Even staunch Republicans were shocked recently when ProPublica published secret IRS files showing that the richest Americans routinely pay a small fraction of their income in income taxes and in some years pay no taxes at all. They note that tax rates for the ultra rich in the last few years have run at about 3.4% of their incomes while Americans earning $70,000 a year routinely pay 14%. Talk of reinstating a minimum tax is already happening in congress. Our concern is how efforts to regulate tax rates for the ultra rich will affect taxes on the average American taxpayer.
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Legal Ways to Avoid Paying Taxes
There are lots of legal ways to avoid paying taxes starting with the mortgage interest deduction used by every American who pays a mortgage on their home. The reasoning behind virtually all of these tax deductions (tax avoidance measures) is to use the tax law to help achieve social and economic goals. When people own their own home it typically becomes their biggest asset at the end of their working lives. Home ownership is a stabilizing influence in society. Other deductions have to do with encouraging investment. Folks like Donald Trump have benefited for years from tax laws favoring real estate developers. Today the likes of Jeff Bezos, Elon Musk, Warren Buffett, Michael Bloomberg, and more occasionally pay no taxes in a given year despite billions of dollars in income.
How Will They Fix the Tax System?
Lobbyists are a fact of life in Washington. They promote various causes including tax relief for those they represent. Unfortunately, not all of these causes rise to the societal value of the deduction on home mortgage interest for owners of single homes. They become tax loopholes that allow folks making lots of money to pay less in taxes or none at all. Fixing this sounds easy. Cut out the deductions. But, which ones need to go and which ones should stay? Fighting every single special interest group would be a nightmare. As such, we predict that there will be a minimum tax imposed so that tax rates for the ultra rich will come in closer to average working Americans no matter what tax loopholes they choose to employ.
What Will Your Taxes Be if They Go After the Super Rich?
Ideally, more taxes paid by the ultra rich should help balance the budget and reduce taxes for average taxpayers. However, the IRS collects about $3 trillion a year after factoring in refunds. And, the US budget shortfall has been getting bigger every year after the Trump tax cuts coming in at around $500 billion a year now. Thus it would require extra taxes of $500 billion just to balance the budget. On the other hand, according to ProPublica the amount of money in taxes that the 25 richest Americans avoid paying is pretty impressive.
“Our analysis of tax data for the 25 richest Americans quantifies just how unfair the system has become.
By the end of 2018, the 25 were worth $1.1 trillion.
For comparison, it would take 14.3 million ordinary American wage earners put together to equal that same amount of wealth.
The personal federal tax bill for the top 25 in 2018: $1.9 billion.
The bill for the wage earners: $143 billion.”
Thus it would seem that finding a way to bring the tax rates for the ultra rich up to what the average taxpayer pays could net $143 billion minus $1.9 billion which is $141.1 billion. That is a lot of money but it does not pay the current $500 billion deficit. We can assume that by including more than the top 25 in the USA that the “recovery” from those paying little in taxes might be a lot more. But, how far down the income bracket will any changes go?
The effects on your taxes will have to do with the approach that the government takes in rectifying this situation. Our prediction is that rather than going after every single possible deduction that Congress will pass a minimum tax tailored so that the tax rates for the ultra rich will more closely resemble those of ordinary Americans. Then, of course, there will be the matter of paying for Biden’s infrastructure proposals and the question if this would work out well, boost the economy and bring in more in taxes.