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REAGAN'S 28 PERCENT SOLUTION
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I'm having a personal reaction to the death of Ronald Reagan. I felt a
closer connection to him than to any of the thirteen Presidents I’ve survived since
birth. Reagan reached out and touched me in a way none of them did, although
I got drafted into the army once by Truman. But anything that happened to me
through the government always seemed to me to have nothing to do with
presidents but just to be part of the way things had to be, with no input from me
expected.
This changed with Reagan. I was ripe for him. I had become tax-conscious.
I had actually worked for tax-preparation firms and had labored over my own
returns enough to see that there was a lot of room for improvement in the
system, mainly in the direction of reducing the rates. The top rate at that time
was 70%. This was on a taxable income of $215,400 and above. Of course anyone
with the kind of smarts necessary to amass such an income wasn’t about to give
up 70% of it to the government, to be followed by another 12% or so for the
city and state of New York. There were loopholes. You could cultivate a love
of horses and raise them at a (deductible) loss for four years and save on
taxes as long as you made some kind of a taxable profit in the fifth year. You
could take losses in other occupations and a profit in the fourth or fifth
year would save you from being declared a hobbyist and having all your losses
disallowed. This was so painful that practically everyone contrived to show an
eventual profit here too.
Although I write about them in the past tense, tax loopholes like this still
exist, but they don’t have the importance they used to. This was part of the
Reagan plan. He found many of the best brains in the country being kept busy
devising ways to hornswoggle the IRS and thought they could be better
employed. If the tax rates were lowered, loopholes would become less valuable and
productive people would become available to create wealth instead of simply
preserving it from Uncle Sam.
Under the mantle of this good man I found my own tax bracket reduced to 28%
from its previous dizzy height. Of course a lot of the tax shelters vanished
too, but I wasn’t expecting something for nothing. I used to like deducting
all the credit card interest, now gone, and the 2% threshold kind of spoiled
work deductions, but you could still do things with second mortgages and IRA’s
and you had the consolation that you had gotten a reduction which required no
manipulation of expenses at all, thereby making your yoke easy and your burden
light and leaving you time for other things, as planned by R.R
Another progressive step was the revision of the depreciation schedules to
create among other things, a 15-year bracket for property placed in service
after ’81. The bank I was working for at the time sent out an advisory that every
building in the country had now been converted into a tax shelter. These
magic words convinced me to invest in some property and enjoy the benefits
thereof. This way I got bragging rights over all the late starters who found
themselves stuck with 27.5- year depreciation when Congress changed its mind a few
years later. Reagan probably was out of town when they did this to us.
Tax work was something I took on while still in the police department and
kept up for a few years. It paid all right, but mostly in experience. I didn’t
mind, and in fact I still toy with the idea of going back to it and becoming a
kind of a Mother Theresa to the poor oppressed taxpayers. Well, in my own
way I was a benefactor. Tax preparers exist to save their clients money, after
all. And poor people pay taxes, even now when their obligations have been cut
to the bone. How to help them is a challenge of the kind that every spring
causes tax preparers, even old and doddering ones, to emerge from their dens
like bears from hibernation, and take up their posts at H&R Block, ready for
action.
We knew things too, some of which hadn’t penetrated the consciousness of
high-priced lawyers who failed to be confirmed for government jobs because they
had neglected to pay the “nanny tax” for their household employees. This
happened for the first time in 1993, the first year of the Clinton administration.
I had first discovered the tax in 1978 when I got a necessitous Indian couple
to stop taking dependent exemptions for their mothers, but to start paying
them for baby-sitting their children so as to get the child care credit instead,
making sure they paid Social Security for them as household servants, which
was a legal requirement but would also get the mothers into the SS system. I
even made out the vouchers to be taken to the SSA office. When Zoe Baird and
other got tripped up for cheating on the tax, I shed no tears.
There also was the young man who was bringing up his baby sister because his
momma was in rehab. When I punched this into the computer to get him the
Earned Income Credit, he didn’t get it. Something wrong here. Oh I see, baby
sisters don’t count. No provision for them (at the time). Wait a minute. What
about “foster child”? No particular requirements (then). Let’s try it.
Bingo! You get $1,000 credit from Uncle, my friend. Don’t thank me (he didn’
t). Just doing my job. I get psychic satisfaction (no money).
It was fun while it lasted. It was even more fun to see Reagan putting a
stop to “bracket creep”, which somehow or other I associated with Tip O’Neill,
the Speaker of the House, who was thought to be in favor of it because it kept
increasing the government’s -- that is to say, the politicians’ -- share
of the national income. Bracket creep was the phenomenon created by
inflation, which increased the nominal value of incomes by depreciating the currency.
With a $200 weekly paycheck in place of the old $100, the recipient had an
illusion of increased prosperity, but what he really had was the same buying
power in devalued currency. What he also had was an increased tax obligation
because his nominal income placed him in a higher bracket than before, so that
the workingman was now paying a percentage of his income formerly meant to be
paid by high-income types. Again Reagan had the answer: index incomes. Adjust
exemptions upwards for inflation, which will reduce the taxable incomes to the
brackets they should really be in. Tippo went along; he had to.
A last word. There’s a guy at the New York Times who keeps saying tax cuts
don’t create a single job. Sure, and it don’t rain in Indianapolis in the
summertime either. Let’s get real. The money gets spent, doesn’t it? People
buy movie tickets or education for their kids or new tires, or they bank it and
the bank lends it out; it’s exchanged for something always. “Something” has
got to be produced. By someone with a job. Give it up, man. And a fond
farewell to the man who taught us all about these things.
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