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The Most Absurd 'Loophole' in the Tax Code
Breitbart ^ | 8 Dec 2012 | Mike Flynn

Posted on 12/19/2012 2:43:21 AM PST by plsjr

We all know that the U.S. tax code is riddled with "loopholes", exemptions and deductions intended to incentivize certain activities. ... to the technocrats in the federal government, the tax you don't have to pay on the value of rent you don't have to pay because you own your home is a loophole. Read that last sentence again. Its called "The Imputed Net Rental Income on Owner-Occupied Housing" and the feds include it in their annual list of "tax expenditures." That term is how Washington officially refers to credits, deductions and exemptions. Here's how the federal government describes it:

Under the baseline tax system, the taxable income of a taxpayer who is an owner-occupant would include the implicit value of gross rental income on housing services earned on the investment in owner-occu-pied housing and would allow a deduction for expenses, such as interest, depreciation, property taxes, and other costs, associated with earning such rental income. In con- trast, the Tax Code allows an exclusion from taxable in- come for the implicit gross rental income on housing ser- vices, while in certain circumstances allows a deduction for some costs associated with such income, such as for mortgage interest and property taxes.

Let's say you own a home and your mortgage is $1,000 a month. If, however, you instead rented the home from a landlord your rent, let's say, would be $2,000 a month. To the mandarins at the IRS, you are "earning" an implied $1,000 a month because you own and not rent, and that "value" should be added to your taxable income. If you own your home out-right and don't have a mortgage at all, you would be "earning" $2,000 a month which the IRS thinks should be added to your taxable income.

(Excerpt) Read more at breitbart.com ...


TOPICS: News/Current Events
KEYWORDS: irs; loophole; state; tax
Looks like there are more reasons than zippy-care for hiring an outlandish number of additional tax-collectors.
1 posted on 12/19/2012 2:43:33 AM PST by plsjr
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To: plsjr

So the assumption by the IRS then is that everyone *should* be renting. That they are living in their own house provides them with “income” in the form of money they *didn’t* have to pay in rent. By the same token, if they can conclude that you would shell out more to use public transportation than to own your own car, you’d owe tax on the difference there as well, and any other behavior that might cost you less than what the IRS thinks you should be doing.


2 posted on 12/19/2012 3:02:26 AM PST by Little Pig (Vi Veri Veniversum Vivus Vici.)
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To: plsjr

So this is on the books, the FED is just not enforcing it - but it could - later down the road?

Nice...

So, If I watch the movie Star Wars and like it - the FED has already made the assumption that I might possibly built a Aluminum Falcon and start space exploration - and therefore, I should be taxed for possible transportation of two droids, an old man, and young boy who may or may not have something to do with bringing down the Empire?

Did I get that right?


3 posted on 12/19/2012 3:05:50 AM PST by BCW (http://babylonscovertwar.com/index.html)
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To: plsjr

The ‘Imputed Tax’ scenario. It was projected this was coming under 0bama. Hold on to your shorts; Bubba is coming.


4 posted on 12/19/2012 3:10:03 AM PST by Safetgiver ( Islam makes barbarism look genteel.)
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To: BCW
So this is on the books, the FED is just not enforcing it - but it could - later down the road?

The code includes an "exemption" from tax on the "additional imputed income".

They could drop the exclusion and we'd be paying taxes on money we don't actually recieve as income.

At least that's the way I read it assuming that is actually what the tax code says.

5 posted on 12/19/2012 3:14:24 AM PST by sonofagun (Some think my cynicism grows with age. I like to think of it as wisdom!)
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To: Little Pig

Go another step and apply that same thinking to work you do for yourself. Mow your own grass, pay yourself a prevailing wage for the time spent and declare the income.


6 posted on 12/19/2012 3:15:22 AM PST by WinMod70
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To: sonofagun

Then again, the passage on the tax is not sourced in this article.


7 posted on 12/19/2012 3:16:17 AM PST by sonofagun (Some think my cynicism grows with age. I like to think of it as wisdom!)
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To: Little Pig

So the assumption by the IRS then is that everyone *should* be renting.
*************************************
You haven’t been paying attention ... The gov’t owns about 95% of the mortgages through FNM and FRE , they are the “man behind the curtain” that is pushing all the foreclosures through despite knowing that their ownership has been lost in the securitization process... They are also selling HUGE blocks of stolen homes to investor groups to be used as rentals ..


