If Uncle Sam is Santa Claus, be prepared for a lump of coal in Fiscal Cliff negotiations

Some pundits are saying Uncle Sam has become Santa Claus. If so, why is it fair that Suzy should get a new wagon when Timmy gets a lump of coal? It seems this is the case with the Fiscal Cliff debate and tax deductions.

The best way to reduce federal tax obligations is to make use of three big deductions. The three big deductions are: home-mortgage interest; state and local tax payments; and charitable contributions.

Suppose a person is earning $300,000 per year. Without special deductions, that person would have $300,000 in taxable income.

But suppose that person earning $300,000 can deduct — from his taxable income — $50,000 in mortgage interest, $20,000 in property tax payments, and $30,000 in charitable donations. The sum of these deductions is $100,000.

Subtracting $100,000 from the original $300,000 leaves $200,000 in taxable income.

If the federal government eliminates tax deductions, then that person earning $300,000 annually may have to pay tax on the full $300,000.

States like California, New York, and New Jersey have high-priced homes and high property taxes. Each of these states in the November election voted for Barack Obama for president. One would doubt that Mr. Obama would want to penalize — by eliminating tax deductions — residents of those states where he won a majority of votes.

The home-mortgage interest deduction forces people to buy homes. Eliminating such a deduction and giving a person a lower tax rate might result in more money going into oil exploration and less money going into real estate.

The federal government, by allowing tax deductions, is selecting certain sections of the economy, like real estate, for special treatment. Why not eliminate all tax deductions and, instead, give people lower rates? More people may rent, but gasoline might be cheaper.

Tagged as: fiscal cliff, tax deduction, Uncle Sam is Santa Claus