Editor’s Note: Alan J. Dlugash, CPA, is a consultant primarily concentrating on tax planning and financial analysis for high net worth individuals and their related business entities. He also consults to small businesses on executive compensation and foreign tax matters and assists accountants and lawyers in understanding the tax ramifications of their clients’ activities and transactions. Mr. Dlugash has over 40 years of accounting and taxation experience, beginning his career with PricewaterhouseCoopers (then Price Waterhouse), advancing to the position of tax manager. He then co-founded Dlugash & Kevelson, where he spent 23 years as the managing partner until his firm merged with Marks Paneth & Shron in 2003. He retired from Marks Paneth in 2012 and continues to be a tax advisor and consultant through Alan J. Dlugash, LLC. Mr. Dlugash is a member of the New York State Society of CPAs (NYSSCPAs) serving on the Individual Tax Committee (and a previous chair), and is currently also a member of the IRS Relations Committee. He has also served on the Society’s Task Force on Tax Simplification as well as on the Special Committee for Reform of the Tax System whose report had been widely circulated. Additionally, he is a member of the American Institute of CPAs (AICPA) and its Tax Division. A prominent industry thought-leader, Mr. Dlugash has been a regular speaker at the NYSSCPAs’ annual conferences and has appeared on CNBC, Bloomberg TV and NY1 to discuss current tax matters. He has been quoted in Money Magazine and has authored a number of articles for the CPA Journal. In addition, Mr. Dlugash offered instruction on individual tax matters via the AICPAs’ video instruction courses. Mr. Dlugash holds a Bachelor of Science in economics and a Master of Business Administration (MBA) in Accounting from the Wharton School of Business of the University of Pennsylvania. He is licensed to practice public accounting in New York. Mr. Dlugash resides in Larchmont, New York.
MM: You are a tax preparer. And you are an Ayn Rand fan. On taxes, Ayn Rand remarked, “As to such things as taxes and the rebuilding of a country, I will say that in his goals, if not his methods, the best economist in Atlas Shrugged was Ragnar Danneskjold.” A lot of young people visit The Atlas Society website. Explain for them some of the problems with taxes that Ayn Rand alludes to, especially the notion that all we have to do is tax the rich and all our problems will be solved.
AD: I started in accounting at the age of six. My father saw me doing arithmetic homework and said, “Why do you need to solve made up problems?” So he gave me his business ledgers and had me add up the columns. By the time I was eleven I was doing tax returns, and I’ve been doing tax work ever since. I love it. I’m also a student of it. I don’t just blindly follow the rules. I insist on explaining to my clients how the tax laws work.
In my view, Ragnar Danneskjold is really a Robin Hood figure. The standard view of Robin Hood is that he stole from the rich to give to the poor. But that’s not really what happened. Robin Hood didn’t steal from the rich. He stole from the government, which was impoverishing the people with excessive and inappropriate taxes. He stole from tax collectors, not the rich. Robin Hood, read correctly, is a libertarian.
The rich are people who create things that people want to buy. The government, on the other hand, doesn't do anything productive. It takes your money then redistributes it to special-interest groups.
Taxing wealthy people and giving the proceeds to poor people does not make people more equal. It does the exact opposite. High taxes mean less money reinvested in businesses, which means fewer jobs. Moreover the people who get the money transfers are less likely to risk those benefits, which keeps them dependent and relatively poor. The idea that we can tax the rich to solve our problems is just wrong. Taxing the rich is just a recipe for making everybody worse off.
There are many, many ways in which the tax code is ridiculously unfair, but because high earners are often the victims, no one cares. There hasn’t been an honest article written on taxes in the New York Times in 20 years. I comment on tax, economic, and political issues on my blog at taxpolitix.com.
MM: Can you give me some examples of how the tax code is unfair?
AD: Sure. Everyone knew they hated the alternative minimum tax, but they didn’t understand why. Here’s why: It is just a hidden tax. No logical reason for it whatsoever. It is punitive. It was designed purely to target people who were taking advantage of so-called “loopholes.” What’s a loophole? A loophole is somebody else’s tax deduction. Everyone thinks their own earnings and their own tax deductions are fine; it’s those of other people that they’re complaining about. The loophole rationale was parroted for over 20 years, long after the tax had been modified so that it targeted even people who were taking advantage of legitimate deductions. It was really an extra tax on the middle class.
