Tuesday, April 15, 2008

The U.S. Tax System is Screwed Up

Before I start down this path, let me say that I consider myself very fortunate. What follows is meant as a critique of the U.S. tax code, and should not be read as a personal complaint, although, I must say that I do find this situation both frustrating and perplexing.

Today is tax day. Yesterday our returns were finally completed by our tax advisor (the reason that they were so late is another story which I will cover at a later time), and it turns out that we owe... wait for it... over $12,000. Yikes. So how could this be? A number of reasons but here is the biggy: Alternative Minimum Tax. Good ol' AMT.

Yes, in absolute terms my wife and I make a very good living. Most people in this country would trade places with us pretty quickly. In other parts of the country our income would certainly make us wealthy, however, here in Silicon Valley we are not even close to wealthy. As readers of this blog know, I have written many times against buying a house as an investment. My wife and I rent. However, on Sunday we went to see a model house in a new development in our neighborhood. Let me put things in perspective. The house, while new and nice, was a three bedroom townhouse, with no yard. The cost? $1.3 million. Let me be very direct here: there is no way on earth that we can afford to pay that price for a house (or for anything else), and this was NOT a fancy house.

So here is the way I see it. We cannot afford to buy even a modest house in the town in which we live - in my mind that means that we are not wealthy. However, because we have three kids and live in a state with high income taxes (California), the Federal Government considers us wealthy and hits us with the penalty rich man's tax.

In my business travels, I spent much time in South Carolina, Ohio and other places around the country. If we made anywhere near our income level elsewhere in the country (with the exception of Manhattan), we would be able to afford very nice houses, and could legitimately be considered wealthy. However, here in Silicon Valley we are simply middle class.

Why is the Federal tax code not indexed for cost of living in the various states? Why are citizens living in expensive parts of the country being penalized?


Traciatim said...

They aren't penalizing people for living in affluent areas. You know the rules of the tax code and choose to live there anyway. If you were really that angry about it you would move. If you can't take the heat . . .

Shadox said...

Of course - we could move - but I don't think that the federal government should be creating incentives / disincentives for population movements around the country.

Moving is certainly an option, but I guess an equivilent answer would be "make less money". The place I live or the income we make is not the issue. I certainly don't object to paying my fair share. However, there are legitimate issues with the tax code that create some wierd and completely inappropriate (and probably uninteded) consequences.

AMT is a ridiculous, outdated notion. It does not capture the vast majority of folks it was originally intended for. On the other hand it captures a whole bunch of people that have made a few critical errors - such as having too many kids or that choose to live in states that impose higher taxes on them. I feel that AMT (along with the rest of the tax code) should be completely redesigned. Completely scrapping it would not be a bad idea either.

saving in the midwest said...

The problem here is the AMT is outdated and unworkable--not that taxes should be indexed to cost of living. Like traciatim said, you choose to live where you live. Allowing you to pay less would equivalent to making people in Ohio pay more, which is still creating disincentives to live certain places, just in the opposite direction.

Shadox said...

Saving in the Midwest - maybe you have a point there. If we can all agree that this AMT business is completely ludicrous that's good enough for me.

Ted said...
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Ted said...

You're confusing two separate things that are only linked by money and outrageousness. The place where you live is what is truly screwed up to your situation, not your tax rate. The tax code is another issue all together.

Of course if you get enough people to whine loud enough maybe the government will bail you out, too.

The fact remains that you are rich, no matter how your perception is altered by your surroundings.