Part 1 of a 2 part series, Midland Daily News, April 20, 2005
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
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.
"Defending Social Security system begins with history lesson", The
Michael J. Graetz,
Daniel Kadlec, "The New Tax Trap", Time, 3/28/05, page 35
and Bill Allison and the Center for Public Integrity, The Cheating of
"Bush Proposal Differs
Greatly from Model",
"Republicans Float Ideas for
"Rivals shape public message", The Detroit News, 3/27/05, page 6A
"Social Security ills divide
Social Security website http://www.ssa.gov/qa.htm