Here is another example: In 2017 they eliminated the only legitimate tax deduction that there is in the Internal Revenue Code: the deduction for expenses incurred to earn income. What is the base we should pay taxes on? We should pay taxes based on the net income we earn. If we earn $100, and it costs us $20 to earn that $100, we should pay tax on $80. That’s the way the income tax law was created, the way it was intended. Now if you make $100 of income, and it costs you $20 to earn it, you still pay taxes on $100.
Charitable, mortgage interest, and state and city income tax deductions, on the other hand, are not necessary for a fair administration of the system. The charitable deduction is designed to promote charitable giving, but that doesn’t make the tax system fair. Mortgage interest is strictly a sop to the real estate industry, which likes it because it encourages people to own a home and makes it possible for them to pay more for one because they can deduct the interest on the loan. That has nothing to do with making the system fair either. Neither do deductions for state or city income taxes. They are just benefits to special interest groups. The one legitimate and necessary deduction, the most equitable deduction, they threw out.
MM: What is the best way to fix the problem?
AD: There is no perfect fix. Taxes are inherently inequitable because the people who write tax law focus not just on raising the money necessary for the limited sphere of government activities but also to influence and benefit cronies in business and government. The only way to minimize the flaws of the latter is to minimize the total level of taxation. If government is bad, the less of it we have, the better it will be. If we limit taxation to funding what government is supposed to do, the tax burden would be much less.
Ayn Rand understood this. Mostly people don’t know what the issues are. They don’t know what questions to ask, and when they hear information they don’t know how to judge. We have to explain this better. It’s not enough to be right. We need to persuade others that we’re right.
I’m not an anarchist, and one thing that I like about Ayn Rand is that she wasn’t either. There are some things government can do that the private sector cannot reasonably do: Running the court systems, national defense, and local police forces. But that’s it. Government should be limited to those few things. It shouldn’t be competing with private businesses. It shouldn’t be operating schools or collecting garbage or running job training programs or providing healthcare. It shouldn’t even be running the post office. We’ve proved that those things can be done much better privately.
Let's just take one example, public schools. People think that public schools came about in the United States because people weren’t being educated. That’s just not true. People were very well educated. Look at the Founders. They never went to public school. The government schools started in response to the rising number of people immigrating to the United States. The government decided they wanted to instill in immigrants a feeling of allegiance to the country. That may not have been terrible, but it demonstrates that public schooling was less about education than about indoctrination. This has only gotten worse. Today it is only about indoctrination. Homeschoolers understand this, and they have been taking their children out of public schools because they don’t agree with what their children are being taught. But they still have to pay taxes to support public schools, which isn’t fair.
MM: I’m glad that you mentioned Ayn Rand. How did you first learn about her ideas?
AD: I first learned about Ayn Rand when I read The Fountainhead in high school. That book made me think about things I had never thought about before. Howard Roark became a role model for me.
I grew up in New York City and went to Stuyvesant High School with a whole lot of very smart, very liberal students. When Ed Koch first ran for Congress, a bunch of my friends decided to canvass for him. I went with them, and I made a lot of calls. Then, at one point, I thought, “What am I doing? I don’t agree with any of this.” My friends were all fired up. It never occurred to them to question the higher taxes and bigger government that Koch promoted. Howard Roark was always in the back of my mind though, so I quit. I had to think for myself. I own my life, and I didn’t feel any obligation to Ed Koch.
I think that The Fountainhead is Ayn Rand’s most important work, because it gets to the core of her philosophy of individualism. I read Atlas Shrugged later, but that book would not have brought me around to Rand’s ideas the way The Fountainhead did.
MM: How did you get involved with The Atlas Society?
AD: I got involved with The Atlas Society through Stephen Moore and John Fund. We would talk and they would mention TAS. Because of what they were saying, I wound up attending an Atlas Society event four or five years ago, after which I decided that this was a great organization to associate myself with.
