A Taxing Subject

U.S. Rep. John Linder with the current Tax cod...

The Current Tax Code, via Wikipedia

In today’s Joplin Globe, Robert Reich makes his case that,    “. . . rather than depress economic growth, higher taxes on the rich correlate with higher growth.”

He adds,

During almost three decades spanning 1951 to 1980, when the top rate was between 70 percent and 91 percent, average annual growth in the American economy was 3.7 percent.

Between 1983 and the start of the Great Recession, when the top rate dropped to between 35 percent and 39 percent, average growth was 3 percent.

How to explain this? Easy.

Since the early 1980s, a larger and larger share of total income has gone to the top (the richest 1 percent of Americans got 10 percent of total income in 1980, and get over 20 percent now). That’s left the vast middle class with insufficient purchasing power to boost the economy – without going deep into debt.

Lower tax rates on the rich – including lower capital gains rates – have exacerbated this regressive trend.

Lotus 60th Celebration

Image via Wikipedia

Surely no one would argue that the rich have not gotten richer and the poor, poorer, and this despite historically low tax brackets.  That the divide between rich and poor is now huge has been all over the news.  Why, you might ask, should the rich be worried about this?  It goes to the structure of society – someone has to do the work, especially the physical work, like on assembly lines, building sites and waiting tables.

So, what is wrong?  It got me thinking about taxes, that perennial sore subject.  A read-through Wikipedia on the subject of taxes made my head swim.  There appear to be no clear solutions, although it is equally clear that the present tax code is a chaotic nightmare of complexity and inconsistency.  I was unable to find a tax strategy that didn’t have some fatal flaw and most, like the flat tax and the VAT, appear to be regressive.

Economist Bruce Bartlett and others have long advocated a general house-cleaning of the code, but this seems very unlikely in a contentious pre-election season.  The electorate hates change and, based on my unscientific sampling of late-night radio talk shows, they are increasingly fearful about changes to Social Security and Medicare.

I would like to start some discussion about one contentious statement that keeps appearing, i.e., that almost half of Americans pay zero income tax.  While technically true, this paints the bottom 47% or so as tax freeloaders, and they are not.  Why?  Because  payroll taxes are indistinguishable (fungible) from income taxes once they arrive in the federal hopper.  Congress spends that money right along with income tax revenues.  Currently social insurance taxes, those that support Social Security and Medicare/Medicaid, amount to 6.2% of wages on the first $106,800 plus 1.45% of the total.  The employer pays an equal amount.  Also, for the year 2011 only, this rate, for the worker only, has been reduced by the Obama administration to 4.2% in an effort to stimulate the economy.

And here’s one more topic, possibly for a future post:  Is money “earned” through the collection of interest or capital gains morally equivalent to money “earned” through actual labor?  And if not, should this be a driving factor in the degree to which the tax system is progressive?

The whole system seems out of whack to me.  Personally I think we need to go back to “root causes”, as I mentioned in a previous post.  What do you think?

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About Jim Wheeler

U. S. Naval Academy, BS, Engineering, 1959; Naval line officer and submariner, 1959 -1981, Commander, USN; The George Washington U., MSA, Management Eng.; Aerospace Engineer, 1981-1999; Resident Gadfly, 1999 - present. Political affiliation: Independent, tending progressive as the GOP recedes from its Eisenhower roots.
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One Response to A Taxing Subject

  1. ansonburlingame says:

    Jim,

    I have not read Duane’s blog yet today but expected him to jump all over the Reich column. Right down his alley it seems.

    You said, ” I was unable to find a tax strategy that didn’t have some fatal flaw and most, like the flat tax and the VAT, appear to be regressive.”

    I sure agree with the first half of your observation. But as I have stated forever it seems a tax policy alone will never get us out of the “mess we are in” today, in my view. Remember I keep seeing it as a $1.5 Trillion PER YEAR problem, not the miniscule $150 Billion or so a year “reachable” by a tax policy change alone.

    Now let’s talk about the 47% that supposedly pay “no taxes”. I assume that we might have, what, 150 million (out of 300+ million in our population). So roughly half of the “taxable” (based on being a “working age”) amount to some 75 million that pay no taxes.

    Then I think about 45 million that are on food stamps, or about the same number without health insurance. My guess is most of those 45 million indeed pay NO taxes, payroll or otherwise, even SS withholding. We have at least 10 million today that are unemployeed. How much do they pay in taxes, federally? Zero of near that figure is my guess.

    Now one of the reasons those folks pay no taxes or very little is the lack of a “regressive” tax. Those people eat, drive cars, watch TV, do many of the things that tax payers do but we do not “touch” there money to make them contribute to their own “society”, our society. So why not “make” them pay a tax when they buy a TV to watch, or a car to drive, etc or even food above a “nutritional” level of subsistence.

    My goodness, tax ding dongs the way we tax whiskey or cigarettes and listen to the howls from the left.

    Yes a consumption tax is regressive. So what when the consumption has nothing to do with life or death or may even contribute to quicer death which we try to prevent with more taxpayers dollars?

    Greece has evidently “maxed out” the taxes on the rich and now look what they are doing and look at the riots as a result.

    In my view EVERYONE should and must “pay” for society in general. I think far too many are getting away with paying nothing.

    And for sure a tax code reform all the way to ONLY a tax, with no deductions whatsoever, on ALL income, regardless of where it comes from is called for. Then look at potential tax rates, progressive if you will. Then add in a consumption tax to make up for what is really needed to have a “society”. EVERYONE would then pay for what they consume, not what they earn alone. And EVERYONE can moderate their consumption, at least of ding dongs, etc or God forbid, forgo watching TV if really necessary.

    Anson

    Like

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