In this two-part series, I will be diving into the discussion of taxes; more specifically, a theory of how government can potentially increase tax revenue and decrease the budget deficit by decreasing the tax rates on all brackets of income. In the first part of this series, I will introduce the topic and focus on the existing situation of our current tax structure, and then move to discuss the inherent problems of that tax structure. In the second half of this series, I will discuss my four main points as to how we can increase tax efficiency in the United States, and I will explain why I believe they are valuable points to consider.
Being that we’re in an election year, one of the many topics of discussion for political pundits has revolved around tax policy. On one hand, liberals see taxes as a way to redistribute wealth throughout the economy, and as such they typically want to increase taxes so that the government may spend more and provide U.S. citizens with more public goods and services. The conservatives, however, see taxes as a necessary evil and aim to decrease taxes because they believe that money is better off in the pockets of individuals and the private sector rather than the government.
On the Democratic side, the Bernie Sanders campaign has promised to provide universal healthcare and public education to U.S. citizens. Unfortunately the government is not a charity, so in order to fund these services, we must substantially increase taxes. The Sanders campaign has outlined a tax policy that will create three new tax brackets, in which the three highest income-earning brackets will be forced to pay significantly higher federal tax rates to fund these new programs.
While I find universal healthcare and public education interesting sentiments, I believe that they are far out of reach, and that increasing taxes on the highest earning individuals and corporations is not the solution to fund these programs. Rather than focusing on providing “free” services and creating dependency, our attention should be turned towards empowering individuals to afford more services. American citizens should not demand welfare, they should demand opportunities to become self-sufficient. Our thinking is backwards, and I would like to talk about how we can achieve this solution in a way that liberals typically fail to consider. Rather than increasing the federal income tax to as high as 52.4% (1), our nation, our government, and our economy will actually benefit if tax rates are lowered for all tax brackets.
The perception of taxes are drastically different between the Republican and Democratic parties, and while each opinion holds merit and deserves respect, I would like to explain why I agree with one side rather than the other. To narrow it down, Democrats wish to give people of lower socioeconomic backgrounds increased opportunities and resources by raising taxes on the upper-class who earn significantly higher wages.
The idea is that if someone is earning $10 million, raising the tax rate from 39.6% to, let’s say, 44.6% (a mere 5 point increase), will result in an increase in that individual’s tax by $500,000. Considering that in 2009, there were a reported 8,247 individuals in the United States who reported income exceeding $10 million (2), that means that the United States government can increase tax revenue by at least $4,137,000,000, assuming that no loopholes were used. Notice that this number is in the billions - that’s quite a bit of money. This means that the United States government will have an additional $4,137,000,000 to spend however they see fit.
Republicans on the other hand, aim to decrease taxes so that United States citizens will have a greater personal disposable income (PDI) to spend in the open market, or save and invest if they so choose. So rather than the government spending the money, which is typically inefficient and non-productive, the money stays in the hands of private enterprise and households.
Many liberals argue that reducing taxes is robbing individuals in need from the resources that they require. From the previous example that we used above, it is logical to conclude that a decrease in the tax rate would result in a subsequent decrease in tax revenue. This means that the government will have less money to spend on the public goods and services that it provides. On the surface level this is very true, as the tax rate has a direct relationship with tax revenue, however this is only true if you are examining taxes in a vacuum, but the United States does not operate in a tax vacuum.
When I refer to the “tax vacuum,” I mean to say that people simply look at taxes by the tax rate alone. But the fact is, the tax rate is not the only component of a nation’s tax policy. Despite this fact, nearly all political candidates and their supporters will only debate over the tax rate while not considering the United States Tax Code, which is completely dysfunctional - let’s discuss why.
The United States Tax Code is a lengthy 80,000 pages filled with various rules and procedures concerning our nation’s federal and state tax codes. Amongst its 80,000 pages, the U.S. Tax Code contains numerous methods and techniques that people can take advantage of in order to receive various forms of tax deductions. Unfortunately, the Tax Code is so lengthy and detailed that it requires someone with advanced knowledge to dissect the information and understand how to implement strategies that will reduce someone’s tax expenses.
This creates a problem because the only people who can take advantage of the loopholes in the U.S. Tax Code are the wealthy and upper-class members of society who can afford to pay tax specialists and lawyers to implement legal strategies to reduce their tax payments. Because their total tax expense is considerably less than the normal rate they should be paying, the United States government and its citizens are seemingly punished by a decrease in tax revenue.
By having this Tax Code, the United States government has created a system that encourages people with the proper resources and tools to take advantage of the inequitable tax code. If you had the opportunity to reduce your taxes, and have a greater ability to buy goods and services that will directly benefit you and your family, wouldn’t you do it?
The people who have the ability to take advantage of the system, are inherently contributing an unequal portion to our nation’s tax revenue, and indeed, the rest of society is seemingly punished. This is best exemplified by Mitt Romney, when he publicly released his tax statements while running for presidential office in 2011. To summarize, his reported taxes were as follows (3):
Reported Earnings (Income): $21.7 million
Total Federal Tax (Expense): $3 million
This created outrage amongst the American population, especially amongst liberals, as they believed he was cheating the system. But rather than cheating the system, Mitt Romney was simply playing the game that the government allowed him to. Based off of his reported taxes, we can see that his effective rate was 14% - significantly lower than the 39.6% bracket that Romney normally falls under. What’s even more unsettling is that Romney didn’t take full advantage of his opportunity to decrease his effective rate. If he had reported his actual level of charitable donations and other potential forms of deductions, his effective rate would have been 10.55% (4).