MM: You were very critical of the federal bailout in 2008-2010. Is the current federal spending in response to the Covid-19 pandemic different, and what can we expect over the next decade in terms of taxes?
AD: In 2008 - 2010, the need for the Treasury to get involved was legitimate. Once they determined that the economy wasn’t going to tank, however, and that the banking system wasn’t going to collapse, after the first week or ten days, that should have been the end of it. Their review showed that the banking system was safe.
But politics overruled logic. There were really only a handful of banks that were in trouble because of the mortgages that the banks were holding. Most of the banks were not in danger. They were able to quantify their situation. But the Treasury decided that they were going to force every bank to take a bailout as if it were failing. This way, people wouldn’t know which banks were in trouble but think that all the banks were in trouble instead. I don’t know what they were drinking, because it was the dumbest idea ever. And they lied. That was the other thing. The government forced the banks under threat of criminal prosecution. If anyone hasn’t read John Allison’s book, The Financial Crisis and the Free Market Cure, about his experience at BBT, then read it now.
To me, the ensuing Obama Stimulus was criminal. Either stupid or evil, I’m not sure which. Obama just called it a stimulus package, but it was nothing of the sort. A stimulus is a one-time deal. The money goes out and is spent, and the budget returns to what it was. The administrative state had grown so big, however, that nothing like a shovel-ready project was possible. What Obama did instead was increase welfare, increase teacher pay, lower the threshold for people to qualify for food stamps, and other things that would not disappear as a one-time stimulus outlay but rather remain in the budget, which created huge deficits during the rest of his Administration.
Now, with the coronavirus pandemic, things are going to get even worse. We’re in a horrific situation, because we do need to deal with the virus. And we will need to spend. The best we can hope for is that they decide on an amount to spend in that regard, then make a commitment that once the virus danger is over to cut the budget.
Without the virus problems, which are new and severe, most of the budget is Medicare, Medicaid, and Social Security. If those programs are not reformed, our budget deficits will be impossible, coronavirus or not. There will be a tipping point. For a long time people have said, “Yes, we have a massive deficit, but it hasn’t hurt us so far, so let’s keep spending.” They ignore Stein’s Law: “If something can’t go on forever, it won’t.”
Well, we will wake up one day, and the rest of the world will have decided not to buy our debt any more. Our ability to keep printing money will end. People will no longer be willing to buy our bonds. There will either be huge inflation, or we’ll be unable even to refinance our maturing bonds. When something like that happens, I don’t know how we will undo it. I think we need to practice fiscal restraint now. Deal with the virus, absolutely, but afterwards commit to cut entitlements.
And it isn’t just the responsibility of government. People have to stop electing irresponsible politicians, stop believing pie-in-the-sky promises. Government has never been the answer. It is individuals who will pay the consequences of these massive deficits, and individuals who need now to take responsibility for their own finances and their own well-being.
MM: One more question. Ayn Rand loved New York City. You are a New Yorker. What is one thing that you would like to see happen as New York slowly emerges from the lockdown that would make life better for everyone living in that great city?
AD: New York has become something of a closed system. Income tax is high. Real estate taxes are outrageous. There are excessive land-use regulations, unsustainable rent stabilization, and political corruption. Apart from Wall Street, all the economic activity in New York is basically supported by the people who live there. In other words, they all buy and sell to each other, and they charge and pay the high prices in order to subsidize the welfare state. Anyone who is not a New Yorker would never dream of paying these prices. If it weren’t for things like the Statue of Liberty, the Empire State Building, Broadway, the museums, the opera, all those nonprofits that attract tourists, there would be no outside money at all. The huge advantages that NYC has from generations of immigrant energy is being squandered as the high income and estate taxes and suffocating regulation force the talented people to leave New York.
What I would like to see going forward is a policy where income taxes and all the city-based taxes have to decline on a per capita basis year after year. Just reduce the amount of money the city has to spend. The only way to stop it all is to have a continuous decline on a per capita basis. Return the money to the private sector and open things up.
MM: Well, thank you so much for your time.
AD: You’re welcome.