Think of it as a back-door tax increase. While the public was watching the payroll debate in Washington Congress was actually increasing the cost to finance or refinance a home.

The Temporary Payroll Tax Cut Continuation Act of 2011 was widely applauded because it prevented the Social Security withholding from increasing to 6.2 percent from 4.2 percent of wages. However, the extension is only for two months and is set to end as of February 29, 2012. In other words, the payroll tax debate will be renewed once Congress returns from the mid-winter recess.

New Borrower Costs

Buried in the payroll compromise are new costs for borrowers. Specifically, these new costs come in two forms.

First, Congress has directed Fannie Mae and Freddie Mac to increase the fees lenders pay by ten basis points or .10 percent. This new cost — called the g-fee — will begin April 1, 2012.

This increase is substantial. According to Market Watch, lender fees now amount to .26 percent of the loan amount. The congressional increase will cost borrowers with a $200,000 mortgage an additional $5,400 over a 30-year loan term.

Second, Congress has directed the FHA to increase its annual mortgage insurance premium or MIP by .10 percent.

The FHA, which is an insurance program, has two borrower charges.

• There is an up-front mortgage insurance premium which is now equal to 1 percent of the mortgage amount.
• There’s also an annual mortgage insurance premium which in 2011 was increased to 1.15 percent for most borrowers. It will now rise to 1.25 percent.

The annual MIP increase will be costly to borrowers. The expense of a $200,000 mortgage will grow by about $4,200 over the life of the loan.

Taken together, the two increases created in the payroll tax bill will raise the cost of a $200,000 mortgage by roughly $9,600 over the life of the loan.

Impact

The result of the congressionally-mandated increases is that FHA loans will be artificially less attractive.

So is the MIP increase necessary?

The purpose of the MIP is to collect money from FHA borrowers which is placed in a reserve called the Mutual Mortgage Insurance Fund. This fund is supposed to equal 2 percent of the FHA loans outstanding but is now below the required level.

However, HUD has reported to Congress that under the current MIP structure the reserve fund will grow to the required 2 percent by 2014.

Moreover, the policies and programs which created problems for the FHA loan system — policies and programs and put in place by the Bush Administration prior to 2009 — have been changed. For instance, the required down payment has been raised, the mortgage insurance premium schedule has been changed, “seller-funded downpayment assistance loans” have been eliminated and lender standards have been tightened. The results are plainly visible when looking at the FHA’s book of business

Lenders will pass through the new charges, raising home financing costs nationwide at a time when the housing market remains stalled. Higher mortgage costs mean borrowers will qualify for less financing so they will have less ability to pay higher prices. Home sellers will thus feel part of the fee increase in the form of less buyer demand and reduced pressure to raise prices.

The net result of the congressional action is that borrowers will needlessly pay more for FHA financing and home sales will suffer. Various politicians will no doubt explain how the legislation made the FHA reserve fund “more secure” when, in fact, it was becoming more secure without a further increase in borrower costs.

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The general answer largely depends on when you buy the property.

“If the property was foreclosed and possessed by the bank, the bank will have to pay the back taxes to sell the property with clear title,” says RealtyTrac spokesman Daren Blomquist. “However, if you purchase the property at the public foreclosure auction (on the courthouse steps) then you will be responsible for any senior liens, and property taxes fall into that category.”

With a short sale the situation is different. A short-sale is not a foreclosure. It’s a transaction where the lender agrees to allow a sale without a foreclosure even though the entire mortgage debt is not being repaid. In terms of property taxes a short sale is simply a sale with property taxes to be paid at closing. Who pays the property taxes? In some jurisdictions there is a tradition that the buyer will pay or that the seller will pay, but the issue can typically be negotiated.

For local practices speak with a nearby real estate broker or attorney who specializes in foreclosures.

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In an historic development the willingness of the United States government to fulfill financial obligations has been called into question by a major ratings agency due to “political risks” and a “rising debt burden.”

“The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed,” said the S&P in a statement. “The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options.”

A lower credit rating could impact mortgage loans, auto financing, and the cost and ability of the federal government to borrow money.

