Income taxes in America are progressive. This means that the more you make the more you pay, not only in dollars but in percentage. Most people, however, don't realize just how much some people pay. The following table illustrates the latest data from the IRS.[1]
| % of Total Taxes Paid |
|---|
| Income Group | 2003 | 2002 | Income Share in 2003 |
|---|
| Top 1% | 34.27% | 33.71% | 16.77% |
|---|
| Top 5% | 54.36% | 53.80% | 31.18% |
|---|
| Top 10% | 65.84% | 65.73% | 42.36% |
|---|
| Top 25% | 83.88% | 83.90% | 64.86% |
|---|
| Top 50% | 96.54% | 96.50% | 86.01 |
|---|
This table shows that, even though the top 1% earns 17% of the yearly income, they pay 34.27% of the income taxes. Any fair tax cut would then, logically, involve the top 1% getting about 34% of the savings.
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A Threat to Our Liberty
The national income tax is currently one of the greatest threats to individual liberty facing our country. When the income tax was introduced in 1913 it was 400 pages long. By 1974 it was 19,500 pages, in 1995 it was over 40,500 pages, and today it's over 66,000 pages.[2] The tax code is simply too complicated for any single person to understand. There's now a special class of citizens you have to hire just to understand the law!
James Madison declared such a problem as "poison[ing] the blessing of liberty itself." He went on to state that "it will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood."[3] "Citizens find themselves facing sanctions and penalties because they fail to understand the requirements within the rules. They want to comply with the law, but the complexity of many rules inherently causes a failure to comply," says Representative Candice Miller.[4] The IRS "constitutes over 80 percent of the paperwork burden of the federal government."[5]
To force the populace to follow laws they can't understand is essentially tyranny; the government now has a ready made excuse to punish anyone they don't like. Government critics routinely find themselves at the unfavorable end of an IRS audit. We know from the secret tapes of the Nixon White House that he used the IRS to harass his critics. Most of Clinton's sexual harassment accusers were slapped with IRS audits[6], along with officials working on his impeachment and a litany of conservative organizations. One IRS official even admitted to Judicial Watch that they were being targeted because of their lawsuits against the President.
Judicial Watch first received notice of an attempted IRS audit on October 9, 1998, a few days after its “Interim Impeachment Report,” which called for Bill Clinton’s impeachment for misuse of the IRS, was officially made part of the Congressional record. The IRS’s initial audit letter demanded that Judicial Watch “[p]rovide the names and addresses of the directors and their relationship to any political party or political groups.” In January, 1999, an IRS official admitted to Judicial Watch representatives, in the context of the propriety of the audit, “What do you expect when you sue the President?” Another IRS official admitted in June, 1999, that the political affiliations of Judicial Watch’s directors is a factor in any IRS audit
After Judicial Watch scored legal victories against the Clinton Administration, Judicial Watch received audit notices and warnings from the IRS. For instance, immediately following its uncovering of the Clinton-Gore White House e-mail scandal in February, 2000, Judicial Watch lawyers received a call from an IRS official to inform them that Judicial Watch was still on the IRS’s “radar screen.” The IRS finally agreed to defer on deciding whether to audit Judicial Watch until after the Clinton Administration ended. Despite this agreement, in one of the last acts of the Clinton Administration, the IRS sent Judicial Watch another audit notice on January 8, 2001. The IRS also sent new audit notices throughout 2001 after Judicial Watch criticized IRS Commissioner Charles Rossotti.
[7]
James Madison argued, "The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets."[8]
Economically Damaging
The current tax system is also detrimental to our economic growth. Not only do punitive taxes hurt investment and slow growth, but average citizens are forced to spend countless hours filing taxes, or they have to hire someone else to do it. In either case this constitutes an opportunity cost, where productivity that could be better used to actually produce something is instead being used to comply with the tax laws. Quantifying the opportunity cost is extremely difficult, as it requires much speculation. However, we can quantify the overhead costs of complying with the tax code.
Most Americans naturally think of their income tax burden simply as the amount at the bottom line of their 1040 form. Economists, on the other hand, may express Americans' tax burden as a percentage of GDP or even as a date on the calendar, such as Tax Freedom Day. But such measures fail to register another cost to taxpayers: the cost of complying with the tax system.
"We contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle." - Winston Churchill
...the income tax code today is a hodgepodge of deductions and credits that have nothing to do with raising the revenue needed to fund government operations. In fact, these tax code items not only reduce revenues but at the same time dramatically increase the complexity of the tax code.
