A-Tax on Average Americans

Yes, the Internal Revenue Code is way too complex, has way too many loopholes – most of which favor those at the top end of income and wealth – and is deeply unfair. But understanding the difference between a regressive tax scheme and one that is progressive becomes important. Regressive means that while a tax might look more “uniform” in its application, that uniformity is a much bigger sacrifice for those at the bottom of the earnings curve than it is for those at the top. Regressive taxes include sales taxes, since those at the bottom of the earnings ladder have a lot less in the way of discretionary spends than those higher up the income ladder, so those who accumulate capital for investment purposes pay a smaller percentage of their income by reason of purchases where sales taxes (including the VATs, “value-added taxes,” which are assessed at one or more stages of the sales/distribution chain) are the revenue producers. Those at the bottom spend most of their income to survive, but pay taxes on virtually all of their non-food purchases. Flat taxes or schemes with only a few fixed levels of tax rates, also tend to extract money from those at the bottom or middle of the earnings level where the result is true income impairment while those at the top generally benefit from a lower effective rate. So when you see proposals that envision sales, VAT, flat or two or three level income tax schemes, it is almost axiomatic that those at the top make out the best – no matter what the politicians try and tell you – and those in the middle and the bottom bear a disproportionate burden. Those at the very bottom generally don’t pay taxes anyway. As for U.S. corporate income tax, you really have to differentiate between the tax rate (federal rates vary from 15% to 35%, and with state taxes thrown in, the average rates stand at about 39%) and the actual sums paid. While on paper, the United States has some of the highest corporate taxes in the world, for companies with incomes of $10 million or more, a little tax planning and some sophisticated movement of off-shore monies yields an average federal payment of between 12% and 13%. Some of the biggest U.S. companies in the world pay no or virtually no federal income tax. All efforts to repatriate foreign earnings of big U.S. corporations into the U.S. have met with a stone wall of Republicans in Congress. So while they scream about our high tax rate, only the smallest American “C” corporations ever pay anything close to the posted rates. Rand Paul has suggested a “Fair and Flat” tax. Jeb Bush’s tax proposals – should we even consider these given his plunging standing in all the relevant polls? – are a boon to the wealthy. “Bush would drastically lower tax rates for both individuals and corporations, while eliminating loopholes and a number of popular deductions to make up some of the forgone revenue. The seven individual brackets we have today would be crunched down to just three, with rates of 28 percent, 25 percent, and 10 percent (currently, the top rate is 39.6 percent). Among other changes, he'd outright abolish the estate tax, which would be a boon to the Hilton family, and double the standard deduction most taxpayers take, which would help eliminate income tax liability altogether for millions of Americans. Meanwhile, he'd do away with the write-offs for state and local taxes, while capping them for things like mortgage interest and medical expenses.” Slate.com, September 9th.  Donald Trump, who seems to have borrowed heavily from Bush’s plan, has told the world that his new personal federal income tax plan, reducing the current seven tax brackets to four, would benefit the middle class and eliminate federal taxes on those earning less than $25,000/year. He plans on eliminating some loopholes (with a rather unclear vision of how much, in hard dollars, this would generate) and dropping the federal corporate tax to 15%. It is unclear if his loophole closing would remotely bring all that U.S. corporate money sitting overseas back to the U.S. to be taxed, but he is hoping that a one-time 10% rate would motivate them to do just that, suggesting that he is not doing much in the way of permanent tax reform to keep companies from continuing to shelter earnings overseas. Want to make a little bet on how rich folks will fare under a Trump presidency? “Steve Gill, a tax and accounting professor at San Diego State University, said that as a group, Americans who are making more than $200,000 a year would pay $400 billion to $500 billion less in taxes annually under Trump's plan than under the current system.” AOL.com, September 29th. Hmmmm! Not exactly a big surprise. Lots has also been made of the so-called ‘carried interest’ rule, an absurd loophole that allows certain fund managers to treat their percentage upside in their clients’ investments to enjoy the same lower capital gains tax rates accorded to their clients… even if the fund managers haven’t invested a dime. But this anomaly has become a cause célèbre among Democrats, as it should be, but Republicans who are all for keeping taxes on the rich low – still pushing that clearly false notion that rich folks with low taxes create great jobs for everyone else (a rather completely disproven statement) – sense that they can make out like bandits by simply saying “yes” to the Dems in a legislative trade-off.  Indeed tax-devil, Grover Norquist, who has seduced a whole lots of Republicans into signing a “no new taxes” pledge, seems to be cackling at the prospect. The September 29th New York Times (First Draft on Politics) summarizes: “Have Democrats duped themselves with their fixation on carried interest? … Grover Norquist, the antitax crusader who founded Americans for Tax Reform, thinks they have.

“Democrats have pointed to a provision that allows private equity and hedge fund managers to pay lower tax rates as an embodiment of all that is unfair in the tax code. Now both Mr. Bush and Mr. Trump have issued tax proposals that target the loophole, presumably throwing liberals a bone.

“While Mr. Norquist, who pressures candidates to sign pledges against tax increases, has been against increasing carried interest tax for philosophical reasons, he said that killing the loophole would not be that big of a deal.

“‘You guys can have carried interest; we’ll take a big cut in the corporate rate, and we’ll call it even,’ Mr. Norquist said, referring to Democrats. ‘Carried interest doesn’t matter.’

“Mr. Norquist estimated that taxing carried interest, the income that fund managers make when investing other people’s money, like ordinary income might generate $3 billion in tax revenue over a decade. He said that he would happily give that up in exchange for slashing the corporate tax rate and cutting the top personal income rate to 25 percent, as Mr. Trumphas proposed.

“Likening attacks on carried interest to a dog chasing a bus, Mr. Norquist said that, for Democrats, closing the loophole could be more trouble than it is worth.” At the end of the day, tax laws are complicated. Most Americans have no real ability to read these statutes or proposals and understand what it all means. So instead, they buy into the buzz-words, slogans and those aspects of the proposal that the politicians cite (usually the rate numbers without a clear explanation of the way they apply). Just understand that none of the proposals set forth by any GOP candidate will fund government sufficiently without a serious alteration in their structure to require those at the top really to pay their fair share. And none of these proposals do that. I’m Peter Dekom, and until the real loopholes are closed, the foreign monies sitting overseas repatriated, and those at the top of the food chain pay their fair share, the U.S. remain a government by the elite, for the elite and of the elite.