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The Nation, of course, now has a massive budget deficit. Not since four straight years of surplus under Bill Clinton has the government broken even much less had a few spare dollars. Under President George W. Bush the deficit increased by $4.35 trillion and it has also increased under President Obama.

Obama, of course, inherited not just a massive deficit that topped $10 trillion the day he entered office, he also took on the expenses of the Iraq and Afgan wars which began years before as well as economy that was in tatters as a result of the mortgage meltdown, falling real estate values and Wall Street bailouts.

Now comes Republican presidential candidate Tim Pawlenty, a former Minnesota governor and social conservative, with a detailed proposal to right the government and the economy. The specifics look like this:

Reagan

“Between 1983 and 1987,” says Pawlenty, “the Reagan recovery grew at 4.9%.  Between 1996 and 1999,  under President Bill Clinton and a Republican Congress the economy grew at more than 4.7%. In each case millions of new jobs were created, incomes rose and unemployment fell to historic lows. The same can happen again.”

What’s not said is this: Reagan raised taxes. According to Bruce Bartlett, Reagan signed off on at least 11 tax increases during his presidency — and Bartlett is hardly a liberal. He served as senior policy analyst for President Reagan and was the deputy assistant secretary for economic policy at the Treasury Department during the George H.W. Bush administration.

Tax Rates

Pawlenty says “on the individual rates we need a simpler, fairer and flatter tax system overall. I propose just two rates, 10% and 25%. Under my plan, those who currently pay no income tax would stay at a zero rate. After that, the first fifty-thousand dollars of income or one-hundred thousand for married couples would be taxed at 10%. Everything above that would be taxed at 25%. That’s it.”

This is essentially a version of the flat-tax plan long advocated by fiscal conservatives such as Steve Forbes, an heir to the Forbes magazine fortune.

If enacted the Pawlenty proposal would create massive unemployment among accountants, make doing taxes a snap and, alas, bankrupt the country. It would lower the margin top rate for billionaires from today’s 35 percent to 25 percent. Given lower tax rates, less money would flow into the government, a government which already has a massive deficit. In comparison, the top marginal tax rate under President Reagan was 69% and 92% under President Eisenhower, 91% under Kennedy, 77% under Nixon and Johnson, and 39.6% under Clinton.

No Taxes For The Rich

“In addition,” says Pawlenty, “we should eliminate all together the capital gains tax, interest income tax, dividends tax and the death tax. Government has no moral or economic basis to claim a second share of the same income. When you deposit a dollar in your bank account. Every penny should be forevermore yours and your children’s. Not the federal government’s.”

To understand what Pawlenty is saying, look at the mechanics of his proposal: If you earn $50,000 a year from work and overtime your income will be subject to the income tax. If you make $50,000 a year from interest, dividends or selling stock you pay zero. If you make $100 million a year from interest, dividends or selling stock you pay zero. If you inherit $20 million there will be no tax.

The Pawlenty tax program, if enacted, would split the country in two. Most households would be taxed on all the income they bring in — because all the income they bring in is from labor — while the richest among us would pay little or nothing to support what would be left of the government.

The Pawlenty plan is great for the wealthy, a gift to plutocrats and those who believe the government should be made smaller, really smaller, by reducing tax revenues. The Pawlenty proposals would create a patrician class while denying money to the government for Medicare or Medicaid. If a tornado, hurricane, earthquake or fire hits your town, too bad. You won’t get a dime in federal assistance unless the money can be taken from elsewhere in the budget. Since there will be very few dollars in the federal budget, good luck.

Corporations

“American businesses today pay the second highest tax rates in the world,” says the former Minnesota governor. “That’s a recipe for failure, not adding jobs and economic growth. We should cut the business tax rate by more than half. I propose reducing the current rate from 35% to 15%.”

The obvious point is that corporations are not paying the official tax rates. What they actually pay are the effective tax rates and those rates are often zero and less than zero.

Here’s an example:

“General Electric, the nation’s largest corporation, had a very good year in 2010,” reports The New York Times. “The company reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States.

“Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.” (See: G.E.’s Strategies Let It Avoid Taxes Altogether, March 24, 2011)

GE, of course, is not the only corporate behemoth that benefits from massive tax loopholes. Oil companies, tech firms and banks — among others — pay less than their share and when they pay lower taxes and no taxes because of lobbyists and overseas tax havens guess who pays more?

Combine little if any taxes for major corporations along with the right to make unlimited political donations under the Citizens United decision and you get representation without taxation, the exact opposite of the traditional arrangement.

In the end — and no matter how dressed up — what Pawlenty and others like him are proposing is not a new tax plan, it’s a new society, one without a safety net, something along the lines of what they have in Mexico, Haiti, Romania and Brazil; places where a few rich live in great splendor, most live in poverty, kidnapping is common, bribery is rampant, and no street is safe.

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Don’t believe it? According to the nonpartisan Congressional Research Service, “If
all earnings were subject to the payroll tax, but the base was retained for benefit calculations, the Social Security Trust Funds would remain solvent for the next 75 years.”

How It Works

Social Security is a regressive tax. That means the more you make the less you pay. Social Security is funded with taxes paid on the payments of wages for services performed as an employee — but not all wages and certainly not all income.

For 2011 the rates look like this:

If you look at the table above you can see the source of Social Security funding problems — and the gross unfairness of the system. Simply put: The households with the most money pay the lowest Social Security taxes relative to income.

Earnings

The term “earnings” for Social Security purposes does not mean all the money someone earns. It means the wages received for labor but generally not dividends, interest, rent, royalties or capital gains.

Why is this important? Imagine you’re a self-employed real estate broker, computer programmer, carpenter, plumber or attorney. You have a net taxable income of $100,000. Of this amount you must pay $10,400 for Social Security. (The self-employed pay 10.4 percent because there’s no employer to pay a portion of the tax.)

Now imagine that the Johnsons receive $100,000 in dividends, interest, rent, royalties or capital gains. Their Social Security tax on such income is zero, so the Johnsons have $10,400 more than someone who sells, programs, saws, plumbs, sues or whatever because monied interests have better lobbyists on Capitol Hill than workers.

Percentages

The table shows that in 2011 the Social Security tax is applied to the first $106,800 in income. For most workers this means the Social Security tax applies to 100 percent of their income. According to the Census Bureau, in 2009 — the latest year for which we have statistics — the median household income was $49,777. And remember that in a “household” we can have more than one wage earner.

Imagine that Smith makes, oh, $50,000 a year as a self-employed daycare operator. The Social Security tax is $50,000 x 10.4 percent or $5,200.

Now imagine that Jones makes $250,000 as a consultant. Jones pays 10.4 percent x $106,800 or a total of $11,107 in Social Security taxes.

Jones plainly pays more in cash than Smith — but then Jones has five times as much income and will receive a vastly larger Social Security pension when he retires. His effective Social Security rate is 4.4 percent — less than the rate paid by his maid or the person who mows his lawn.

But Isn’t Social Security Broke?

Social Security is not broke now and it will not be broke for decades. This year, 2011, it’s expected to produce $121.3 billion in net interest.

“The Social Security Trust Fund currently holds approximately $2.6 trillion and can pay full benefits through 2037,” says Rep. Xavier Becerra (D-CA), ranking member on the House Subcommittee on Social Security.

What About The Deficit?

Federal spending, deficits and surplus figures do not include money paid into the Social Security.

“By law,” says Rep. Becerra, “Social Security can only spend what it has: the contributions workers make from their paychecks, the bonds purchased with those contributions, and the interest earned on those bonds. By law, Social Security cannot contribute to the federal deficit (Chapter 7, Subchapter II, Section 401(h) of the Social Security Act).”

Why Not Privatize Social Security?

If Social Security were privatized big Wall Street banks and brokerages would be able to extract billions of dollars in fees and charges from the retirement accounts of all Americans — meaning there would be an expense where now there is none. More important, unlike Social Security and its guaranteed payments, putting retirement money in the stock market is hardly a sure thing.

According to the Federal Reserve corporate equities were worth $9.643 trillion in 2006 — and $8.514 trillion in the fourth quarter of 2010, a loss of more than a trillion dollars.