...the Tax Foundation estimates that in 2001 individuals and businesses spent over 4.6 billion hours complying with the federal income tax. Using an hourly cost of $25.21 for individuals and $36.20 for businesses (aside: the methodology for determining these figures is found in the report), the estimated cost of compliance in 2001 is $140 billion... Therefore, the overall compliance cost surcharge alone amounts to nearly 12 cents for every $1 collected by the federal income tax.
To put the tax compliance burden in perspective, the $140 billion tax surcharge is greater than the combined revenue of Sears ($40.9 billion), Walt Disney ($25.4 billion), Microsoft ($22.9 billion), Right Aid ($14.7 billion),
McDonalds ($14.2 billion), 3 Com ($5.4 billion) and Radio Shack ($4.8 billion). Put another way, 4.6 billion hours per year represents a work force of over 2,235,000 people, larger than the populations of Dallas (1,076,000) and Detroit (965,000) combined, and more people than work in the auto industry, the computer manufacturing industry, the airline manufacturing industry, and the steel industry combined.
[9]
Not only are the costs of the tax system significantly high, they also fall heavily on lower income individuals.
...the compliance cost hits lower income individuals harder than higher income individuals. In fact, taxpayers with less than $50,000 of adjusted gross income (AGI) pay almost 60 percent of the total compliance cost for individuals - $37 billion of the total $65 billion compliance cost imposed on individuals.
Socially Divisive
"The fundamental class division in any society is not between rich and poor, or between farmers and city dwellers, but between tax payers and tax consumers." - David Boaz
There are serious social repercussions to having a tax system that drains resources heavily from one group and distributes them to another. This kind of system promotes divisions between economic groups. Though many politicians like to capitalize on these divisions by pandering to one group or another in order to garner votes, this kind of class warfare is not healthy for a society. Worse still is the fact that most all of these problems are completely avoidable.
All of these problems were recognized in the final report from the President's Advisory Panel on Federal Tax Reform.
Tax provisions favoring one activity over another or providing targeted tax benefits to a limited number of taxpayers create complexity and instability, impose large compliance costs, and can lead to an inefficient use of resources.
The current tax system distorts the economic decisions of families and businesses, leading to an inefficient allocation of resources and hindering economic growth.
The complexity of our tax code breeds a perception of unfairness and creates opportunities for manipulation of the rules to reduce tax. The profound lack of transparency means that individuals and businesses cannot easily understand their own tax obligations or be confident that others are paying their fair share.
The tax system is both unstable and unpredictable. Frequent changes in the tax code, which often add to or undo previous policies, as well as the enactment of temporary provisions, result in uncertainty for businesses and families. This volatility is harmful to the economy and creates additional compliance costs.
[10]
Additional reading on the problems with the tax code:
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The FairTax
There is a solution to all this mess. Rather than trying to reform a 66k page tax code, let's scrap it and start over. This time, let's use our knowledge of the economic burdens an income tax causes. Let's keep in mind the cost of enforcing an income tax, both on government and industry. Let's pass the FairTax. From their site:
The
FairTax plan is a comprehensive proposal that replaces all federal income and payroll taxes with an integrated approach including a progressive national retail sales tax, a rebate to ensure no American pays federal taxes up to the poverty level, dollar-for-dollar revenue neutrality, and the repeal of the 16th Amendment. This non-partisan legislation (HR 25/S 25) abolishes all federal personal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes and replaces them all with one simple, visible, federal retail sales tax – collected by existing state sales tax authorities. The
FairTax taxes us only on what we choose to spend, not on what we earn. It does not raise any more or less revenue; it is designed to be revenue neutral. So it is also cost neutral – the final cost for goods and services changes little under the
FairTax. The
FairTax is a fair, efficient, transparent, and intelligent solution to the frustration and inequity of our current tax system.
The FairTax offers a transparent replacement to a complicated and burdensome tax code that is often used to reward campaign contributors. Rather than restricting the speech of citizens, like the McCain-Feingold campaign finance reform bill, the FairTax can help alleviate corruption at its source by removing the ability of lawmakers to play favorites with their big time contributors.
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The Legislation
The first tax cut President Bush passed was the Economic Growth And Tax Relief Reconciliation Act of 2001 (EGTRRA). It made changes to the income tax rates, capital gains tax, retirement plans and estate and gift tax rates. It also increased the Alternative Minimum Tax Exemption and reduced the marriage penalty.
Summary of EGTRRA Income tax rate changes:
- The 39.6% rate would be lowered to 35% by 2006
- The 36% rate would be lowered to 33% by 2006
- The 31% rate would be lowered to 28% by 2006
- The 28% rate would be lowered to 25% by 2006
- A new 10% rate was created for single filers with taxable income up to $6,000, joint filers up to $12,000, and heads of households up to $10,000. The 15% rate's lower threshold was indexed to the 10% rate.
