Will Iowans do their fair share?

As we work to avoid the fiscal cliff and solve our federal budget deficit problem, we need to ask what we Iowans are willing to give up.  We cannot solve our deficit problem by only increasing taxes on other people or by only cutting other people’s benefits.  Here is a partial list of federal expenditures that benefit Iowans: crop insurance subsidies, ethanol subsidies, wind power subsidies, biodiesel subsidies, Medicare, Medicaid, Social Security, National Guard installations, Silos and Smokestacks national park funding, Harkin grants, student loan subsidies, mortgage interest deductions.

Will you do your part?  What cut to your current or future benefits are you willing to accept?  If we don’t solve our deficit spending problem, sooner or later we will end up with a crisis like Greece. Contact your Senators and Representative and tell him which of your benefits you are will to have cut.

Don’t raise top tax rates.

I just don’t believe most people think we should raise the top income rate above the current 35%.  All of the examples given are of the super rich, like Warren Buffet and Mitt Romney, who earn millions each year and pay a total tax of between 15% and 20%.  This is the unfair situation that most people think of and most politicians describe when they ask the rich to pay their fair share.  Maybe the easiest way to fix this problem is to revamp the Alternative Minimum Tax.  Why can’t we simply tax all earnings over $250,000, no matter the source, at the maximum 35% rate?  This would include interest earned on tax exempt bonds, dividends, capital gains, carried interest, and any other type of income that is otherwise tax exempt or taxed at lower rates.  It that doesn’t generate enough revenue, then start taking away itemized deductions based on income.  If need be, take away all itemized deductions.

The idea above presumes that we need to increase revenues (taxes) to help solve our deficit problem.  Of course, the biggest cause of our problem is that spending has increased too rapidly.  So, the biggest part of the solution should be to reduce spending.

The chart at the link below shows clearly that our deficit problem is due to uncontrolled spending, not that revenues (taxes) are too low.

Chart showing the history of federal revenues and federal spending:  http://www.heritage.org/federalbudget/growth-federal-spending-revenue

Raise tax rate on capital gains.

The 15% income tax rate on long term capital gains is a very significant tax break for business owners and investors, including the very wealthy.  It is a big part of the reason why Warren Buffet and Mitt Romney pay such a low rate on their income taxes.  A capital gain is the profit made on investments such as stocks, businesses, and real estate.  For tax purposes, a capital gain is considered “long term”, and receives the low 15% rate, if the asset was held for at least one year.  (Short term capital gains, on investments held less than a year, are taxed at ordinary income tax rates – up to 35%.)

One justification for the lower tax rate is to encourage investment.  In theory, if you lower the tax rate on certain investments, more people will put their money in those types of investments.  But, people who save their money in a bank or who buy bonds also encourage investment, and their profit, the interest they earn, is taxed at ordinary income tax rates – up to 35%.  It seems unfair to tax interest and capital gains at different rates.

Another justification for taxing long term capital gains at a lower rate is to account for inflation.  If you doubled your money on an investment, your real profit, (adjusted for inflation), is quite different depending on how long you owned the investment.  If you doubled your money in only one year, you did great.  But if it took you 20 years to double your money, you did rather poorly.  If your investment grows, but at a rate slower than inflation, then you are actually losing spending power.  The fair way to tax capital gains would be to adjust the gains for any inflation that occurred while the money was invested.  Then, tax the real gain, after adjusting for inflation, using ordinary tax rates – up to 35%.

Interest income could also be taxed the same way.  If interest earned was for a period longer than a year, then it could also be adjusted for inflation and the tax would be paid only on the real earnings, after adjusting for inflation.

Capital gains and interest income would both be taxed at ordinary tax rates – up to 35%.  That would be fair for everyone.

Let Student loan rates double

Several years ago, as part of the stimulus package, Congress and the President agreed to cut student loan interest in half – temporarily. Like so many other temporary cuts, there is tremendous pressure to continue them. Take the Bush Tax cuts and the Social Security tax cut. Congress need to buck up and let all of these tax cut expire – on everyone. We have a tremendous budget deficit and debt. We are absolutely cheating our children and grandchildren. We must actually reduce our deficits – through a combination of significant spending cuts and letting the various tax cuts expire and by closing special interest loopholes in the tax code.