How Much Will I Get?

You can estimate your benefits by using the government’s Social Security calculator, but until you look at the numbers don’t make a down payment on a yacht just yet. The typical monthly check is paltry: According to the Pension Rights Center in 2009 the average annual benefit for retired workers was just $13,836 while the typical benefit for couples was $22,512.

What If All Wages Were Taxed?

The Congressional Research Service points out that if the Social Security tax was applied to incomes above $106,800 the actual rate could be reduced.

“Raising the taxable earnings base would lead to an increase in total federal revenues. The Joint Committee on Taxation has estimated that raising the wage base to 90% of earnings, to $186,000 in 2008, would generate $221 billion in additional revenue over the five-year budget window of 2008-2012. Over 10 years, the policy would generate more than $524 billion.”

The obvious point is that if all wage income is taxed and benefits were limited to a reasonable maximum there would be no need to reduce Social Security benefits. Indeed, so much money could be generated the actual tax rate could be lowered for everyone.

“If the base was completely eliminated for both employers and employees so that all earnings were taxed, but those earnings did not count toward benefits, solvency would be restored to Social Security. The increased revenue would eliminate 115% of the projected shortfall and the program would have a projected surplus equal to .28% of taxable payroll. Under this scenario, the payroll tax rate could be immediately lowered from 12.40% to 12.12% and the system would remain solvent for the next 75 years. However, the traditional link between the level of wages that is taxed and the level of wages that counts toward benefits would be broken.”

Notice that we’re still talking about a payroll tax — no one is being asked to pay Social Security taxes on their dividends, interest or capital gains. The rich will still have an advantage, but merely less of an advantage.

An Entitlement Program For The Rich

What’s being discussed here will be described by critics as, oh my, a tax increase. What’s being ignored, what will not be mentioned, is the imputed government subsidy now being paid to upper-income households in the form of lower Social Security rates and no Social Security rates. In effect, the tax not paid or underpaid is an entitlement program for the rich.

The issue, as I have said on Patrick.net, is not the rich versus everyone else, but rather a mindset which says there can never be enough personal wealth even if other people are impoverished and hurt. With such thinking it’s okay to reduce Social Security benefits if only to keep taxes low. The term “reduce Social Security benefits” is a polite way to say that some are willing to have elderly people live out their last years deciding whether their few dollars should be spent on food or rent.

Alternatively, many who are rich would readily accept higher taxes — think of Bill Gates and Warren Buffett — because they understand that higher taxes are cheap when compared with the cost of social anarchy.

“There’s class warfare, all right,” Warren Buffett told the New York Times, “but it’s my class, the rich class, that’s making war, and we’re winning.”

Even the King of Saudi Arabia gets this concept. According to Human Rights Watch he recently increased benefits to Saudi citizens with a “$35 billion package of financial assistance to the unemployed and support for first-time home buyers,” meaning he has $35 billion less but, he hopes, also less social discontent. It’s just a guess, but the betting here is that he will not miss a meal — or close a palace.

Paying For The Benefits of America

There is — and there must be — a cost for those who want access to the vast American marketplace and the security of American society. If you’ve traveled overseas you know that the cost to be an American is entirely worthwhile, especially if you have been to poor or nondemocratic countries.

But the cost to operate our national government is now being paid disproportionately by the poor and the middle class, an arrangement which will inevitably corrode if people don’t feel they’re vested in the system — or doubt that the system is vested in them.

You can already see this. Consider the erosion of social and financial norms represented by the large number of people walking away from their homes and their mortgages, people who do not fear bankruptcy or foreclosure.

