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Part 1 of a 2
part series, Midland Daily News, April 20, 2005
Part 2 on Reform
and Sources follow.
There is a strong anti-tax sentiment
around this country. After all, who wouldn't want to pay fewer taxes? The
problem is most people want the same services that are now provided.
One of the chief proponents of
the anti-tax movement is Grover Norquist, who founded
Americans for Tax Reform in 1986. His "fundamental belief is that taxation
is theft - money the government 'takes by force'". He thinks "any tax
cut, at any time, for any reason, is by definition good." (Sojourners)
Contrast that view with the words
of Oliver Wendell Holmes: "I like to pay taxes. They are the price we pay
for civilized society." Contrast also with the Athenian model that
"those who received the greatest material benefit from being Athenians
should bear the greatest burden of maintaining
The first national income tax
(1862 to 1872) was levied to finance the Civil War. Another attempt later at
the income tax was declared unconstitutional, so the Sixteenth Amendment (1913)
was ratified to allow an income tax.
The first income tax in 1918 had
55 tax brackets, yet 95% of the people paid no income tax. The corporate tax
rate was 12%.
Simply speaking there is still a
zero tax bracket, albeit small, based on family status and number of
dependents, but people who qualify generally live in poverty. This zero bracket
is increased through various adjustments and deductions. For example, mortgage
interest, donations of money and property, local and state taxes and a few
other items.
In the 1960's some wealthy people
were minimizing their taxes or legally avoiding the payment of taxes. Congress
passed the Alternative Minimum Tax that required people above a certain level
of income to calculate their tax by using a different method.
In the 1970's, "tax
shelters" were allowed to encourage investment in certain areas of the
economy, such as oil and real estate. Innovative lawyers and others set up
partnerships so that ordinary taxpayers could invest in these shelters. Because
of the abuse of tax shelters, the Tax Reform Act of 1986 ended them.
For years there were no
adjustments in calculating the zero bracket, exemptions, or standard deduction.
As wages increased, more and more people moved into a higher
and higher taxable bracket. The effect of that is most obvious in the
AMT, which now hits the middle class rather than wealthy taxpayers. For
example, more than half the households earning $200,000 to $500,000 a year pay
the AMT, "while only one-quarter of households
earning over $1 million each year pay it," according to Time. The
AMT can affect households with income as low as $75,000.
In 1935 the payroll tax to
finance social security was established and went into affect in 1940. All wages
and salary, including self employment income, are subject to this tax. In 1954
it was a mere 2% of wages up to $4,200 ($84). The percent paid and the maximum
dollar amounts have both increased to their current levels of 6.2% on wages up
to $90,000 ($5,580). The employer pays an equal amount. Self employed people
pay the full 12.4%.
The tax burden has shifted over
the years. About a hundred years ago, only 5% of the people paid income taxes.
Because the social security tax is based on payroll and is unavoidable and
withholding of income taxes is required, virtually all people pay federal taxes
today.
In 1956 28% of all federal tax
revenues was from corporations. That has dropped to
10%. In 1995, 17% of the largest corporations paid no income tax. (The
Cheating of
Self-employed and higher income
people have opportunities to cheat on their taxes because they are more in
control of their financial situation. Corporations hire lawyers and accountants
to find tax loopholes. With a strong anti-tax sentiment in this country, it is
very enticing to cheat. It is estimated that billions of dollars in taxes due
are not paid each year.
Most of the income
for low and middle income earners are wages/salary, interest, and
dividends, so it is difficult to cheat on their taxes. All of these incomes are
reported directly to the government by the paying agencies.
In light of all
the above, one would think that the tax cuts of 2001 would help the
people at the bottom of the scale, since they are most adversely affected by
taxes. Yet more than half of the tax benefits went to the top 1% of earners -
those who make $300,000 or more.
I think President Bush is onto
something by urging a reform of Social Security and the federal income tax at
the same time. It is surely a daunting task, but the two are interrelated.
Given Bush's track record, however, I am suspect of his ability to make proper
reforms. My next column in this two part series will address the issue of reform
of both these taxes.
Part 2 of a 2
part series, Midland Daily News, April 21, 2005
It makes sense to reform both the
federal income tax and the payroll tax at the same time because the combined
tax burden is especially high on those who make less than $90,000, the maximum
salary on which the payroll tax is based.
