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We need nothing less than a revolution in the American tax system.Abstract:
I expect that very few Americans are aware of how much they actually pay in taxes. I'm not; but I would like to see an analysis that takes into account not just the obvious tax payments we're all aware of, but all the taxes that Congress has hidden from our view because they prefer to have us pay without being aware of the pain. They're politicians and they're expert at such deception. For example:
Let's understand from the outset that corporations don't pay taxes, they collect taxes from customers and pass these on to the government. And because the average citizen is unaware of this ploy, corporate taxation is one of the politicians' favorite instruments for raising money for the budget. ("Tax Big Business" is a slogan that never fails to win mass support.) Every corporation is of course aware that a tax will be paid on its profits; this tax is added to the cost of doing business and is factored into the price of the company's product and the wages of its workers. Either way, the company pays nothing. American workers and buyers pay the tax. Congress is well aware of how this works, but they pretend it isn't so. When is the last time you heard a politician brag that he intends to raise our taxes by having corporations collect more tax from us? Oddly, he'll never state it quite that way.
So when we buy a car, for example, we pay not only the sales tax on the car, we pay the manufacturer's tax on the profit he makes on the car. And we pay the same tax for each middleman – the materials supplier, the transporter, the advertiser, the retailer... – who is making any profit on the car we're purchasing. Let's add that the sales tax we're being charged is calculated on the basis of the retail price, that is, we're paying a tax on the taxes that are hidden in the retail price of the car. Not to belabor the point, but these same corporations "pay" plenty of other taxes not tied to profits: employment taxes, social security taxes, workmen's comp, taxes on real estate, telephone and utilities, not to mention the same above-mentioned taxes on the materials and services that the corporations purchase from other companies to make, advertise, and distribute their own goods and services. And of course this next layer of providers reflects the same situation. The result is a fantastically complex web of taxation – not to mention the considerable expense involved in calculating and paying these taxes – which in the end is all paid by the buyer of the car. (The share of the tax attributable to each layer in this web diminishes as the layers recede from the point of purchase, but in the end all the corporate taxes are precisely paid by the nation's individuals.)
In summary, corporate taxation is:
Yes, of course it's possible. Here's how:
If corporations shouldn't pay taxes, who should? Individuals should, and only individuals. This is the only way that we as citizens – wage earners and entrepreneurs – can know what our government is costing us. When the politicians vote for pork barrel spending, it will be coming directly out of our pockets, not through the back door where they're able to hide the waste.
All profit is individual. That is, financial profit – or loss – is felt only when it is registered to an individual. Corporate "profit" is a paper exercise; it becomes real profit only when it is paid out to the shareholder or company owner. Under current U.S. law corporations are considered persons, which have the right to make profit and the responsibility to pay taxes on this profit. It is this notion that allows the government to tax corporations and leads to the wasteful, costly practices necessary to comply with the tax code. If corporations were neither allowed to keep undistributed profits nor required to pay tax on profits, shareholders would gain more profits and would pay the tax that the corporation currently pays – and they would pay at a higher tax rate. This would be a win-win situation for share holders, employees, the corporation, and the government.
(While a corporation's tax lawyers could be laid off under this plan, the accountants would still have work to do, since it's apparent that the flow of money through the corporation would need to be monitored. Briefly, the company's income that is not used for operations or distributed to shareholders must be accounted for, to ensure that tax evasion is not the goal or effect of the company's cash management scheme. Naturally, investment of profits for the company's future growth and renewal must be allowed and encouraged, but tax regulations would have to ensure that undistributed profits are not amassed or manipulated for the personal tax benefit of investors or owners. Such regulation is the price the corporate world must accept in exchange for the cancellation of corporate taxation.)
What kind of tax?
Of the several kinds of individual taxes, we should reject the sales tax as regressive and unfair. It is a level tax – the same percentage for everyone – and will always hit the poorer half of society the hardest. The sales tax is also a drag on business, increasing the cost of doing business, as well as the cost of products and services. There is no logical reason for taxing a person's income twice: first when it is earned, and again when it is spent. The idea behind the sales tax is to tax economic activity. This was a horrible idea from the start, that has now been tried for over a hundred years, and it's time to give it up as antiproductive. It has nothing to do with fair taxation. (See the March, 2005 update below.)
There is no good reason why direct and straightforward income and wealth taxes cannot provide the government with all necessary revenues. While the income tax would be higher than at present, other taxes would disappear, the cost of business would be lower, jobs would be more plentiful, products and services would be cheaper, and the U.S. would be more competitive in world markets.