“Leaving aside the ethical question of deliberately defaulting, not making mortgage payments has left more money in the pockets of Americans,” says Barron’s. (See: Foreclosures Boost Incomes? March 30, 2011)

Whoever heard of such a thing 10 years ago? As Kenneth Lewis, a former CEO with the Bank of America, explained to the Wall Street Journal, “we’re seeing people who are current on their credit cards but are defaulting on their mortgages. I’m astonished that people would walk away from their homes.” (See: Now, Even Borrowers With Good Credit Pose Risks, December 19, 2007)

If Mr. Lewis were on the other end of the financial spectrum perhaps he would be less amazed. Or, he might consider the words of a former President:

“My position as regards the monied interests can be put in a few words,” said Teddy Roosevelt. “In every civilized society property rights must be carefully safeguarded; ordinarily and in the great majority of cases, human rights and property rights are fundamentally and in the long run, identical; but when it clearly appears that there is a real conflict between them, human rights must have the upper hand; for property belongs to man and not man to property.”
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Copyright 2011 Peter G. Miller, All Rights Reserved. For permission to re-print or re-post this commentary in whole or in part send email to OurBroker.

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The unique $8,000 credit for new buyers and $6,500 credit for existing homeowners helped inject stability into the slumping housing market during 2010.

Consumers and some industry observers have pushed for a renewal of the program to prop up the slow-moving economy. While that doesn’t seem likely, the surprising reality is there’s one segment of the public that can still capitalize on the benefits: those who have been serving our country abroad.

Qualified service members who have been on extended duty have until April 30 to ink a purchase agreement and until the end of June to close on the home. Service members must have spent at least 90 days abroad anytime from Jan. 1, 2009, to April 30, 2010.

Beyond that, qualified service members have to meet the same basic requirements as their civilian counterparts. Among those major guidelines:

• First-time buyers and their spouses have to be exactly that — first timers. To meet the definition, the borrower cannot have owned a home in the last three years.
• Individuals cannot have an annual income greater than $125,000. Married couples cannot have a joint annual income greater than $225,000.
• The purchase price of the home cannot exceed $800,000, which is certainly plausible, even with a VA loan, in some of the nation’s more high-cost areas

For the $6,500 tax credit, existing homeowners basically have to meet the same criteria. They also must have lived in their current home for five of the last eight years.

The tax credit can be applied no matter the loan product, be it VA, conventional or FHA. But a VA loan will often represent the simplest, cheapest and most effective path to homeownership for military borrowers.

Military borrowers across the board will likely need a credit score of at least 620 in order to secure financing.

___________________________________

About the author: Chris Birk writes about real estate and the mortgage industry for a host of sites and publications, including Bigger Pockets, Mortgages Unzipped and Scotsman Guide. A former newspaper and magazine writer, he is also content director for a leading VA lender.

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Zillow reports that US homeowners lost $1 trillion in 2009 and it expects that losses will total $1.7 trillion in 2010. Specifically, Zillow estimates that values dropped by $1 trillion in the second half of 2010 compared with $600 billion for the first six months of the year.

“By comparison,” says Zillow, “from 2001 to the end of September 2010, the war in Iraq has cost $750.8 billion.

Only 31 of 129 markets tracked by the company showed gains in 2010. Negative equity for mortgages properties — situations where the loan balance was greater than the value of the home — reached 23.2 percent in the third quarter of 2010 versus 21.8 percent at the end of 2009.

Tax Credit Impact

“Despite a strong start to 2010, by the end of the year homes lost more of their value in 2010 than they did in 2009,” said Zillow Chief Economist Stan Humphries. “Government interventions like the homebuyer tax credit helped buoy the market during the second half of 2009 and the first half of 2010, but we saw a renewed downturn in the last half of this year. It’s a testament to the nearly irresistible force of the overall market correction that government incentives can only temporarily hold back the tide, and that the market will ultimately find its natural equilibrium of supply and demand.”

However, the reason the tax-credit for first-time homebuyers could only “temporarily hold back the tide” was not because it was ineffective but because it ended with sale agreements made no later than April 30, 2010.

Looking Ahead To 2011

“Unfortunately,” says Humphries, “with foreclosures near an all-time high in late 2010 and high rates of negative equity persisting, it does not appear that the first part of 2011 will bring much relief.”

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A report by the Treasury Department’s Inspector General for Tax Administration shows that nearly 1.8 million taxpayers filed claims under the government’s First-time Homebuyer Tax Credit Program for 2009. Many received an individual credit of as much as $8,000 and their group benefit amounted to almost $12.5 billion.