Consider now that many millionaires have various other tools at their exposure and often get away with paying less than 10% of their total income in taxes. This is why I said that you can't look at the issue of taxes as if you are in a vacuum, meaning that one has to consider the entire tax system and not just the rate.
Of course, this behavior is not considered illegal by the federal government because they are the establishment who created this tax code. This current system allows people like Mitt Romney to pay a significantly less than their standard rate, and results in working-class citizens actually paying a higher percentage of their income in taxes than their wealthy counterparts. This is the issue that I have with so many people calling for an increase in the tax rate on the rich.
Quite simply, no one wants to pay nearly 40% of their income in taxes; however, this is the rate that the highest tax bracket is forced to pay. That 40% rate, however, only takes account the federal tax rate, and when one considers, for example, state income tax and real estate tax as well, some individuals are paying in excess of 50-65% of their annual income. This is why the upper-bracket of taxpayers are taking advantage of loopholes and deductions - the rate is too usurious. As a result they are robbing American citizens of an equitable tax system by paying less than their fair share. However, I don’t believe that their fair share should be upwards of 50% of earned income.
I truly believe that individuals want to pay taxes. All citizens know that the government provides us with goods and services such as roads, dams, streetlights, national defense, and a fair judicial system. Because we benefit from these goods and services, it is only fair that we can help to pay for them. This is the primary role of taxes - to fund government operations that we as citizens benefit from. Taxes are also a way for humans to act compassionately towards each other. It is always unfortunate when someone is unexpectedly laid-off from work, or if they can’t afford enough food to feed their families.
As compassionate beings, we want to support those who need assistance, and taxes help to fulfill that role by supporting the general welfare through unemployment benefits, social security, food stamps, etc. However, there is always a limit that people are willing to contribute, and I believe that the United States government has created a tax policy and tax rate that far exceeds people’s ability and willingness to contribute. If you talk to anyone in today’s economy, whether they are business owners, rich people, or poor people, nearly all will tell you that taxes are too high.
Even so, our government has recorded the greatest levels of debt in history while our trade deficit has reached near its all-time highs. We have a serious problem; however, I don’t believe that continuing to increase taxes will solve this problem - so far it has continued to make it worse.
In this article, we discussed a significant amount of information regarding taxation, and I would like to summarize what we have discussed so far. We outlined the basic views of the Democratic and Republican parties in regard to the role taxes play in society. We then moved to discuss the fallacy in which people believe that the issue of taxes can be solved by only changing the tax rate rather than diagnosing the issues of the entire tax system, namely the United States Tax Code.
The more we continue to raise taxes, we actually punish middle-class Americans, the drivers of economic growth. It’s no wonder why our middle-class has continued to shrink - they are the ones who take the brunt impact of taxes, yet they lack the resources to take advantage of loopholes. Meanwhile the richest percentage of Americans could care less about the tax rate rising so long as they can use the loopholes in our existing tax code to decrease their effective rate. Finally, we discussed the role of taxes which serve as two-fold:
1. Pay for the goods and services that the government provides.
2. As a way to be compassionate and share wealth to those who are in need. This is also referred to as the redistribution of income.
In my release of the second part of the article, I will dive deeper into the issue of taxes by outlining my views on how to increase the efficiency of our nation’s tax system, and why I believe they will increase economic efficiency. They are as follows:
1. Abolish the current 80,000 page tax code and remove all forms of deductions and loopholes.
2. Decrease taxes on all brackets of income. By doing this, we must decide between two options:
-Preserve our current style of a progressive tax
-Establish a flat-tax system
3. Abolish the tax on capital gains earned through equity and fixed income securities.
4. Decrease the tax on corporate profits as an incentive for businesses to hire more full-time employees.
I look forward to further discussion in Part 2.
(1) Cole, Alan, and Scott Greenberg. "Details and Analysis of Senator Bernie Sanders's Tax Plan." Tax Foundation. N.p., 28 Jan. 2016. Web. <http://taxfoundation.org/article/details-and-analysis-senator-bernie-sanders-s-tax-plan>.
(2) Hodge, Scott A. "Who Are America's Millionaires?" Tax Foundation. N.p., 15 June 2012. Web. <http://taxfoundation.org/article/who-are-americas-millionaires>.
(3) Maraniss, David, and Robert Samuels. "Mitt Romney Releases Tax Return for 2011, Showing He Paid 14.1 Percent Tax Rate." Washington Post. The Washington Post, 21 Sept. 2012. Web. <https://www.washingtonpost.com/politics/decision2012/romney-earned-nearly-14-million-in-2011-paid-141-percent-tax-rate-campaign-says/2012/09/21/e62e5096-0417-11e2-91e7-2962c74e7738_story.html>.