Taxes are central to any national election, more so with the 2012 race because of the chasm separating Democrat and Republican philosophies, including their stands on taxes.
“The ideal tax system should… raise a sufficient amount of revenue to fund government activities with the least amount of harm to the economy,” as Tax Foundation Economist William McBride expresses it. His analysis also reveals that the number of millionaires—a major Obama target—has dropped dramatically in recent years.
Our federal tax system has become so discombobulated, it is in desperate need of restructuring. The non-profit Tax Foundation has developed ten principles for taxation to ensure neutrality in economic decision-making, and stability to promote economic growth.
President Obama has said in one of his innumerable rants against the rich: “A quarter of all millionaires now pay lower tax rates than millions of middle-class households. Some billionaires have a tax rate as low as 1percent,” Even if true, that would mean a tax bill of one million dollars. Not exactly chump change.
Barack Obama has loaded his campaign cannon with class-warfare cannon balls, aimed at more taxes for the rich. Republicans, in contrast, argue that the worst time for tax hikes is in a recession, and have shown that in the past when taxes have been cut revenues have risen, rather than dropped.
If or when true tax reform will be enacted, the following questions raised by the Tax Foundation lead to answers to build the best system.
1. How does taxation affect fairness? Whether it is to buy a home, build a factory, or hire new workers, tax impact should play the smallest role possible. Currently “our tax code is “rife with measures” to lure us into all manner of activities from buying hybrid cars to investing in solar roof panels. Because interest payments are deductible. The mortgage interest deduction diverts billions to the housing industry and away from uses that may be more productive, such as investment in ideas of entrepreneurs.
1. Do taxes reduce special interest provisions? “The estimated cost of tax preferences…sometimes called “loopholes,” is “over $1 trillion a year,” according to Economist McBride. And “the vast majority of these provisions” are for individual taxpayers “whereas roughly $100 billion” benefits business.
1. Does it treat all Americans equally? A single tax rate is fairest. The present personal tax code is highly progressive, mainly to make sure the “rich” pay their “fair share,” as Obama incessantly puts it. But these rates and the incomes they apply to “are set by political fiat, not by any economic rationale,” McBride explains. There now are six brackets from 10 to 35 percent. Taxes now raise 6 percent of GDP.
• “There is a mistaken perception that a single-rate system” can’t protect the poor. “This can be addressed with an allowance that “shields a certain amount of income from tax.”
1. Does it end double and triple taxing of savings and investment?
• Today, personal income is hit once by the income tax. Then a second time on any saved or invested post-tax income. Corporate profits are taxed first at the firm level, then a second time when distributed as dividends to individuals or realized as capital gains. Finally, a life’s savings is taxed a third time by the estate tax. Penalizing saving and investing “harms us all.”
1. Should business be taxed equally whatever its size?
• The traditional “C-corporation” is taxed twice as indicated above. “Pass-through” businesses, such as S-corporations, sole proprietorships, partnerships, and farms, pay their business taxes just once at the individual owner level.
• Small businesses are often able to expense (deduct the full cost) of equipment, while corporations must depreciated equipment over a period of years.
1. Is complexity reduced?
• In its 2010 report to Congress, the IRS National Taxpayer Advocate pinpointed “tax complexity as the most serious problem facing taxpayers and urged lawmakers to simplify it.
• Complying with the tax code costs taxpayers about $400 billion a year. That doesn’t count the $12 billion yearly budget of IRS. Plus what economists call the “deadweight”
• of taxpayer compliance of up to $150 billion.
1. Does the system provide stability for making long-range plans?
• Since 2003, lawmakers knew the Bush tax cuts would expire Dec, 31, 2010. Yet they were extended, for only two years, at the eleventh hour, meaning taxpayers’ plans were coated in a web of mystery, not knowing how to plan for the future.
• The top estate tax rate went from 45 percent in 2009 to repeal in 2010, then increased to 35 percent, but only through 2012, making it impossible for many taxpayers to plan their estates. Tax holidays, subsidies, and shorts-term incentives, (Obama political favorites) only complicate matters.
1. Does it make us more competitive in the world?
• In the past four years, 75 counties have cut their corporate tax rates to make themselves more competitive. Meanwhile Obama has dithered and dithered after many promises to reduce our corporate rate.
• It may surprise many Americans—including those ranging from “occupiers’ to naive Democrats—“to learn that the U.S. has the most progressive income tax burden among the leading industrialized nations,” observed McBride. That means the “top 10 percent of U.S. taxpayers pay a larger share of the tax burden than do their counterparts in any other industrialized. And low-income Americans have the lowest income taxes of any OECD county.”
9. Does it promote economic growth?
• A “great body of evidence indicates there’s a trade off between economic growth and the distribution of income. “This means,” writes McBride, “that the more we try to make an income tax system progressive, the more we undermine the factors that contribute most to economic growth, risk-taking, entrepreneurship, and productivity.” Taxing high-income earners “reduces all the key factors in job creation and economic growth.”
• 10. Is it least harmful to the economy?
• Our current tax system “is anything but stable and harmless” McBride maintains. Our GDP has been “particularly volatile in recent years. This is partly due to the business cycle, but it is also due to our progressive tax rate system and our over reliance on tax collections from wealthier Americans. Comparing 2009 with 2007 data shows “not only did the number of millionaires fall by 40 percent, but the overall income of millionaires fell by 50 percent.
• The result for the U.S. Treasury was that the total drop in tax revenues during this period [unlike the false picture Obama has tried to draw] was due to the falling tax collections from millionaires”