Unfortunately, 959,813 buyers who purchased in 2008 will have to repay their money because — as we have explained — the 2008 “tax credit” was actually a 15-year loan.

However, there are additional claims that were filed in 2009 and 2010, meaning that the total number of homeowners making repayments to Uncle Sam will likely exceed 1 million.

So what went wrong? How could so many people — and there will be more — wind up owing money?

Qualifications

To stimulate the homeownership market the government has offered several tax credits for “first-time” homebuyers during the past few years. In general, a first-time homebuyer for purposes of the programs is defined as someone who has not owned property for at least three years. In addition, there have been other qualifications as well.

• In 2008 under President Bush there was a first-time homebuyer “credit” of up to $7,500 for married couples and single taxpayers but no more than $3,750 for married individuals filing separately. This money, however, was actually a loan which had to be repaid over a 15-year period.
• In 2009, under President Obama the credit was raised to $8,000 and no repayment was required. The money is an outright grant. However, there are other standards which have to be met, such as owning the property for at least three years.
• In November 2009 the deadline for the first-time homebuyer credit was extended from December 1, 2009, to contracts made before April 30, 2010 but which closed no later than June 30th. (For those on active-duty military service the deadline is April 30, 2011.)
• In 2010 the June 30th closing deadline was pushed back to Sept. 30, 2010.

Repayment Required

There are a number of events that could set off a repayment demand by the IRS.

First, the borrower was not a “first time” purchaser as defined by the rules.

Second, the property of a 2008 buyer ceases to be the main home before the end of the 15-year recapture period.

Third, the home of a 2009 or 2010 buyer ceases to be the taxpayer

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It used to be that a basic American value was a fair day’s wages for a fair day’s work. Over time this standard has been eroded. When I was growing up an individual with a high school degree could support a family, today it typically takes two adults to support a family and even then a missed paycheck or lost hours can lead to economic ruin.

In 2009 the typical household income was $50,303. That may sound like a lot but it’s actually less than the $51,296 earned by a typical household in 1999, a decade earlier. Meanwhile, as household incomes have fallen, what’s happened to the cost of medical care? College? Cars?

And do you think home prices can rise if incomes decline? How will people pay for the bigger mortgages required by growing home prices if income is stagnant or declining?

While the importance of labor has been devalued, the role of capital has become central. Just look at the way we tax labor and the way we tax capital. Improving shareholder value is the mantra of the day and if that means closing a plant within our borders to lower costs and opening one elsewhere that seems to be socially, morally and economically acceptable. And if an “American” company is actually located in a tax haven overseas to avoid US taxes, no one seems to care.

The Social Contract

We’re destroying the middle class and with it the social contract, the idea that if you get an education and a job you’ll have a fair shot at a good life. Not a guarantee of a life with yachts and private planes, but a decent life that will allow you to live better than your parents and their parents before them.

I’ve been to Flint and seen the closed plants and what used to be middle-class neighborhoods. I’ve been to Arizona and Florida and seen the economic destruction that has resulted from the foreclosure crisis. I hear from readers nationwide who face the terror and the tragedy of losing their homes.

We’ve recently seen major political rallies in Washington. Whatever your views, it’s easy to understand that people are frightened by the new economics of fewer jobs, lower wages, homes that are worth less and retirement accounts that yield close to zero. It’s also easy to understand that such fear is the ripe ground for extremism, a willingness to overturn the 1st and 14th Amendments, an effort to brand some of us as “real” Americans as opposed to individuals with different views who presumably are not “real” citizens.

Tax Rates

Most unfortunate is the willingness of people to argue against their best interests. From 1940 through 1963 the highest federal tax rate never fell below 80 percent. Today the maximum rate is 35 percent.

On one hand the federal government is collecting far less revenue than it needs because we have failed to tax fairly while on the other we’re spending more than we should — just consider the needless wars in Iraq and Afghanistan. During the Bush Administration, for example, the deficit increased by $4.35 trillion and the income needed in future years is now being denied through the passage of massive tax cuts for America’s rich during the Bush presidency.

