As a professional tax return preparer, I do a great deal of thinking about how to make the tax system more fair. One of the unquestioned assumptions of our federal income tax system is that if you are paying a great deal of mortgage interest, investment interest, and property tax on many parcels of property, you should be able to deduct those amounts from your taxable income. You then pay less tax than a person making the same income who makes different choices:
- Who chooses to rent their home,
- Who chooses not to own expensive property
- Who has paid off their home or managed to borrow less
- Who invests their own money instead of borrowing money to invest
Supposedly there was a time in the distant past when “we” wanted to encourage people to buy houses. And so “we” said: “If you can show that you are spending more than the standard amount (currently $10,300 for a married couple) on mortgage interest, investment interest, property taxes and some other items, we will allow you to reduce your taxable income by deducting your mortgage interest on 2 homes and all the property taxes you pay on property you own anywhere in the world.
My question is simply, is this fair? Is it fair that someone who goes out and borrows a great deal of money to invest in some venture, should be able to deduct that interest? Is it fair that someone else may scrimp and save and invest their own money and they wind up paying more in tax. Our tax system is rewarding those who borrow large amount of money, not those who save.
Is it fair that those who go out and borrow huge sums of money to buy very expensive homes get to deduct that interest and those who buy very modest homes and finance very little of the cost, pay more in tax that the big spender?
Is it fair that someone who is paying more than $10,300 per year to rent their home cannot deduct their rent wile someone who is paying more than $10,300 per year AND GAINING EQUITY their home, gets a tax deduction?
What about Charitable Contributions? Donations to public charities are another itemized deduction. We DO want to encourage charitable contributions. Why not make charitable donations deductible on the 1040 separately from itemized deductions. Right now the system is set up so that if you rent your home, most likely your charitable donations don’t “count”.
What do other people think about this? What makes a tax system “fair”? Should we each pay the same percentage of our income in tax? That is known as a “Flat” tax. If you make $ 40,000 and I make $140,000, should we each pay 15% of our income in tax? Or should I pay a higher percentage because my income is higher and I have benefited more from our wonderful economy than you have?
Should everyone pay the same rate? Or should we tax people according to their ability to pay?
If we think the federal system is unfair, should we change the Vermont Income Tax so that it is more fair and does not simply transfer the federal loopholes to the state level?