The Convergence of Good Friday, Tax Day and Easter

The irony of this week should not be lost. Good Friday, tax day (although delayed until Monday) and Easter were together this year. I spent part of the days preparing my taxes this year which are excessive. That is in part because of the AMT - which is increasingly catching middle class people; but also in part because of capital gains. The California income tax does not recognize capital gains (which are currently at 15% on the federal level) thus all capital gains are taxed at the highest marginal rate (9.3%). So one of the benefits from living in California is that your state taxes on gains are more than 2/3 of your federal ones.

Capital gains is an odd concept because the government gets to recognize all of your profits even though they take some of them through inflation but they only participate in part of your losses. I sold a big chunk of Apple last year (albeit a bit too early) and so got socked. I understand the concept of income here but income is not static you don't earn it in one taxable year- thus, it should have some recognition of the cuts that our government has made in the true value of the asset. Pure inflation would be harder to calculate so they go to a reduced rate - although there is good theory behind taxing capital at lower rates.

The tax system needs to be thought about more carefully - lower rates, which Bush helped to implement at the federal level, are always a start. But a lot of the complexity needs to be brushed away too. The Alternative Minimum Tax was established originally to ensnare very rich people who were thought not to be paying their "fair" share of taxes. In reality, as most items in the code designed to do this have done, it moved down into the ranks of the middle class and now gets a whole lot of people. Were the code to be simplified there would be no need to have an AMT.

I liked most of what the tax panel proposed earlier in the year. It limited mortgage deductions, generally cut away a lot of the underbrush that infests the Internal Revenue Code and changed the charitable deduction to a modified credit. (Assuming everyone gives something to charity and that after a modest floor, people could get credit for their gifts.) But the administration has shown itself, like it did on social security reform, to be woefully inadequate in advancing a reform agenda. Perhaps, one should look more to Secretary Snow and less to Rumsfeld (or perhaps both) in yammering about who should go.

Anyway, Happy Easter.