Tax cuts. Reform. Incentives. All this talk about how to boost economic growth by fixing the tax code falls on the jaded ears of people old enough to remember the same debates 36 years ago, in Ronald Reagan’s first term. For people born since, especially those of an idealistic bent, we offer this glossary of the key concepts.
AMT. The much despised alternative minimum tax, in which rates are somewhat lower than those in the usual income tax but the deduction for state and local taxes is not available. One of the selling points of various tax plans proposed by Donald Trump and Paul Ryan is the “elimination” of the AMT. But since these proposals combine low rates with a zapping of the state and local deduction, it would be more accurate to describe them as a way to extend the AMT to everyone.
Buffett Rule. The magnanimous proposal that those with high incomes should pay a tax of at least 30%. It is endorsed by people so wealthy that taxes are irrelevant to their lifestyles.
Capital gain tax. A levy altered often enough to create what is called a natural economic experiment. Sometimes, after a cut in the rate, revenues from it go higher as asset owners undertake trades that have been pent up for years. This proves the supply-side theory that lower tax rates yield higher revenues.
Or does it? Let’s try this experiment: Instead of cutting capital gain taxes, Congress enacts legislation that triples the rate, effective Jan. 1, 2019. If there’s a burst of activity in 2018, we have proof of the reverse.
Death tax. An appellation used by Republicans for the tax on bequests. By renaming what used to be called the estate tax, they have inspired a clamor for its repeal from middle-class taxpayers unaware that the tax now applies only to eight-figure estates.
Family businesses, small businesses. A category of taxpayers viewed as deserving of special help. That is, someone whose family owns a chain of hardware stores small enough to be worth only $20 million should pay at a lower rate than someone who owns $20,000 of Home Depot shares, because Home Depot is a big business.
Laffer curve. An epic line drawn on a cocktail napkin in 1974 illustrating the point that a 100% tax rate would yield no revenue. By extrapolation, the curve serves as evidence that a tax cut can pay for itself by paradoxically increasing revenue to the government. It thus enables politicians to vote for tax cuts while proclaiming their devotion to fiscal prudence.
Marginal rate. The tax paid on an incremental dollar of income, that rate being, in economic theory, a prime determinant of a citizen’s incentive to work. It is the counterpart to the disincentive to work that arises from welfare and unemployment compensation.
When Ronald Reagan’s acolytes were popularizing such talk in 1981, the economist John Kenneth Galbraith, whose sympathies lay on the other side of the aisle, offered this at a press conference: “The Republicans say that the rich don’t work hard enough because we pay them too little, and the poor don’t work hard enough because we pay them too much.”
Mortgage deduction. A tax write-off that inflates the price of homes. In that fashion it makes people who already own homes better off while making people who want to buy homes worse off by the same amount. By taking note of only the former effect, the real estate industry has persuaded Americans that erasing the deduction would make the country poorer.
Pass-through entity. A business organized as an LLC or partnership that has no tax liability of its own because the burden is passed through to the owners. In contrast, a small business organized as a corporation pays corporate tax, after which profits distributed to the owners incur tax again on the owners’ individual returns.
Some recent proposals for a tax cut incorporate an enticing interaction of these two different ways to collect taxes: The pass-through would enjoy the favorable rate accorded small corporations, but pass through no further liability to the owners. Thus, by declaring themselves to be LLCs, high-paid doctors and trial lawyers could cut their tax bills in half.
Postcard return. With tax simplification, say the reformers, the IRS could fit the 1040 onto a postcard. But where on the postcard would you distinguish retirement accounts on which you had already paid tax from accounts on which you had not yet paid? What line would treat business assets that were only partly depreciated separately from those that had been fully expensed? How would the IRS fairly assess taxes on alimony, fringe benefits, college accounts not used for college, stock options and offshore holding companies?
The postcard tax return would work fine, so long as it allows for up to 1,200 additional postcards to be attached.
Simplification. The purported aim of the tax law enacted in 1986. Since that date the length of the tax code has doubled.
Tax reform. The name applied by politicians to any tax change that they favor. In this sense, reforms are more common than you might think. Wolters Kluwer, the publisher of tax guides, keeps track of changes to the Internal Revenue Code. Since 2001 Congress has enacted 5,886 tax reforms.
Tax shelter. An investment product that reduces the tax on a high salary by having the salary earner lose money on investing.
Trickle down. The notion that rich people should get a break, on the theory that their money will trickle down to the rest of us in the form of tips.
Transfer pricing. The magic by which a cell phone designed in the U.S., made in China and sold in Germany gives rise to taxable income in none of those places because the profits are ascribed to patents residing in yet another place. Where, we don’t always know. Could be inside a satellite hovering over the island of Vanuatu.
Lest this sound too fanciful, take note of that curious Seventh Circuit case decided years ago against U.S. Gypsum. USG had a subsidiary that, as an element in an international tax minimizing scheme, bought gypsum rock as it fell from a chute on Canadian soil and then resold the rock at a profit before it landed in the hold of a ship below.
Voodoo economics. An epithet that the elder George Bush applied, while campaigning against Ronald Reagan for the Republican nomination, to Reagan’s theory that tax cuts pay for themselves (see Laffer curve, above). The phrase disappeared from his speech after he became vice president.
Ways & Means. A House committee that gets the attention of lobbyists by debating possible ways to change the tax laws, thus providing the means for members of the committee to raise funds for reelection.
Originally published at Forbes