8 posted on 12/19/2012 3:22:42 AM PST by Neidermeyer
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To: Little Pig

So the assumption by the IRS then is that everyone *should* be renting.

We never own our own land, we rent it from the “king” that is government.


9 posted on 12/19/2012 3:32:25 AM PST by GraceG
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To: plsjr

Next on the list should be the market value of “marital relations”, since at least a few married people get that benefit without paying the retail price. Will they require activity reporting or just assess imputed income based on average rates?


10 posted on 12/19/2012 3:34:52 AM PST by Pollster1 (Freedom is never more than one generation away from extinction. - Ronald Reagan)
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To: plsjr

Well I guess we’re entitled to “impute” depreciation and to write off repair costs, then. Sweet!

Thanks, Washington!


11 posted on 12/19/2012 3:41:36 AM PST by RegulatorCountry
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To: plsjr
Let's say you own a home and your mortgage is $1,000 a month. If, however, you instead rented the home from a landlord your rent, let's say, would be $2,000 a month.

so... if I don't rent from Fred, I make $1000 per month, but if I don't rent from Joe, I make $1500 per month?

Tell you what - I'll not rent from Vinnie in New Yawk - then I'll make $4000 a month!

12 posted on 12/19/2012 3:49:44 AM PST by Izzy Dunne (Hello, I'm a TAGLINE virus. Please help me spread by copying me into YOUR tag line.)
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To: Izzy Dunne

Woohoo, we’ll all be rich. /s


13 posted on 12/19/2012 3:51:11 AM PST by RegulatorCountry
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To: Izzy Dunne

Don’t say that too loud or they’ll be asking you to pay taxes on the $4K/Mth.


14 posted on 12/19/2012 4:12:38 AM PST by Portcall24
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To: plsjr

Later


15 posted on 12/19/2012 4:25:34 AM PST by I_be_tc
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To: sonofagun
Read it again ~ when they impute rent they also impute depreciation and other costs associated with maintaining the property to be imputedly rented.

Notice that you do not currently get to deduct depreciation, or operating expenses (power, gas, sewer, water, paint, mowing, trimming, mortgage, trash removal) from your income.

Let's say Congress went totally nuts and decided to go after imputed income from owning a home ~ they'd set the initial value of the property at whatever it is on the market today ~ and the net rental income would be determined the regular way ~ gross rental income less deductable expenses and depreciation.

For about 99% of the individually owned SFDs, condos and trailers in America you'd be showing a loss! Actually, every time a large scale analyis of the situation has been attempted by anyone, they come up with a negative number.

Many people imagine their home value, as it increases over the years due to inflation, surrounding higher quality growth, and all the good stuff, is a serious personal profit center but it's not.

16 posted on 12/19/2012 4:25:57 AM PST by muawiyah
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To: sonofagun
Read it again ~ when they impute rent they also impute depreciation and other costs associated with maintaining the property to be imputedly rented.

Notice that you do not currently get to deduct depreciation, or operating expenses (power, gas, sewer, water, paint, mowing, trimming, mortgage, trash removal) from your income.

Let's say Congress went totally nuts and decided to go after imputed income from owning a home ~ they'd set the initial value of the property at whatever it is on the market today ~ and the net rental income would be determined the regular way ~ gross rental income less deductable expenses and depreciation.

For about 99% of the individually owned SFDs, condos and trailers in America you'd be showing a loss! Actually, every time a large scale analyis of the situation has been attempted by anyone, they come up with a negative number.

Many people imagine their home value, as it increases over the years due to inflation, surrounding higher quality growth, and all the good stuff, is a serious personal profit center but it's not.

17 posted on 12/19/2012 4:25:57 AM PST by muawiyah
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To: sonofagun
My understanding is that the tax code includes this "imputed income" for the purpose of establishing income levels for certain things (maybe taxation of Social Security benefits for different brackets?), not for the purpose of actually collecting taxes on the "imputed income."

If the Federal government ever began taxing this kind of "imputed income," smart homeowners would simply do what some of my associated have done: transfer the ownership of the home to a limited-liability corporation owned by the homeowner*, pay rent to the corporation, and have the corporation legitimately deduct every penny of repairs, insurance, etc. on the home when computing its "income."

The IRS would end up collecting less revenue in that situation than under the current scenario.

