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Fill Form 2220 Reduction: What You Should Know

Not very fair, not very effective, and not fit for purpose. It's not surprising that the tax code is a mess. As it has evolved over the centuries, it has been crafted to maximize a relatively small number of taxpayers' incentives to do things. The modern tax code is designed to encourage capital investment, which is a good thing. We want more of it, especially when it is financed with debt. The reason for the tax code's problems is that it discourages capital investment in a way that penalizes saving and investment in the future. I'll begin with a brief description of capital investment before explaining how the tax code can actually make it less productive. The chart shows the relationship between the expected future tax payments and investment in various investments. It turns out that the more likely you are to receive a tax break for investment, the less investment that should be done in the future. A tax break for capital investment means that a 250,000 investment has a tax bill of 150,000 (a 20% tax rate), and a tax break for retirement savings has a tax bill of zero (a zero percent tax rate). But this relationship is not static. As long as Congress allows any given investment to be deductible, the tax rate on such investment will eventually get lower and lower. A tax break for retirement savings would have the exact opposite effect if it didn't take up some of this deduction. In that sense, the incentives to invest are always changing in any given year, even though the underlying incentives for investment remain the same. In the 1980s, for instance, the tax reform legislation enacted in that decade eliminated a number of deductions, and the overall savings of about 20 billion over 10 years proved to be a huge boost to capital investment. When we talk about how the tax system is broken, we're not just talking about the corporate income tax, which currently has a top rate of 35 percent and a top rate of 39.6 percent when state and local income is included, which also have negative marginal tax rates. The tax code also allows companies to deduct interest on loans they take out to acquire and expand their enterprises (although for now the interest deduction caps at a maximum of 8 percent of earnings). The top marginal tax rate on earnings for high-income households is now 50 percent, and the top marginal rate on capital gains income is currently 15 percent. Capital spending is taxed at 39.

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