I'm shocked, I tell you, to learn that if someone loses $100,000 one year and gains $100,000 the next, the income tax law treats that as though he made nothing in either year. The magic January 1 date is temporarily ignored and the two years net against each other in one big two-year income result that equals zero. That means you pay no tax for one of those years even though on paper you made big bux in that 12-month period. We generally expect an organization like the IRS to play by "heads I win, tails you lose" rules, but in this case the rules are what you might call rational and fair.
This net-operating-loss write-off is known as a kind of "deduction," and deductions are actually available to all of us. Many of us ordinary people have used a "tax avoidance" technique of one kind or another, such as the mortgage deduction. I'll bet you didn't know that, not only is it not illegal, it's not even wrong!
From Althouse:
It's unAmerican to use the phrase "get away with" to refer to following the law. It's like accusing me of speeding when I'm going 75 in a 75 mph zone. I'm not "getting away with" it. I'm going the speed limit! Change the speed limit if that's the wrong top speed. Crimes are the things that have been defined as crimes. It's particularly irksome for a legislator to talk like that — shifting the blame for the legislature's own failures.
8 comments:
I know fiscal literacy is bad in the United States. I had no idea how bad it truly was until this broke and you see people talking about it like children with no understanding of any of what you're talking about, or how real estate works, etc. It's stunning, and depressing.
Oh, I've known fiscal literacy was abysmal for decades. When you ask someone at your job how much they paid in taxes and they say "oh, I didn't, I got money back!" you know. Because they had money withheld from each of their paychecks, just like I did, and the government (oh so graciously) returned some of their own money when the withholding was more than their tax debt, and they seem to be under the impression they got bonus cash from the government. Yeah, I'm well aware of the lack of financial literacy in the US.
I'd really like tax withholding to be a thing of the past so that people actually have to write that yearly check and see exactly how much they're getting soaked for each year. I know it will never happen, because the government would see both outright riots over it, as well as tax delinquency unlike anything we've ever seen. But a man can hope.
Douglas..."people talking about it like children with no understanding of any of what you're talking about, or how real estate works, etc. It's stunning, and depressing."
In particular, people seem to have a hard time understanding the concept of *depreciation*, which is of course especially important in real estate. I was once talking to someone in an important executive position who really didn't seem to understand depreciation being a non-cash expense.
Another thing that is not well-understood is the effect of *inflation* on capital gains, which can and does mean that the true rate of taxation on a long-term investment is considerably higher than what one would think from the capital gains tax rates. There's a good video that explains this point:
https://www.youtube.com/watch?v=tvzqa71plv4&feature=player_embedded
There are two other things that chap my ... about this subject.
One is the outright felony of leaking tax records, regardless of the legality granted the NLMSM of receiving stolen goods and publishing them--and nearly no one in the NLMSM is mentioning the felony aspect of the New York Times' story. The NYT recognizes the felony aspect of this, though, with its refusal to publish the actual tax forms--that might reveal the source of the "leak."
If they were leaked. The other thing is that with, the paper's authors' and editors' refusal to print the actual forms they claim to have, there's no way to tell that one of them didn't just download some IRS forms and fill them out himself.
Along the lines of Trump's and potsful of real estate business accountants' explanations of the obvious way in which real estate capital gains can be deferred while current expenses remain...current..., recall the hoo-raw a few short years ago over GE's having no (net, it turned out) tax liability on profits of some hundreds of millions of dollars. In the event, across a broad range of GE subsidiaries, the company had paid millions of dollars in taxes. The company had, though, millions of dollars worth of deductions and tax credits (another evil thing, unless allowed only to the politicians' preferred pronouns) in a broad range of other subsidiaries, enough to net GE's aggregate tax bill to zero.
Eric Hines
David,
Great video- trying to explain this to people is difficult- a lot of them don't even understand inflation...
@ MikeD - yes, and make election day the day after those checks are due. I have also run into a fair number of people who say they get money back from the government every year. Not so many as I used to, but then, I stopped asking years ago, so there's a selection bias.
People have been trying to convince me for decades that it's possible to avoid paying taxes if you're rich. I say, at best you can do it for a little while, at the end of which you suddenly won't be rich any more.
You can avoid paying income tax indefinitely if you have a permanently low enough income. If you're living on substantial savings and don't care if they grow, you can keep your income low enough to avoid paying taxes, but of course at the cost of sacrificing huge wealth by putting your savings in a mattress.
If you're traditionally wealthy, with either a salary or lots of gains on your savings, you may miss a tax bill one year if you lose money, but you'll always make it up when you earn enough money in the future to wipe out the loss. If that doesn't happen, it means you're all losses and you're not rich any more.
Of course, the hidden lesson in all of this is that the powers that be want it this way- want people to not really understand how it all works, so that they can keep doing what they're doing. The obfuscation is quite deliberate.
That alone is a good argument for a flat tax, whatever it's downsides.
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