A guiding principle in tax reform
must be: Those who benefit the most from our economic system are the ones who
should pay the most taxes.
Every now and then there is much
talk about a flat income tax. At first glance, it has strong appeal. Why
shouldn't everyone pay the same percentage of income as tax? A flat tax is
unfair because it flies against the principle stated above. For example, let's suppose the flat tax was
10%. The dollar amount is far more significant on lower incomes than on upper
incomes. Ten percent of $20,000 is a hefty reduction in income, whereas ten
percent of $200,000 still leaves significant income to live on. And which of
these two reap the greater benefit from our economic system?
Michael J. Graetz
in his book, The U.S. Income Tax, proposes that we go to a value added
tax (VAT) of 15-20%. This tax would generate enough revenue to make the first
$90,000 of income exempt from federal income tax. This would eliminate the need
for personal exemptions and various deductions, thus simplifying tax filing.
There would be progressive tax rates above the $90,000.
The VAT is a consumption tax used
by most industrialized nations. Many states would probably oppose a VAT, since
they feel consumption taxes are exclusively in their domain. Sales taxes are
another form of consumption tax.
The social security system has
been one of the most remarkable success stories of the federal government. In
1983 Congress and the President made changes in the rate and amount of taxes
and increased the normal retirement age to 67. As a result, the Social Security
website says there is a trust fund and "Social Security collects more in
taxes than it pays in benefits. The excess is borrowed by the U.S. Treasury,
which in turn issues special-issue Treasury bonds to Social Security. These
bonds totaled $1.5 trillion at the beginning of 2004, and Social Security
receives more than $80 billion annually in interest from them." By 2018
the surplus is estimated to be $3.6 trillion dollars.
A key element in this trust fund
is that the money has been spent. The government has to come up with trillions
of dollars to pay this debt to the trust fund in order to continue benefits to
2041. This debt must come out of other revenue, not increased social security
taxes - in direct contrast to the tax cuts of 2001.
I think a small increase in the
payroll rate would not be burdensome, if the income tax were reformed. It would
also be fair to raise the salary cap to whatever is necessary to extend the
life of social security at least to 2080.
I think Senator Chuck Hagel's suggestion that the retirement age be raised to 68 and the amount that an early retiree can
receive prior to full retirement age be reduced are reasonable also. These
changes would go far in stabilizing the system. It also would make sense to
figure benefits on a different basis, so the poor are truly helped.
The model often cited for
personal accounts is the Thrift Savings Plan (TSP) available to all federal
employees. The TSP is "an example of a publicly run system that can offer
substantial investment choices at relatively low risk and cost," (Washington
Post).
The model, however, doesn't work
for personal accounts. The TSP has millions of participants of one employer,
which has an efficient payroll system allowing contributions to be deposited
electronically to the TSP with every paycheck.
In contrast, social security
payments are made quarterly (monthly by large companies) and not allocated to
an individual employee until the annual report due in January. Also, there are
5.7 million employers, most of whom have fewer than 10
employees and operate without the technological advances of the government or
large corporations.
This means there would be
significant administrative costs for these individual accounts, to be borne
either by the government (estimated as much as $30-$45 billion a year) or the
individual (as much as $100 per year). If borne by the individual, one can
easily see the investment results are going to be adversely affected, probably
to the point of not being better than leaving it in social security. Every
supporter of personal accounts admits they will require extensive borrowing.
How much more debt can we handle?
It just doesn't make sense to me
to "reform" social security by taking money away from it.
So there you have it: reform the
income tax by adopting a value added tax and making the zero tax bracket up to $90,000. Reduce or
eliminate most income tax deductions for both individuals and businesses.
Reform the social security system by increasing the full retirement age,
reducing the amount one can receive upon early retirement, figuring benefits on
a different basis, and increasing the salary cap on which taxes are based.
Barbara Arrigo,
"Defending Social Security system begins with history lesson", The
Michael J. Graetz,
The
Daniel Kadlec, "The New Tax
Trap", Time, 3/28/05, page 35
Charles Lewis
and Bill Allison and the Center for Public Integrity, The Cheating of
"Bush Proposal Differs
Greatly from Model",
"Republicans Float Ideas for
Social Security",
"Rivals shape public message",
The Detroit News, 3/27/05, page 6A
"Social Security ills divide
aging
Social Security website http://www.ssa.gov/qa.htm