I would like to commend Tyrus W. Cobb on his recent column that pointed out to some of the fact-challenged Taxed Enough Already people that taxes in this country are already very low, and that raising them by a small amount is not anathema to the conservative cause.
While I agree with his basic conclusions, I would like to point out some areas where I feel his analysis is off-target or incomplete, and suggest a slightly different prescription for our country’s fiscal ills.
My first quibble is his contention that the bottom 50 percent pay little or no taxes. While it’s true that the bottom 50 percent pay almost no income taxes, they do pay federal payroll and excise taxes, which equates to a significant share of that group’s income. For instance, the bottom 20 percent pay an average of 8.8 percent of their income in payroll taxes, and an additional 1.6 percent in federal excise taxes. Then add in 12.3 percent for state and local taxes and the poorest 20 percent are paying an average of 22.7 percent of their meager incomes in taxes.
I also think it is a mistake for Cobb to focus on raising the top individual tax rate bracket. While the 2001 tax cut that lowered those rates gets all the attention, the biggest factor affecting the top income earners was the 2003 cuts that lowered capital gains to 15 percent, and dropped taxes on stock dividends to 15 percent as well. These cuts overwhelmingly go to the top 1 percent, and even more to the very top.
In 1995, the top 400 taxpayers on average paid 29.9 percent of their income in federal taxes. By 2007, that number had dropped to 16.6 percent. In other words, the 400 richest people saw their effective average tax rate drop almost in half, while their average incomes rose by 500 percent (in inflation-adjusted dollars).
It’s this situation that led Warren Buffet to remark that he pays a smaller percentage of his income in taxes than his secretary.
It is also somewhat deceptive to talk about the increasing share of taxes paid by the wealthy without also directly comparing the increase in the share of income this group takes home. In 1980, the top 1 percent’s share of annual income stood at 8.5 percent. By 2007, that share had risen to nearly 23 percent. In other words, the top 1 percent’s share of taxes has doubled over that time, but that group’s share of income has almost tripled. Meanwhile, the bottom 50 percent’s share of income dropped from 17 percent in 1980 to 12 percent in 2007.
The greater share of income that flows from the bottom to the top, the greater the share of income taxes the top will have to bear.
The problem isn’t really the tax rates, it’s the loopholes, deductions and tax credits that allow too many of those at the top — individuals as well as corporations — to greatly reduce their tax liabilities in proportion to their increasing share of income. The complexity of all these things also makes the tax code appear unfair to most taxpayers, especially when they hear that companies like ExxonMobile or General Electric sometimes end up paying no taxes at all.
Throwing out the tax code is one issue in which most liberals and conservatives can agree. So let’s start there.
First I think we need to cut corporate taxes. Ah, I can hear the liberals screaming now, but just hear me out. We should lower the corporate tax rate from 35 to 15 percent, but also get rid of ALL loopholes, credits and deductions, and implement tough restrictions on companies moving profits offshore like they do now. So, whatever corporations report as profits to their shareholders, they would pay 15 percent of that. It would be easy for anyone to see, transparent and fair.
Since corporations today pay an average effective tax rate of about 13 percent (after all the loopholes, credits and deductions), this would increase tax revenues while making the system fair for all companies, not just those with the resources to hire armies of accounts, lawyers and lobbyists. It would also make American corporate tax rates very competitive among the other countries of the world, enough to convince more businesses to relocate here, thus further increasing revenues to help our deficit problem.
Instead of raising the top marginal individual rate from 35 percent to 39.6 percent as Cobb suggests, I would be in favor of actually lowering that top rate to say, 30 percent, but eliminate all deductions, credits, etc. I would also lower all the other marginal rates and eliminate all the deductions. It would make taxes easy enough for a 5th grader to fill out, and restore some confidence in the fairness of the system.
It would also eliminate much of the headache of doing taxes for Americans. Think of the money that individuals and businesses could save just in the cost of tax preparation, which is a non-productive economic activity that creates no value. It would also allow the Internal Revenue Service to cut costs, so they could focus on the big tax cheats instead of policing things like the Earned Income Tax Credit.
Those on the left are probably saying wait, you’re going to hurt the poor if you take away EITC and other credits that help those in need. But this can be countered by lowering the rate and raising the bottom level of income subject to income taxes enough to reduce or eliminate changes in the total taxes paid by this group. The poor do not need EITC if their taxes are lowered or eliminated to compensate. It’s the same outcome, arrived at in a more simple, efficient way.
As for Cobb’s suggestion of a minimum tax, we already have it. It’s called the payroll tax, as discussed above.
Once you have all these new tax rates in place, it’s now practical to go back to treating capital gains and stock dividend revenue the same as any other revenue. For corporations under the new rate, this wouldn’t have an affect on investments, since it’s the same rate they pay now. But for individuals, especially those at the top, it would help correct the imbalance that was created over the past 15 years. There should continue to be exemptions for one-time capital gains on things like selling your family home for a profit, but with limits to make sure people don’t use these exemptions to unfairly shelter income.
In the end, we would end up with a system that collects more taxes, but is simpler, more fair, more transparent, and competitive with other countries in the world. It doesn’t solve all the problems, but at least it’s a step in the right direction.