In 2003, President Bush passed The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). Recognizing a need for economic stimulation, the bill accelerated many of the rate reductions of the EGTRRA as well as cutting capital gains and dividends tax rates, the latter being the most crucial to economic stimulation.
The Bush tax cuts were a mixed blessing. Although he cut taxes for all Americans and successfully stimulated the economy (see below), by passing a cut disproportionately favorable to those who pay the least taxes Bush has placed an even bigger burden on those who already pay most all of the taxes.
The Bush tax cuts (which Congress just voted to extend) are an affront to the most fundamental principles of fairness. They are skewed in favor of those who already pay less than their rightful share of taxes and shift the burden even farther onto the shoulders of the most overtaxed. In other words, the Bush tax cuts are unfair to the rich.
I know there's a lot of hype to the contrary, but look at the numbers. If you and your spouse have a taxable income of $60,000 a year, you've had almost a 24 percent income tax cut since President Bush took office. (And ditto if your income was just $20,000.) Meanwhile, the folks who make $350,000 a year got a cut of only about 12.5 percent; those who make $1 million a year got an even smaller cut.
The "cuts" of the past few years have established a precedent that in the future the rich will bear a larger share of the burden than they bore in the past. Thanks to the president, the tax code is more progressive now than it's been in recent memory, and that's a hard sort of change to undo. We got where we are by cutting taxes mostly for the poor and the middle class; to reverse that, you'd have to raise taxes mostly on the poor and the middle class—and think of the outcry that would cause.
So in the not too distant future, most of us will be paying higher taxes, but the rich will be paying a larger share of those taxes than anyone would have expected before the Republicans came to town. How should we feel about that?
My own opinion is that the rich already pay too much—it seems patently unfair to ask anyone to pay over 30 times as much as his neighbors (unless he receives 30 times as much in government services, which strikes me as implausible).
[11]
He makes a good point, as the tax cuts were inherently unfair and added more inequities to a system already skewed heavily against the successful. It's unfortunate that at a time when Bush had to act to help the economy, in order to get the support he needed for his cuts, he was forced to pander to the liberal Democrats and waffling moderate Republicans and make the tax code even more progressive instead of less so.
Budget and Economic Effects
We've all heard the liberal battle cry against tax cuts. "The Bush tax cuts have left us with a massive deficit!" While it's true there is a current budget deficit, it makes no sense whatsoever to say it was caused by the tax cuts when those cuts increased revenue.
One argument that was made against the President's tax plan was that it would cost the government too much revenue. But, again, the facts since 2003 have shown that the economic growth spurred by the President's tax policies have significantly swelled government coffers. In January 2004, for example, the non-partisan Congressional Budget Office projected that 2004 revenue would be $1.817 trillion. Actual revenue came in $63 billion higher – half a percent of GDP. In January 2005, CBO projected 2005 revenue would be $2.057 billion; actual revenue came in $96 billion higher – 0.7 percent of GDP.
In May 2003 when President Bush worked with Congress to enact the tax policy that lowered the rates on dividends and capital gains, there were many skeptics. Critics of the proposal disputed our view that this reform would create jobs and spur economic growth. One critic called the plan "tragic"; another leader said it was "reckless" and wouldn't create jobs.
But the past 30 months have demonstrated just how powerful those reforms were… and how mistaken our critics were. The evidence that that was the right policy prescription for America stream in every day:
- 4.5 million new jobs created
- unemployment running lower than the 1970s, 1980s and 1990s
- GDP growth averaging over 4.0% annually
- household wealth at an all-time high
- federal revenues increasing
- U.S. equity markets rising steadily
- Dividends paid to shareholders – millions of whom are senior citizens and middle class – are up.
There are a lot of things you can say about these statistics, but neither "tragic" nor "reckless" come to mind. . .
[12]
Addition resources:
American Shareholders Association report on increased revenue from the capital gains tax cut.
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Minimum wage laws are a perfect example of the folly of liberal policy. Advocates of "living wages" think they can benefit poor workers by legislating higher pay, but they ignore the unintended consequences.
Before discussing the impacts of minimum wage laws, it's necessary to dispel some myths about who does, and does not, earn minimum wages.
- Only 1.9 million American workers (out of a total workforce of 127.4 million) earn the minimum wage. Most (63%) are women. More than half (53%) are between the ages of 16 and 24, and an even larger percentage (58%) work part-time.