* One particularly creative guy I know has his entire family listed as shareholders in the limited-liability company that owns his home. They make a point of holding their annual shareholders' meeting in Orlando every spring ... and deduct most of the cost of their annual Disney vacation as a "business expense."

18 posted on 12/19/2012 4:27:51 AM PST by Alberta's Child ("I am the master of my fate ... I am the captain of my soul.")
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To: plsjr

Real estate in the city is pretty expensive. In some municipalities, even the parking space you own has a high dollar value.

I wonder what the value of a 6x6 square of sidewalk or alley is in the city. Lots of imputed income on the homeless.


19 posted on 12/19/2012 4:34:21 AM PST by fruser1
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To: muawiyah

they’d set the initial value of the property at whatever it is on the market today ~Wrong. They’d set the value at what a similar abode WOULD rent for something, THEY deem is realistic. For instance, My 25,000 sq. ft. home would be deemed to be rentable for $4000 per month. I pay $785 a month for my payment which includes insurance, property taxes and school taxes as well as fire hydrant taxes and street light taxes. I may not deduct the taxes towards the value. They say, (the gov.’t) Your rent is $4000 a month, so you need to report 48,000 a year minus your principal ($195 a month) and pay taxes on that.


20 posted on 12/19/2012 4:39:31 AM PST by Safetgiver ( Islam makes barbarism look genteel.)
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To: plsjr

There will be ‘a whole lot of people’ who will have to go off welfare and food stamps because they will be considered rich.
The government will discourage ANY home ownership.

(What happened to ‘everyone should own their own home?’)


21 posted on 12/19/2012 4:53:56 AM PST by PastorJimCM (truth matters)
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To: Safetgiver
Again, compute the imputed rental income as taxable the same way rental income is ordinarily computed as taxable. There are deductions ~ most of them are things you can't now deduct on your private residence.

In a market where there are still a significant percentage of SFDs sanding empty, comparable rents (where all SFDs fall within the gaze of the taxpukes) are LOW ~ so it's not the lucky guy who gets $4,000 a month in reality who sets the tone of the analysis ~ it's the AVERAGE of all comparable properties ~ with half of them getting $0 a month that must be used.

22 posted on 12/19/2012 4:59:07 AM PST by muawiyah
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To: plsjr

So instead of being a $100000/yr musician/song-writer I could have made $400000 a year as a pediatrist. So I should pay an additional $100000 in taxes on income I decided not to earn. Where do I send the check?..../sarc


23 posted on 12/19/2012 5:18:20 AM PST by wesagain (The God (Elohim) of Abraham, Isaac and Jacob is the One True GOD.)
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To: Safetgiver
My 25,000 sq. ft. home would be deemed to be rentable for $4000 per month.

Are you a movie star?
Your house is huge!

24 posted on 12/19/2012 5:24:49 AM PST by libertarian27 (Check my profile page for the FReeper Online Cookbook 2011)
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To: plsjr

For those of you who don’t think this is real, this was first developed by the IRS in 1976 during the Carter administration. I was stunned when I found out about it.

As far as I know it is not in the tax code and it should stay that way.


25 posted on 12/19/2012 6:26:27 AM PST by buffaloguy
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To: BCW
that I might possibly built a Aluminum Falcon

Let me guess--another triumph for "auto-correct". (Millenium Falcon)

26 posted on 12/19/2012 6:38:58 AM PST by exit82 ("The Taliban is on the inside of the building" E. Nordstrom 10-10-12)
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To: plsjr

Speaking of crazy deductions, how about the uncapped deduction of state income taxes paid? Is this not a subsidy by the taxpayers in low state income tax and no state income tax states to the taxpayers in high state income tax states?


27 posted on 12/19/2012 6:47:49 AM PST by Stingray51
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To: buffaloguy

Yes, the concept has been around for a long time, buried away among the multiple alternative definitions of income that the economists have devised. “Income” is actually a quite slippery concept when you start looking at it closely. What do you count, and how?

IMHO, employer contributions to employee’s health insurance and pension plans should count as taxable income, as should all transfer payments including both Social Security and other welfare paynents. The insurance value of Medicare and Medicaid should count. Etc.

