Taxation & Tax Reform

Introduction:

On December 16th, 1773 the Sons of Liberty boarded the ships of the East India Company and proceeded to destroy an entire shipment of tea, in response to the Tea Act of May 10th, 1773. This act of defiance eventually led to the end of “taxation without representation”, paving the way for years to come. It was deemed then that the British Parliament taxing the colonies was unfair and unnecessary, prompting the Conciliatory Resolution to be passed by the British Parliament in 1775, ending taxes for the colonies that provided defense and preservation of the imperial forces. However, the tax on tea didn’t end until 1778, when the Taxation of the Colonies Act was passed. The argument over taxes has been a part of American history since the very beginning, and continues to be one of the hottest topics of discussion amongst Americans and our politicians. While taxes may have started out simple, like the Tea Act and the Stamp Tax, the tax system has grown more complex throughout the years. The only thing that has remained the same is that people do not like having their money taken away by a government, be it a foreign or domestic.

America’s Turmoil Over Taxes-CBS:

Taxes are complicated. Who has time to read a 65,000-page book? The worst part is, it gets more complex every year. Because of this, there tends to be a lot of outrage when it comes to taxes. The fortunate denizens of America think they pay too much, so they find shortcuts and loopholes to avoid it, or hire someone to do it for them. The less fortunate find it easy to point the finger and blame their predicament on the rich business owners and large conglomerates. There is a vast array of different types of jobs in the United States, each one of them paying money in exchange for work. The idea of work has changed throughout the course of American history, so the need for different types of taxes at different rates has arisen. In addition to the concept of work changing, so has the idea of human entitlement. The complexity of taxes seems to be directly correlated with the rise of social programs like Social Security and Medicare. Social Security was the one to carve a path to more social programs down the road. The more entitlement programs we have, the more money we need to pay for those programs.. The revenue required for these programs is generated by collecting taxes from every American on a payroll or otherwise working in some way. The more entitlement programs we have, the more complex the tax code gets.

The government issues a handy chart each year so people can be outraged by it:

Tax Rate Single Married Filing Jointly Married Filing Separately Head of Household
10% Up to $9,275 Up to $18,550 Up to $9,275 Up to $13,250
15% $9,276-$37,650 $18,551 to $75,300 $9,276 to $37,650 $13,251 to $50,400
25% $37,651 to $91,150 $75,301 to $151,900 $37,651 to $75,950 $50,401 to $130,150
28% $91,151 to $190,150 $151,901 to $231,450 $75,951 to $115,725 $130,151 to $210,800
33% $190,151 to $413,350 $231,451 to $413,350 $115,726 to $206,675 $210,801 to $413,350
35% $413,351 to $415,050 $413,351 to $466,950 $206,676 to $233,475 $413,351 to $441,000
39.6% $415,051 or more $466,951 or more $233,476 or more $441,001 or more

That looks awful. 39.6% of $415,051 is a whopping $164,360.20 of that person’s income for the year. Except it’s not. The system is so much more complicated than that. It’s a progressive tax system, so as the chart says, a single person is taxed 10% on the first $9,275 of their income, then the next bracket comes into effect for the $9,276-$37,650, and so on. The gradually increasing taxes in different income brackets largely complicates the tax code for the general populace. This is a bad chart for explaining how the tax system works in the United States, because it is not as it seems. This chart does not include personal exemptions, child credits, donations or any of the other things a person can do in order to lower their effective tax rate. The marginal tax rate may seem outrageous and astonishing at first, but delving deeper into the workings of the tax system can be enlightening. This just barely scratches the surface of the tax code, which in the year of the video, over 500 new pieces were added onto the already extensive book of rules and regulations.

 

The American population is divided on their view of taxes and who should be paying the most. There was a time that the richest in America were paying 94% tax on their income. That has significantly dropped, but the cost of living and inflation has called for that. $400,000 was considered significantly more money in 1946 than it is today. However, as mentioned before, the effective tax rate people are likely paying is significantly lower than the 39.6% marginal tax rate. An issue that was touched upon in the video was that the wealthy have the ability to hire accountants and tax lawyers in order to make the most out of filing their yearly taxes. There are numerous other less than honorable ways of avoiding taxes, and the elites have certainly found their ways of doing just that. So what is really fair anyways? There is a very likely possibility that if taxes on the rich are raised, they will continue to evolve and search for more ways to pay less taxes, thereby increasing their wealth. The middle class and lower are then left to shoulder the burden of taxes, creating discord amongst the classes. Modern day class warfare is now taking to social media and deriding the thoughts and beliefs of others in order to cater to your group of friends. It’s easy to point the finger, to blame, to hate and to be envious of others, rather than trying to understand their standpoint. Liberal and conservative media alike point the finger and blame and accuse, be it against the rich jerks who live extravagantly while the McDonald’s worker toils or against the “welfare queens” that live easy lives of free money and housing off the backs of the hard workers.