- Upward mobility is the happy norm. Two out of three of today’s minimum-wage workers will earn 10% more within a year.
- Many are teenagers who live with their parents in middle-class homes. This explains why the average household income for minimum-wage earners is more than $40,000 a year and why only 19% (about 400,000 nationwide) fall below the poverty line.[13]
Minimum wage laws, like so many other liberal policies, accomplish exactly the opposite of their stated purpose. If a businessman believes hiring an additional worker can generate an extra $7 an hour in production, he'll create a job opportunity only if the position will cost him less than $7 an hour in pay and other costs. When government sets an artificial pay level it crowds out these positions and insures an unfavorable marketplace for low skilled laborers.
Raising the minimum wage increases poverty. A 1997 National Bureau of Economic Research study found that "the higher minimum wage rates passed by Congress in 1996 and 1997 increased the number of poor families by 4.5 percent." The legislation also resulted in the loss of 20,000 jobs and an unemployment rate increase from 37 to 41 percent among African-American teenagers.[14]
The economic consequence of political largess -- whether in the form of minimum wage laws or medical or other benefits mandated to be paid for by employers -- is to make labor artificially more expensive.
Countries with generous employee benefits mandated by law -- Germany and France, for example -- have chronically higher unemployment rates than unemployment rates in the United States, where jobs are created at a far higher rate than in Europe.
There is no free lunch. Higher labor costs mean fewer jobs.
Since all workers do not have the same skill or experience, minimum wage laws have more impact on some than on others. Young, inexperienced and unskilled workers are especially likely to find it harder to get a job when wage rates have been set higher than the value of their productivity.
[15]
Minimum wage laws can also have negative long-run effects. "The evidence indicates . . . individuals . . . earn less and may also work less the longer they were exposed to a higher minimum wage." These affects tend to hit blacks the hardest. ". . .[T]he adverse longer-run effects of facing high minimum wages as a teenager are stronger for blacks and for those who do not complete high school, again presumably reflecting the greater extent to which minimum wages are binding for these groups."[16]
The goal of price controls like the minimum wage is essentially to repeal the law of supply and demand, but senators might as well try to repeal the law of gravity. Worse than folly, disrupting the equilibrium of labor markets causes economic damage. Although the minimum wage will not work according to economic theory—and it has not worked in reality—what makes it especially tragic is that it hits poor Americans hardest.
A survey published in the Winter 2005 Journal of Economic Perspectives, an academic publication, reports that 71 percent of economists at America’s top universities agree with the statement “a minimum wage increases unemployment among the young and unskilled.” About one-third of the economists agree outright, and another third agree with reservations. Think about that: the consensus among top economists is that the very existence of a minimum wage harms those who, according to its supporters, need it most.
[17]
Who Really Benefits
Unions have historically represented skilled, highly productive workers. As has been demonstrated in the construction industry, employers facing excessive wage demands from union members may find it less expensive to hire unskilled workers at low wages and to train them on the job. Unskilled workers often benefit: accepting lower wages in return for training increases their expected future income. With high minimum wages like those specified for government construction by the Davis-Bacon Act, the wages plus the training cost may exceed the total compensation that employers can afford. In that case the employer would prefer the union member to his unskilled competitor, and passage of a minimum wage law reduces the competition faced by union members.[18]
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Average Americans Are Moving Up
A common charge leveled by class warfarists is that the middle class is shrinking and that average Americans are worse off than they have been in the past. This is completely false.
Over the past 25 years, more families have moved to upper-income brackets. In 2004, the latest year for which we have comparable information, 34% of families made over $75,000. But in 1979, only 21% did so, after adjusting for inflation. And we now have fewer families in lower-income brackets. Only 46% of families made less than $50,000 in 2004, compared with 54% of families in 1979. The stagnant real median family income that is supposedly the reason for last month's Democratic victory is not so sluggish after all. Real median family income was $54,000 in 2004. After inflation, that's 11% higher than in 1994, 18% higher than in 1984, 25% higher than in 1974, and 59% higher than in 1964.
The American family has shrunk due to changes in society, such as more divorces, longer life-expectancy for women, and fewer children. So family income in 2004 cannot correctly be compared to family income in 1964 — today's family income is spread around fewer people.
Adjusting for decreasing family size, real median family income is 13% higher than in 1994, 22% higher than in 1984, 37% higher than in 1974, and 88% higher than in 1964. That's a significant increase.
[19]
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[5] United States. Cong. House. Committee on Government Reform, Subcommittee on Regulator Affairs. Official Website. Accessed August 2005.
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