Income tax brackets should be fairly progressive, with a higher percentage bracket for the wealthy than is currently the case. Tax brackets – or a tax formula – should be calculated each year with reference to the median national income. That is, a person with an income of, say, 1.5 times the national median would pay a given percentage in tax. Persons with incomes below the recognized minimum living income should not pay tax. For the wealthy, as defined (see next paragraph), a minimum income proportional to their wealth should be assumed for tax purposes, to avoid creative tax evasion.
Wealth tax though fair, useful, and workable, is insidious because it taxes the same assets repeatedly, so it ought not be applied to the great bulk of the population; it should be reserved for the wealthy, for those with "excess wealth" – but "who is wealthy" is the difficult question.
Wealth that society might characterize as excess must be defined by Congress; it could, for example, be set as holdings representing more than 200 times the US median annual income. A low annual tax rate such as, for illustration, one-half of one percent could be introduced on assets above this level. In this example, if the median income is, say, $30 thousand, there would be no wealth tax on assets under $6 million, while the annual tax on wealth of $7 million would be 0.005 x (7M - 6M) = $5,000. In this example, wealth tax on $50 million would be $220,000, and on $500 million the wealth tax would be $2,475,000. This wealth tax would apply in addition to the income tax.
How to calculate "excess wealth" for tax purposes is a tricky question; stock holdings in active, productive companies – not holding or investment companies – should perhaps get special treatment. Equally tricky is implementing a wealth tax without needless intrusion into the affairs of those who are less than wealthy. European countries, which use the wealth tax widely, typically require all their citizens to report wealth information, an intrusive requirement that causes more effort and anguish than it's worth, and would not be acceptable to Americans with their concern for individual privacy. Before implementing a wealth tax a system must be designed that assures that only the minority of citizens whose holdings are at or near the wealth tax trigger level, would be required to report holdings.
US federal and local taxes have multiplied and risen, and many are cleverly hidden. Americans pay a confusing welter of taxes to the federal, state, county, and city governments, along with special taxes to special purpose districts. All of this can be united into a single payment system.
A single straightforward income tax, together with a wealth tax on the wealthy, is the fair way to fund our state and federal governments. Only thus can we prevent the hidden taxes levied on us by politicians, and hold them responsible for what they spend in our name. The income and wealth taxes can and should replace sales taxes and other taxes on economic activity, corporate taxes, property taxes, inheritance taxes, etc. (See note below about fees.) A single predictable tax, without deductions, should be paid to a central governmental clearing-house, where the various state and local governments get their share of the pot through a process which we should leave to them to work out. This is perfectly doable, and has the great benefits of:
Update, March 2005
Today, Fed Chairman Greenspan testified to a congressional committee that he likes the idea of a federal sales tax. The idea as he expressed it was that such a tax on consumption would replace a portion of the income tax, and thus simplify the tax structure. It is used effectively in Europe, he said.
He neglected to mention that no European sales tax has replaced the income tax. Quite the contrary, they have been additional taxes. Several European countries now have a sales tax of 25% or near that, while the income taxes hover close to 50% for the average worker. You do the math. European sales tax rates – "value added taxes" they call them – have consistently increased since their introduction. Our State sales taxes have done the same, rates doubling over the past four decades. You give politicians a new chance to raise taxes and you know what they'll do.
Chairman Greenspan said he believed that a federal sales tax could be crafted so that the food and goods most needed by the poor could be excluded from the tax or be taxed at a low rate. One must ask what he thinks the "poor" do and do not need? The poor need chairs, curtains, window glass, cars, gas and oil, electricity, carpets, computers, and even airline tickets – like everyone else – in order to take part in the benefits of our society. They need radios, TVs, water heaters, lumber, clothes, plumbing fixtures, books, and bird seed. What does Chairman Greenspan believe they do not need? Presumably Rolls-Royces, swimming pools, and Dior fashions. Very well, then tax those. But the fact remains that nearly everything that's bought by the middle class is also needed by the poor. A sales tax is in every case regressive, because the poor spend more of their income on goods which are taxed by the sales tax. Which means that they pay a larger portion of their income in tax than the well-to-do. This is the case also with our existing State sales taxes, which therefore ought to be abolished.
Fees for special services are not taxes, and should still be collected separately for such specific purposes as hunting license, driver's license, pet license, transit fees, etc. These fees relate to voluntary activities where a subset of citizens wish or require a service of government which is not needed by the general public. But the flip side is that funds so collected must be used by the government for the benefit of the payers, not abused by being redirected to another item in the general budget, as is often the case.