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Thursday, November 16, 2017

Taking It with a Grain of Salt

By now, I’ve read many SALT-free analogies and stories since the House Republicans decided to eliminate most of the deduction for state and local taxes.  Obviously, a lot has been said about eliminating the SALT deduction for decades.   

However, I don’t understand some people’s doubt of the double taxation point—they say that eliminating the SALT deduction does not result in double taxation because it’s two different levels of government taxing the money.  But, why not instead focus on the fact that the money IS being taxed twice?

I’m not yet aware of any authoritative definition of double taxation requiring the taxation to be only by one level of government.  Is there a non-political distinction between saying the same money has been taxed twice and the same government is taxing it twice? 

Posted by Margaret Ryznar on November 16, 2017 at 06:27 AM | Permalink

Comments

The common definition is that it's being taxed twice and generally by different jurisdictions.

Source: Wikipedia

And just for fun, it's one of the rare times when citing directly to Wikipedia works. While Wiki might not be an authority on how double taxation works, it is a primary source for indicating how a term is commonly used or understood.

Posted by: Derek Tokaz | Nov 16, 2017 9:37:29 AM

OK, there's some aspect of double taxation.

What about "double earnings" from investments — in the classic, Grahamesque-analysis-of-marketable-securities sense, "current income" AND "capital gains"? And this rolls back into the double-taxation argument when there are (a) significant retained earnings and/or (b) immediate reinvestment of dividends into more equity shares of the same issuer, as was a common strategy extolled in investment guides in the 1970s and 1980s.

In short, "double taxation" is just part of the issue, and one willfully ignores context when equating it with "evil" (or "unfair" or "inefficient").

Posted by: C.E. Petit | Nov 16, 2017 11:03:01 AM

Derek: I too would agree that to be a generally accepted understanding of double taxation, so I was surprised to see arguments that double taxation requires 1 government to be taxing the money twice.

C.E. Petit: True--but, there is a tax benefit to capital gains in recognition of the fact that it is double taxation--a lower taxation rate for capital gains compared to ordinary income. Maybe that would argue for some federal tax benefit for state and local taxes--if not a full deduction.

The estate tax is another example of double taxation--but there are tax benefits there too, such as a huge exclusion amount, such that most estates are not affected by the estate tax.

Posted by: Margaret Ryznar | Nov 16, 2017 5:28:46 PM

I don't think anyone should deny it is a type of double tax, but it is not the particularly egregious type that I associate with that term. When it involves taxes by different levels, it just seems like each is taking its cut. There are other examples that are generally tolerated, such as sales tax that are levied by both state and local governments in many areas.

Posted by: TJM | Nov 16, 2017 10:35:22 PM

Right--fair enough.

Posted by: Margaret Ryznar | Nov 17, 2017 3:59:54 AM

Double taxation is everywhere. I pay income tax on my income and then I take my post-tax dollars and walk into a store and they have the gall to charge me sales tax! How dare they! Don't they know those are post-tax dollars? It's double taxation. Etc. Etc.

Really "double taxation" is a bit of a misnomer -- lots of things are double taxation. The real problem being claimed by everybody arguing for keeping SALT deduction is better described as "taxing income the taxpayer never received." In general we want the tax system to tax people's actual income, not other money that they never saw. When the state takes a large cut, the federal government is then taxing not only the taxpayer's actual income they received in their bank account, but also some other income they DIDN'T receive because it went to the state.

I have some sympathy for the idea that some local taxes directly provide services that the taxpayers themselves enjoy -- which means that in some sense they did "receive" that part of the money, and disallowing that component of the SALT deduction makes a kind of sense. But when New York State is using its income tax to fund (laudable) anti-poverty programs, for instance, it does not make any sense to imagine that all the taxpayers got direct personal benefits for their money. It's simply money they never got. That's why keeping the SALT deduction, especially the state part, makes sense just in terms of taxing people's income accurately.

Posted by: Joey Fishkin | Nov 18, 2017 11:31:01 PM

I agree with Joey about accurately taxing income, but most taxpayers, even those in NY, take the standard deduction, which more than makes up for the difference. The SALT deduction mostly benefits high income earners.

Posted by: TJM | Nov 19, 2017 12:28:52 AM

All the taxpayers may not have gotten direct personal benefits equal to the amount they paid in taxes but they all got some direct personal benefits. Setting that to zero makes even less sense than setting it to the full amount paid.

Consider wealthy parents living in Westchester. Many of them explicitly made a decision between staying in NYC and paying for private school and moving to a fancy suburb with high property taxes. Schools in places like Scarsdale are public in name only, they are effectively fancy private schools for the rich and there's no good reason that tuition in the form of property taxes should be any more deductible the tuition paid by those that decided to stay in NYC and send Aiden and Olivia to Dalton.

A similar argument could be made for the grand-daddy of all tax expenditures the non-inclusion of benefits as taxable income. Not every last benefit is fully utilized by every employee. Nonetheless collective they are extremely valuable and ought not to be disregarded.

Posted by: john | Nov 19, 2017 9:41:58 AM

"And just for fun, it's one of the rare times when citing directly to Wikipedia works. While Wiki might not be an authority on how double taxation works, it is a primary source for indicating how a term is commonly used or understood."

Well, it might be a good judge, if the sample size of the editors are appropriate. Directly quoting from Wikipedia works at various times for basic comments that aren't meant to be fully true such as getting a basic definition about such and such. That reflects the "commonly used or understood" rule, I guess. Wikipedia often is a fair source because it repeatedly has sources that you can check though some are to books that might not be as easily obtained at a moment's notice. Often there are links to sources you can read though.

Posted by: Joe | Nov 19, 2017 10:25:34 AM

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