11 Tax Charts-The Atlantic:

In 1946, the tax rate for the top percent of Americans was 94%. The gap between the richest and the poorest tax rates has shrunk considerably in the last 70 years or so. The chart below describes the tax rates from 1960-2004, effectively showing that the crevasse between the top tax rate and the lowest tax rate has shrunk to little more than a crack. The lowest tax rate has also decreased, going from 14.1% to 9.4%. However, this rate of change is much smaller than the gap for the top percent of Americans. If the lowest tax bracket decreased the same amount that the top tax bracket did, there wouldn’t be a tax bracket there anymore. Perhaps taking the burden off of the more fortunate citizens has created a larger burden upon the less fortunate. The chart below helps to be able to visualize the gap and its changing appearance throughout the years:

However, an interesting thing to keep in mind when considering this chart is this:

This is a chart compares how much income the different percentages of Americans earn in relation to how much taxes they pay. The top 1% pays the most taxes in relation to their income, despite their share of the income being less than that of the 60-80% range. However, there are a lot more people in the 60-80% category than there is in the top 1%. So it is natural to assume that because there are more people in that group, there is more money being earned, but it is less per person so their share of federal taxes would be less than their share of the income and less than that of the top 1%.

Clinton vs. Trump Tax Plans-Market Watch:

This election cycle has been a rollercoaster from the start. Social media involvement is at an all-time high, and information is being spread faster than anyone could have imagined it would. It seems at time that people are more concerned with whatever contemptable thing Hillary Clinton or Donald Trump have both done in the past than they are with what they are saying and doing now. It does not matter at this point, they have been nominated by their parties to run for President. The only way around it now is to vote for a third party. The tax plans and other sayings of both of these people is very important to be aware of because right now, it is hard to tell who will become President.

The Trump Tax Plan The Clinton Tax Plan
Lower rates and less brackets

·         12%, 25%, 33% instead of current rates and number of brackets

 Higher capital gain tax

·         Sliding scale of rates, short term higher than now

·         Top rate would be 43.4%
Child care expense deductions Buffett Rule

·         Millionaires shouldn’t pay less than their secretaries
Capping write-offs for individuals “Fair share surcharge”

·         Additional tax on people who make more than $5 million a year (4%)
Cut corporate tax to 15% from 35%

·         Would also eliminate overseas profits tax deferrals

 Options for higher income individuals to pay more to Social Security
Repeal Obamacare Cap write-offs for upper income
Cap on business deductions Reduce exemption on estate tax to $3.5 million
Caregiver credit for up to $6000

There are not many similarities between the two. The only slight similarity is capping write-offs. Trump’s tax plan would simplify some things. It would significantly reduce the number of tax brackets, making it easier for the average person to determine what they’re paying. It would also have some benefits that are designed to help those who have children, as they are already a financial burden on a lot of people. He believes that by repealing Obamacare, it will decrease the tax burden for most people, but it would also make it more difficult for lower income people to obtain healthcare. Hillary Clinton on the other hand, plans to increase the tax on wealthier Americans, mainly by imposing the “fair share surcharge”, which she hopes will make it so that the wealthy are paying enough taxes in comparison to their income. Clinton’s tax plan is far more liberal than Trump’s, especially as far as adding a 20% caregiver credit up to $6,000, which would take some financial burden off those who are caring for their family members in their own home. She is aligning with the Democratic mantra of higher taxes for the rich.

 

There are a few major issues with both of these tax plans. Looking back at history, cutting taxes has not always been beneficial to the United States. When Bush took office, Bill Clinton had left him with a budget surplus. Bush’s tax cuts tore through that surplus and launched into a deficit by the end of Bush’s tenure as President. Numerous other factors may have contributed to the loss of the surplus, including the war in the Middle East. Obama has, since he took office, halted the tax cuts of the super wealthy, while cutting taxes for the Middle Class and small business owners. What has become apparent in the last few years is that the ultra-wealthy will be able to find a way around paying high taxes, thanks to loopholes in the law and code that are put in place by the Congress. Raising taxes for the wealthy will surely result in a freshly driven desire to avoid paying the higher taxes. Closing loopholes would be a start, but it’s hard to do that when the politicians use the same loopholes.