It should be obvious that if as a nation we have debt we will have more debt if not everyone pays their fair share of taxes. Or, we could tax less and shrink the government to the point where it’s useless — exactly the idea of those who believe there’s too much government, however much government we have.

We have many people who worry about the inheritance tax, fearing perhaps that their families will be hit with a huge bill. The facts, and the reality, are different. In 2004 — the latest year for which we have statistics — 42,212 estates paid federal taxes. That same year, 2,397,615 people died in the U.S. In other words, only 2 percent of all estates paid a tax.

In fact, among the very rich few pay much or any tax. As an example, Leonard Boasberg, writing in the Pittsburg Post Gazette, says “billionaire George Steinbrenner, the late owner of the New York Yankees, couldn’t have timed his death more conveniently for his heirs. The inheritance tax this year is zero.” (See: For the rich, it’s a good time to die, September 2, 2010).

“Where have all the economic gains gone?” asks former Labor Secretary Robert Reich, writing in the New York Times. “Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.” (See: How to End the Great Recession, September 2, 2010)

Happily, it’s possible to be both rich and sensible. Bill Gates and Warren Buffett have both said they favor higher inheritance taxes — and they’re the very people with the most to pay.

Less Government

Let’s think through the logic of this: Who should pay taxes, you or someone who makes more than you? If someone else pays less guess who pays more? While “less government” sounds like an exciting concept, do we want the government to function or do we want to give up on roads, clean air, disaster assistance, food inspectors, decent schools, medical research, veteran’s benefits, Social Security, Medicare, air traffic controllers, and bank regulations? Who would benefit in such circumstances — and who wouldn’t?

Homeownership is becoming a luxury and not a source of intergenerational wealth. Interest rates today are below 4.5% but it’s tough to get such financing if you have a blemish on your credit report. Of course, the very same lenders who gleefully deny mortgage applications send out more than a billion credit card offers to attract borrowers, often at 29.9 percent — plus fees. Lenders are getting some of the money they lend from the Federal Reserve at virtually no cost, almost zero interest since late 2008.

We can do better than this. We ought to do better. And we ought to worry about the consequences of losing the middle class and breaking the social contract.

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Photo Source: Library of Congress, Lewis B. Hine.

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But when you look at the forms, deductions, exceptions, alternatives, and deadlines you have to wonder: Why are we asking military people to pay taxes at all?

Conservatives often believe that taxes should be reduced because cash is the fuel which permits government expansion — cut tax revenues and you also cut the size of the government. As well, many conservatives believe that since the rich pay most of the taxes, they should benefit most from reductions, reductions which will fuel economic growth in general. Liberals routinely argue that tax cuts are fine as long as they are “revenue neutral” and benefit the poor and middle classes, the folks with the fewest economic choices.

If there is an itch to cut taxes and enjoy the wonders of growing deficits, why not please both conservatives and liberals and do something which actually makes sense: End the taxation of military incomes.

We don’t pay much to members of the military in terms of cash salaries and that’s absurd — leading officials at Freddie Mac, Fannie Mae, Enron, Wall Street “analysts,” and trial attorneys have been far-better compensated and look how much they have helped the country. It seems terribly short-sighted to believe that we can combine an all-volunteer military with a minimum wage and continue to attract an ongoing stream of qualified personnel to do the country’s important and dangerous work.

So why not make all military wages go further? Increase military pay now, today, by simply making it tax free. No forms, no deductions, no deadline, no accountants, no exceptions and no paperwork. The value of military salaries would automatically rise, making service more attractive. And for those who favor fewer dollars for government, a tax cut for service personnel in the armed forces would do just that.

Tax-free military incomes would make federal service more attractive and lift many military families out of poverty — a national disgrace. In terms of real estate, combine a tax-free income with VA mortgages and members of the military could afford bigger mortgages and better housing — results which benefit us all. And while we’re at it, let’s gut home sale regulations which unfairly tax members of the military stationed overseas for lengthy periods.

So write your nearby representative or senator and see what they have to say — it will be interesting to see who opposes an idea which is no more than a decent thing to do and in the country’s best interest.

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Published originally by Realty Times on April 22, 2003 and posted with permission.

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