Inclusion of imputed rental income has never made intuitive sense to me for tax purposes, but the idea does make some sense if the purpose is to measure economic well-being on a consistent basis across the population, which I think is why the measure was first devised. A similar wrinkle is whether and how to count a number of wealth effects like the buildup of cash values in life insurance, unrealized capital gains, rising property values, etc. It’s fine to try to measure such things if one is trying to analyze the dynamics of wealth and income in the society, but transfering the concept into the tax arena is another matter. Of course, given that government is bankrupt, the lefties can be counted on to argue that if something can be measured, it can be taxed.


28 posted on 12/19/2012 7:10:28 AM PST by sphinx ([)
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To: Stingray51

no ~ taxes are assessed on individuals ~ not states ~ so if you get lower taxes by chosing to live in Aransas than by living in California that’s your choice ~ not theirs!


29 posted on 12/19/2012 7:52:35 AM PST by muawiyah
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To: muawiyah

My point is that if you live in Texas with no state income tax, you do not get any deduction for state income taxes paid so the federal government gets full freight from you on your federal income tax. If, however, you live in New York City and are paying over 12% of your income in state and local income taxes, you get to deduct those amounts from your income and the federal government receives less money from you than it would if you made the same income in a no-state income tax state. This amounts to a diversion of would-be federal tax revenues to spendthrift states, i.e., a subsidy by the taxpayers in Texas (Florida, etc...) of the bloated state budgets of the high-tax states. In other words, all other things being equal, Texas taxpayers pay a higher percentage of their income to the federal government than do New Yorkers or Californians.


30 posted on 12/19/2012 8:00:23 AM PST by Stingray51
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To: Stingray51

There’s no diversion by the states ~ you chose where you want to live. Besides, federal tax levels ARE NOT determined by what is needed by the government ~ they’re willful, arbitrary and capricious in the extreme. No decision by any state can be traced to the results!


31 posted on 12/19/2012 8:12:13 AM PST by muawiyah
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To: plsjr

It makes sense if you’re going to be consistent with all the taxes on passive income we slap on those who invest in stocks or a business or whatever, rather than a McMansion on a hill.

(My answer would be to tax neither, but that’s another story.)


32 posted on 12/19/2012 8:33:46 AM PST by 9YearLurker
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To: 9YearLurker

not to be too cynical but if we are going to continue to have an income tax, all income from whatever source derived MUST be taxed, or not taxed, on the same basis. That would allow individuals to treat themselves as a business and end up owing very little ~ at the lower end of the income spectrum.


33 posted on 12/19/2012 1:19:41 PM PST by muawiyah
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To: muawiyah

My point is simply that as a result of the deduction for state and local taxes, low tax state residents (Texas) pay a higher net percentage of their income in federal income taxes than do high tax state residents (New York, California...). This means that Texans (and others) end up paying more than their fair share of federal taxes in order to make up the taxes not collected in the high tax states, due to the deduction.


34 posted on 12/19/2012 2:41:00 PM PST by Stingray51
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To: muawiyah

Not really, you’re talking about active income and that is already either taxed like personal income (e.g., a subchapter S) or otherwise covered if regular corporate income.

The reality is that many, many small businesses put capital into their business and when they get a return on that it is taxed like regular income when in reality it is investment income.

If we tax investment income as highly as active income we will really be putting a major, major drag on the economy, as people will simply consume rather than invest.


35 posted on 12/19/2012 3:32:31 PM PST by 9YearLurker
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To: 9YearLurker

Simply tax all income the same ~ at the lowest rate with the greatest number of deductions, exceptions, exemptions and credits.


36 posted on 12/19/2012 4:48:35 PM PST by muawiyah
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To: Stingray51

All sales tax is deductible in states with no income tax.


37 posted on 12/19/2012 4:57:35 PM PST by eyedigress ((zOld storm chaser from the west)/?)
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To: Stingray51

There’s no making up going on in the structuring of federal tax rates. Seriously ~ they are simply willful, arbitrary and capricious ~ there is no rationale at all behind any of them, least of all hoping to make up for losses in one state by collecting more in a different state. Just doesn’t happen.


38 posted on 12/19/2012 5:09:57 PM PST by muawiyah
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To: muawiyah

Do that and you’ll be heavily taxing anyone who decides to invest, rather than consume, their income after they’ve already paid taxes on it.

On the other hand, anyone who spends all of their income doesn’t have to pay any more than any sales taxes for spending it all.

That is a major tax hit on those who would do what is better for our economy—and manifestly unfair.


