Tax Principles: Why Start Now?

(Below is an idiosyncratic view by your humble blogger, who is not a tax lawyer.)

One used to be able to deduce much of tax law by knowing taxation principles, for example, no double taxation, preserving symmetry, the tax-benefit rule, and respect for the sovereignty of States and the Federal Government.

Consumer (non-business) interest deductions were eliminated by the Tax Reform Act of 1986.  Before the TRA, consumer interest (e.g., credit cards, auto loans) paid was an itemized deduction under the principle of symmetry, i.e, interest income was taxable, ergo interest expense was deductible.  (Under symmetry, if an investor took out a loan to buy exempt municipal bonds, the interest on that borrowing was non-deductible.)  The TRA's non-deductibility of consumer interest was a violation of symmetry; another violation example is the taxability of the gain on one's house, while a loss would not be deductible.

An example of the principle of non-double taxation is the treatment of activity in Individual Retirement Accounts. If it was deductible going in, then it is taxable coming out,  the rule for normal IRAs. (Roth IRAs stay true to the principle---non-deductible going in, and non-taxable coming out, though one could argue that distributions should be taxable in excess of one's contributions, as they are for pensions).

Another example of double taxation is Social Security. SS payroll taxes are, of course, non-deductible by individuals, and the pre-1984 rule was that SS benefits received were non-taxable. By taxing SS benefits above an income threshold we have a clear violation of double taxation---non-deductible going in yet taxable coming out.

Under the principle of sovereignty the States and the U.S. Government generally stayed out of each other's lane. The U.S. didn't tax municipal bond interest, and the States didn't tax Savings Bond interest; they don't tax each other's income tax refunds, the States don't tax Social Security receipts, etc. etc. The Federal deductibility of State Income taxes adheres both to the double taxation principle (it's theoretically possible to pay more than $1 on $1 of income if State taxes are non-deductible) and State/Federal sovereignty.

The recently passed Tax Cuts and Jobs Act is a step in the wrong direction from tax principles because of the very limited deductibility of State Income taxes, but based on the many exceptions inserted into the Internal Revenue Code, why start now?