Why the US income tax needs a Robin Hood

The third chapter inĀ Business Adventures by John Brooks is all about the income tax (read my reviews on chapter 1 and chapter 2).

The income tax is interesting, John eloquently reviews all the past versions of income taxes and how the U.S. version of the income tax is spawned from a need to cover war debts. Over time the need to cover war debts is joined by the need to cover other expenses and the permanence of the income tax is cemented in our society. The goal of course is less about robbing from the poor to provide for the rich, but taking money out of everyone’s pockets so that all the various government programs (those that benefit the rich and the poor) can be paid for. On the surface then, no robin hood is really needed to save the poor from the over-reaching greed that is so easy to come by when your bank account is overflowing.

What is less intuitive though is that at the birth of the innovative U.S. income tax, an equally innovative twin was born, the income tax loophole. Nearly every one of those loop holes, from corporation domiciles, to stock options, to capital gains tax, to deferred compensation are geared towards those in the overflowing bank account category and not those with anemic bank accounts. Perhaps it’s not a surprise that the easiest ways to avoid taxes is to have enough money to be eligible for the loopholes. Yet the appearance of a robin hood trying to bring equality to these loop holes is non-existent. Instead arguing over changes to the tax code, adjustments to the tax rates and so on is the focus of advocates. Less often are tax lobbyists for the poor talking about structures that can leverage existing loopholes. Some ideas in this area include:

  1. Stock option compensation for lower paying jobs (such as ESPP and RSU arrangements)
  2. Employer paid benefits far outside the norm (I’ve talked about how popular this is in tech before). There are many places this can be applied for the benefit of employees and employers
  3. Higher incentives for pre-tax contributions to retirement plan

What existing tax loop holes that are traditionally designed for the rich can benefit the not so rich?

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