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Tax code review on a slow summer day

As I See It

Having temporarily tired of politics, this week I decided to visit the Internal Revenue Code to see if there is anything there of interest.

Obviously, it’s a slow news day.

Most readers know that home mortgage interest expense is tax deductible while apartment rent is not. Why? Initially, this provision was put in the law to encourage the perceived stability of home ownership. You know, buy a home and stay in one place and get involved in the community and be a great citizen.

Times have changed and I think this provision of the tax law is outdated. Our mobile society is constantly on the move. Since the life of a home mortgage is about the same as an apartment lease, I doubt there is much increase in community stability resulting from home ownership. I fail to see the fairness in penalizing apartment dwellers by allowing home owners a tax deduction for home mortgage interest.

Meals eaten out-of-town on business are partially tax deductible. Why? Is there an assumption that people only eat when they are out-of-town on business? Do they eat more when out-of-town and therefore require taxpayers to subsidize their “on the road eating?” It seems to me that eating is eating and it is a basic human necessity and allowing a tax deduction for it is hard to defend.

The “minimum tax” is one of my favorites. Get the picture. If a taxpayer complies with each and every tax law and chooses to take advantage of legally mandated tax benefits, he is liable to be hit with a minimum tax surcharge in addition to the regular income tax. Why is that? Tax benefits are put in the law to encourage certain taxpayer behaviors. If taxpayers take the bait and engage in the desired behavior, they are subject to a tax penalty. Go figure!

Death is a taxable event in our country. The underlying theory is that you have no right to pass along your property to the beneficiaries of your choice. It is better for the government to inherit your property at your death. After all, your beneficiaries didn’t have anything to do with your accumulating wealth and therefore they are not entitled to have it at your death. Admittedly, there is a large exemption from estate tax which allows you to bequeath a sizable chunk of property to heirs of your choice tax free.

The irony of the estate tax is that it rewards a high-living life style in that if you spend it all before you die, there is no tax. Only those who live frugally and accumulate are taxed. Contrast this result with a national sales tax which would penalize consumption and reward saving. As I have written before, I think a better tax policy for the U.S. would be a flat income tax coupled with a national sales tax. Choosing this option would lower income tax rates, tax consumption and discard the incomprehensible, loop-hole riddled Internal Revenue Code.


As a reward for reading this column, I shall leave you with a tax loophole that all of us can use with impunity.

Here are the steps.

1. Buy a cash-value type life insurance policy and “borrow” the cash value tax-free at retirement with no intent to ever repay the “loan.”The interest earned over the years on the cash value has accumulated tax-free and the loan to the policyholder is not taxable.

2. Die. When you die, the death benefit will pay off the loan and neither you nor your heirs will ever have to pay income tax on the interest accumulated inside the policy. There will be no estate tax since the loan is a debt of the estate and eliminates any tax that would otherwise be due on the life insurance death benefit. Nifty, huh.


A generation of heathen hedonists, worshipping the idols of happiness and material success, will be unable to evoke the Herculean strength necessary to contain the mighty tide of godlessness in the defense of liberty.

— Rabbi Daniel Lapin,

from the book, America’s Real War

Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. His e-mail address is cpajones@msbusiness.com.


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