Tax No-No: Don't Inflate Your Deductions by 6x (duh)

For those of you working on your taxes trying to figure out all of your charitable donations from the past year, keep in mind that it's probably a bad idea to try and claim deductions six times the fair value of your donation. TaxProf Blog has a post about a court case involving a Goldman Sachs investment banker who made $115k and tried to deduct $55k in used clothes donations. While the tax court found that the fair value of the clothing donation was only $9k, amazingly enough it found that the Goldman investment banker was not negligent in overestimating the value of her donation. So, how in the world do you explain $9k in used clothing? From the Tax Court's ruling:

According to [the Goldman banker], she routinely purchases designer clothing and shoes, wears the items once or twice, and then donates them to an upscale thrift shop in New York, New York.

That's terrific. My only question is how in the world she found the time to do all of this shopping, especially given the legendary hours that i-bankers are known to work.

Thoughts on a Flat Tax Proposal

A recent post from someone named 'popoman' on John Edwards' blog (note eerie resemblance to the Walmart website; second note: Barack Obama's website designed to look like MySpace?; third note: this is NOT John Edwards' plan or proposal):

Is there some reason we can't take [sic] tax the trillions of dollars hidden away from taxation (stock and bond property) of the Multi-Billion dollar companies and wealthy individuals? Why not take total wealth of all people and companies and tax them 30% per year and tax the people making less then $200,000 dollars a year 25%. No deductions for those above $200,000. Take the money and re-invest into society. Eliminate Poverty, Homelessness, Un-education, Sickness (mental and physical)!

A modern-day Robin Hood. Let's TAKE, er tax, from the rich and give to the poor. Why don't we take a look at this proposal a little more closely and see it means.

If you read this proposal literally, the plan would tax 30% of the total wealth of all individuals making more than $200k and 25% of the total wealth of everyone making less than $200k, and he would do this every single year. Or, to translate this into plain English: the greatest destruction of wealth in the history of the world. Consider:

• According to this Forbes article, the Congressional Research Service found that as of 2001, the median net worth of U.S. households where the head of household was between 55 and 64 was $181,500. Under a best-case scenario, let's assume one of these households retires with their $181,500 nest egg, collect $10,000 a year from Social Security and enjoy an 8% return on their entire net worth (highly unlikely unless each household's net worth is invested in the stock market) per year. Under the Edwards redistribution plan, each of these households would have approximately $91K left after 5 years, or roughly half of what they started out with. Oh wait, did we forget to mention that my calculations assumed ZERO spending by each of our households? Factor in food and other basic necessities, let alone vacations and Bingo trips to the casino, and you're talking about some very impoverished retirees.
  

• Moving to the other end of the spectrum, let's take Bill Gates and his 25 billion dollar net worth. There's no doubt that a 30% tax, or 7.5 billion dollars, would go a long way to helping fight poverty, homelessness, un-education and sickness. But, what happens when that money dries out? It's not exactly easy to create 288 billion dollar companies. And, do you really trust our fine politicians in Washington to spend this money wisely? Six B-2 stealth bombers and Bill's contribution is gone forever.
  

• And what about these companies who have to pay 30% of their total value each year? This would require every company to grow 42%! each year just to keep the status quo. Stock tip: if Edwards becomes President, it's time to short the US stock market.
  

But maybe we're reading the proposal all wrong here. Maybe popoman means a flat tax on incomes, not net worth. Putting aside the politics of a flat tax and whether it is morally or socially responsible, could someone please explain to me how such a flat tax on income would work? How would you define income? The Honchos know a whole lot of smart people, but we don't know too many who know what this stuffmeans. When we live in a country where our former President doesn't even know the definition of "is", how are we supposed to come to agreement on what is "income" or "compensation" or "benefit"?

Of course, the Honchos understand that this is all academic and serves no purpose other than to let Mr. Honcho rant a little bit. But, be forewarned - many a downfall of great societies have come from failed tax policy - see Qing Dynasty China.