? If you say yes, you’ve just approved your first deduction–already making your tax system a little more complicated than you might have envisioned at the start.

Not all types of income are created equal, of course. What about income from investments? Investing money is good for our economy, so perhaps you want to tax it at a lower rate than income; or maybe you think that since many poorer Americans don’t own stock, you’d rather tax it at a higher rate. And what about the difference between healthy long-term investments and short-term speculation? The US offers a lower capital gains rate to people who hold their stocks for longer–would your tax system do the same? What about money gained through inheritance? Or what about gambling income from online gambling sites, a huge industry that offers the government a good opportunity for revenues?

If you tax investments, perhaps you should tax properties, which can appreciate in value in similar ways. But what if the property is deteriorating? Should there be deductions for depreciation?

And what about deductions designed to make the country a better place? We already discussed the idea of different tax rates for different types of investment strategies, but what about tax breaks for those paying for student loans, or people starting families, or people taking out mortgages? What about state taxes? New York tax attorneys Mackay, Caswell, & Callahan say residents of states with high income taxes, like New York, might be distressed to see a federal deduction for state and local taxes being eliminated under the tax legislation you mentioned.

You can see already, we trust, just how complicated this can get even if you’re designed a system on your own. Throw in the many different interests and priorities of the people and lawmakers of our country, and you start to get a real mess. No wonder it’s a touchy subject! We won’t touch it ourselves, but we trust we’ve given you some helpful background on why taxes are the way they are.

“In this world, nothing can be said to be certain, except death and taxes.”

— Benjamin Franklin

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