Our tax system is a mess. And not because the wealthy aren’t paying enough — they pay way more than they should; or the average income tax rate for the middle class is higher than that for a billionaire — 7 percent vs. 23 percent for the billionaire; or that more tax revenues are needed to reduce the federal debt — more revenues could worsen the debt problem.
The system is a mess because it’s been haplessly slapped together over decades by political expediency, tit for tat deals, compromises and special interest lobbying. Thus the system is incomprehensible to the average taxpayer, perverse in its incentives, and grossly unfair in its applications. If ever there was something in need of legislative reform, the federal tax system is the poster child. Here are some facts.
The attack on the wealthy for not paying enough taxes is political demagoguery. Sadly, too many voters lap it up. No one likes to pay taxes. So passing the burden on to others who can more easily afford it seems like a no brainer. But the wealthy already pay taxes out of line to income. The top 1 percent of all U.S. households earns 20 percent of total income, yet pay 38 percent of total federal taxes. The top 25 percent earn about two thirds of total income while paying 86 percent of total taxes. The bottom half of income earners pay only 3 percent of total income taxes. A system that allows basically half the population to be free of income taxes while enjoying the benefits of taxes paid by the other half is categorically unfair to everyone if fairness means equal treatment.
Warren Buffett is undoubtedly a great investor but his alter ego, Wally Buffoon, is a little confused about taxes when he says his secretary pays a higher rate than he does. Data from 2008 show that people earning at least $1 million pay an average tax rate of 23.3 percent. Those earning $50,000-$100,000 pay an average rate of 9 percent and those earning $30,000-50,000, a rate of 7.2 percent. Wally’s confusion may stem from the tax rate he pays on the capital gains from his investments which is probably lower than the income tax rate paid by his secretary (depending on how much he values her services). If he’s for increasing the capital gains rate to wipe out this inequality, he’s really advocating slower economic growth. That’s what you get when you punish capital investment.
Finally, the federal tax code is marbled with uneven and unfair rules that favor one group of taxpayers over others. Why, for example, do homeowners get a tax deduction for mortgage payments while renters cannot do the same for portions of rent payments? Why do businesses offering healthcare plans get to deduct the premiums paid on behalf of employees while self employed individual taxpayers cannot? There are hundreds of similar unequal tax treatments in the code emanating from the political lobbying process that drives Washington legislation. They make little economic sense, corrupt the system and reduce total tax revenues
Forget raising taxes. Reforming the tax code is the imperative.
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