Tax Ideology-Bruce Bartlett:

One of the biggest issues we have encountered as a country is a disconnection from being aware of what our taxes are actually spent on. Many people believe the majority of our taxes are going towards helping some lazy piece of garbage be able to stay at home and collect welfare, or being spent on helping countries who have never or will never be able to help us back. Few people are aware of what the actual breakdown of taxes are and where they go after they are collected by the government. Here is a handy chart that aids in visualizing this aspect:

 

The Social Security aspect of our budget is increasing in size every year. Our medical advances have made it possible for people to live much longer than when was expected when Social Security was born. Our ability to maintain this trend is dwindling rapidly. Soon, we will be scrambling for a solution to the problem we have been facing for quite some time now. Drastic measures will need to be taken in order to fix this problem. People love to have these programs, but they essentially believe that they should be provided by the government at little to no cost to them. Unfortunately, money is exchanged for goods and services, so in order to maintain the benefits programs and other essential programs highlighted in the above chart, someone has to pay for it. The politicians are not going to take a pay cut to pay for your medical bills, or veterans benefits. They are not going to take a pay cut in order for you to have somewhere to live and have food on the table. Essentially, it is up to us as a society to come together and help each other out by contributing to the tax system. People are blissfully ignorant of where there taxes go, and when they want their taxes cut, that money typically gets pulled from areas like Education and Transportation. Cutting the defense budget isn’t going to help either, everyone wants a strong military they can be confident in to protect us. It’s apparent that raising taxes again on the wealthy will only increase their ability to get around it, and for anyone to do it, it could very well become political suicide, much like George H.W. Bush experienced during his tenure as President. He did what the country needed him to do, but earned him the reputation of going against his word. People only see as far as their taxes being increased, they do not look beyond that, into the reasons why their taxes are increasing.

7 Tax Reform Plans-Kiplinger:

  1. Flat tax
    1. 19% for first 2 years, 17% for the rest
      1. This would affect wages, retirement and unemployment
    2. Exemptions
      1. Interest, dividends, social security, capital gains
        1. The issue here is that all of these things generate a lot of revenue, especially capital gains
      2. Large standard deductions
        1. This would aid people who have lower incomes by drastically reducing the amount of tax burden they take on, especially when they make less than $50,000 a year.
        2. A large credit would also be given for children as well
          1. This helps everyone across the board, not just low income people
        3. Reduce number of brackets and rates
          1. Essentially the same idea as Trump
            1. By lowering the rates and reducing the number of brackets it makes the tax system less complicated
          2. Capital gains
            1. Capital gains would no longer have special treatment over regular income
          3. Raise incentive to donate by adding a 12% credit for donations over 2% of income
        4. Pick your tax
          1. Enables people to choose between current tax rate and the flat tax rate
            1. Would enable certain people to get a lower tax rate, but people may take advantage of that system
          2. “Fair tax”
            1. 9% tax on all goods and services
              1. Huge tax, especially when coupled with individual state sales tax
            2. Eliminate all other federal taxes
              1. Hard to tell whether this will be beneficial as most people don’t pay anywhere near 30% in taxes.
            3. VAT
              1. A little tax added at every stage of production/processing
                1. Would likely end up becoming a burden on consumers because companies would charge more to maximize profits
              2. National sales tax
                1. 5% on everything
                  1. Increase revenue to pay for programs
                2. Maintain current tax system
                  1. The national sales tax would increase revenue but would be likely to decrease spending in the economy due to people paying more money, on top of the state sales taxes many people already have to pay
                3. End tax system
                  1. Repeal all taxes
                    1. Attempt to find a solution in meantime

Some of these are downright nutty. Completely ending the tax system would result in a barely cobbled together tax code that would surely benefit the most powerful Washington Lobbyists. A humongous national sales tax would cripple the economy with people refusing to buy things in order to fund the economy. While companies like Walmart make a lot of money, they also bring jobs and other revenue into the area they are in, when you take away consumers, people are going to lose their jobs because the Walton’s won’t sell one of their vacation homes to make sure some random employee can keep their job. A smaller national sales tax of 6.5% would be more reasonable, however it is still risking loss of commercial revenue, albeit less likely to occur. This would certainly supplement the tax revenue, but coupling that with current local taxes would prove hard to convince people that it’s a good idea. Of these, the flat tax seems most favorable, aiding the lower income people in getting a bigger and better tax break that is crucial for them. It wouldn’t help the wealthy nearly as much as it does now, because it would eliminate a lot of the options wealthy people have to avoid paying a high effective tax.

Conclusion:

It is obvious that the tax system is a complex system that most people aren’t interested in enough to delve any deeper into. If people became more educated about the tax system and how it works, they may be more inclined to find a solution to the problem we are currently facing. In a perfect world, everyone would dutifully pay their taxes and not complain about their money being taken away and distributed to someone else. However, due to the basic flaw in humans, greed is something that is very real. Greed and entitlement together are what is slowly devouring our nation’s economy, and lax political spending is only adding to the problem. Without drastic measures like closing loopholes and raising tax rates, we are only doomed to fall further into debt, making it harder each year to pull ourselves out. It is evident that something must be done, but getting people to agree and capitulate is the largest issue that faces the solution today.

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