39 posted on 12/19/2012 5:22:12 PM PST by 9YearLurker
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To: 9YearLurker
You are drawing a distinction that does not exist in reality. Every swinging ....... invests every day in his own continued existence. Sometimes he makes a profit and sometimes he doesn't.

Someone with a bit more saved up might invest in something a bit beyond his control ~ stocks, bonds, simple bank savings ~ maybe a new car so he can travel to a better job. Someone with even more savings might open up a business and employ himself, or maybe just hire a manager to run the shop.

You work your way up the line and you'll find that NO ONE with some little bit of free money (not tied down by basic investments in meat, potatoes and condiments) gives up trying to make more money.

Current rules allow GE to not make a profit ~ so they didn't pay any taxes!

I want that part!

40 posted on 12/19/2012 5:38:04 PM PST by muawiyah
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To: muawiyah

That’s not actually how people spend their money. Lots of people spend their money on vacations, clothes, bigger houses, fancier cars, expensive restaurants, etc..

In our culture investing is more the exception than the rule.

The crony capitalism that GE plies is obscene—but that doesn’t have a thing to do with personal marginal tax rates.


41 posted on 12/19/2012 5:46:30 PM PST by 9YearLurker
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To: 9YearLurker
lots of people spend an awful lot less on vacations and such these days than they used to.

if you think sumptuary taxes are necessary, get them passed ~ leave folk's savings alone, even if all they can put away are a few bucks here and there.

Many of our modest 'high earners' are also supporting other adults during the Great Obama Recession ~ they are making an investment ~

42 posted on 12/19/2012 6:04:41 PM PST by muawiyah
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To: libertarian27

Just an example. 2500, 3500 50,000 the point is the gov’t. will figure out what it’s worth.


43 posted on 12/19/2012 6:57:17 PM PST by Safetgiver ( Islam makes barbarism look genteel.)
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To: plsjr

These are the same pinheads that also said if you buy a product, let’s say a bar of soap, on sale for $1 versus a normal charge of $5 that $4 savings should be taxed.


44 posted on 12/19/2012 7:38:13 PM PST by CodeToad (Liberals are bloodsucking ticks. We need to light the matchstick to burn them off.)
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To: muawiyah

I’m for savings, whereas you’d be killing it by taxing savings income like regular earned income!

And I’m not for sumptuary laws—just not for killing people on unearned (investment) income.


45 posted on 12/19/2012 9:03:51 PM PST by 9YearLurker
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To: 9YearLurker

look, people with enough surplus income to save do so ~ they understand how money is made. that they might give up saving is a ridiculous reason to tax people differently.


46 posted on 12/19/2012 10:23:18 PM PST by muawiyah
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To: muawiyah

So you don’t believe that taxation affects behavior?

Do you believe in the fundamental laws of economics?


47 posted on 12/19/2012 10:32:32 PM PST by 9YearLurker
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To: 9YearLurker
The 'laws' of anything are most likely nothing more than DESCRIPTIONS OF SEQUENTIAL PROCESS.

The real 'laws' behind economics include the uncertainty principle ~ among other things. Now that's a law.

But, i think you want to argue something else ~ maybe you want me to believe that people of drive and ambition will just give up and crawl into caves if everybody pays the same tax rate.

Frankly, that is a bizarre belief. First, we'd have to imagine a world where there were no Jews ~ you can beat them down over and over and they keep coming back. You can destroy their communities, their culture, their population ~ and somebody will be out there rebuilding the instant the swords and firebrands go away.

Then, there are the Huguenots ~ it was noted during the time of their travails that France had run out of Jews to persecute, or to run businesses for them, so they created a new class of Jews ~ to wit, the Protestants whom the government persecuted in the same manner they had earlier persecuted the Jews.

No, I don't think eliminating meaningless categorizations of income of supposedly different types, and then taxing it at the same rate will cause the rich to give up hope and abandon the pursuit of money, nor will the poor give up the same ambition!

BTW, I'm in favor of eliminating the income tax and returning to the sort of taxation envisioned by the founders where the individual never came into contact with the federal tax collectors ~ all taxation was to be indirect at the federal level.

I thought I was clear on the matter when I started my part of the discussion by noting that 'if we are stuck with an income tax, it must do so and so, not this and that'.

48 posted on 12/19/2012 11:06:55 PM PST by muawiyah
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