David Leonhardt and the staff of the New York Times have created an animated graphic that the Democratic Party ought to run as a paid advertisement hourly in the evenings on Fox News, just this graphic with a title reading “Taxes rich people pay as compared to you”:
“Everything is taxable unless we say it isn’t.”
I have written several times in the past about the problem of ever-increasing tax law complexity over time having just one goal for a host of tax lobbyists: to make sure my special interest pays less in taxes. I learned basic rule of taxation from my spouse as a line her state tax authority employer would use on tax-skirting businesses: “Everything is taxable unless we say it isn’t.” Essentially, tax law is that one basic rule plus thousands of exceptions.
That sounds like a brutal rule, but it is really the essence of fairness. Those lobbyist-pushed exceptions make life much more complicated for everyone, and these same exceptions often apply to just a few well-connected taxpayers, but likely not to you. The concept of the commonweal, or the common good, has been at the heart of “small-d” democratic political thought ever since the Renaissance writers began to challenge the monarchies. Somebody pays for what Article 1, Section 8 of the U.S. Constitution spells out as “the common Defence and general Welfare of the United States.” Over the last 232 years, we have been engaged in a process of both defining the extent of that phrase’s application and specifying who that “somebody” is to bear the burden of the commonweal.
Put all argument on the size and extent of that governmental spending on the table for a bit, watch the animated graphic above and think about how the tax laws of the country have become much more complex over time while simultaneously changing the mix of that burden. Then ask yourself if we are in a better place. Is the middle class prospering? Are the least fortunate among us, the children and the elderly being properly cared for? How are the roads, the air and the water supply around your town? And are the richest Americans still in need of more care and feeding to incentivize them to keep investing in America?
Ironically, the 2017 changes to the federal tax laws effectively took away several big “tax preferences” but just for the middle class, by changing the standard deduction and dependent calculations. Yet the overall tax law complexity remains, so you still likely need to go to a tax advisor or use tax software, if only to find out that you no longer get any tax benefit for, say, the money you contribute to your church or pay in interest on your mortgage.
When people get into the higher income levels, however, it becomes much more profitable to “play” in the numerous complex rules that lobbyists have inserted into the U.S. tax code and state tax codes which have the effect of lowering their overall tax rates, even if their theoretical “marginal rate” is still higher.
The fairness of progressive marginal tax rates
Those marginal tax rates for higher incomes have steadily come down over the last 50 years. The common Republican talking point has been that, even at the same marginal rate as you pay, rich people are paying much more in taxes than the median income-earning family in dollar terms. There are basically two things wrong with that argument.
First, people on the bottom end of the income scale are much more likely to feel the day-to-day burden of other flat-rate, very regressive taxes, such as sales taxes. Property taxes (especially if you realize these are also embedded into rents) take a much bigger bite from spendable income for poor and middle class people than for rich people, as do health insurance premiums (which most of the developed world correctly recognizes as a tax).
Second, a 20% tax rate on a middle-class family is simply felt much more strongly than a 20% tax on Bill Gates, Mitt Romney or Donald Trump. You don’t have to be a card-carrying communist to see some basic obscenity in Jeff Bezos employing legions of tax lawyers and lobbyists just so that he can add more billions to his wealth, effectively forcing you to pay more.
How do we fix this?
My long-standing proposal to address tax inequity is threefold. The simple part is restoring more progressive marginal tax rates. The respected Peter G. Peterson Foundation notes that even modest bumping of marginal rates at the top end would bring in billions of dollars of needed tax revenue over the next decade, and most very rich folks would not feel any change to their lifestyles or investment motivations.
The second step is what I call tax preference sunsetting. Most tax rule changes, special tax calculations, special credits and deductions have crept their way into the tax code, thanks to skilled lobbyists and their captive, paid-for Congress members, with little public awareness or even effective Congressional oversight. These provisions never die, and yet they make tax calculations more complicated for everybody, they clog up the tax courts, and they make tax audits of the rich much harder to do. Recent reports show that the IRS more often audits poor people because the audits are easier to do than lawyer-shielded big-money returns. You pay more in taxes because some special interest pays less. That’s the basic math.
I have long proposed getting rid of these tax preferences the way we have closed redundant and obsolete military bases over the years, with a basic sunsetting rule and a bi-partisan congressional commission charged with either implementing the sunset, or “saving” some rules if a super-majority of the commission and Congress approve the changes. A “Tax Realignment and Closure Commission,” if you will.
The IRS knows the percentage of taxpayers who take advantage of each particular calculation line on every tax form, or who have used other obscure special calculations, credits or deductions. I have proposed an initial one-in-1000 rule for the initial cut. In other words, if a particular tax rule applies to fewer than 0.1% of the business or personal taxpayers, it is, by definition, a “special interest rule” and it needs to “go on the table” for sunset within a very short period of time. There are thousands of pages of tax code and opinions that could be tossed out the window if these rules go away, billions of dollars of “tax expenditures” could be recovered for the budget over time, and life would be much simpler and fairer for all other taxpayers.
And I would not object to going beyond that, to even the one-out-of-100 level, but that would likely be a tougher hill to climb. Those 99% of taxpayers need to stand up and say to the 1%, “What makes you so special?”
The third part of much-needed tax reform is to enforce a basic rule of “income is income.” We have a morass of rules and exceptions which treat different types of income differently, with capital gains and carried interest as the most obvious offenders. I still consider myself a capitalist, but the notion that money earned by just sitting on your keister cashing in on inherited investments (or my own personal retirement savings for that matter) deserves a lower tax rate than the wage income earned by any “normal earner” is patently offensive. For savers, the “time value of money” is its own reward, and a properly-progressive marginal tax scale can protect most retirees living off their savings in a much simpler manner than complex capital gains rules. In reality these rules are primarily used by the mega-rich to avoid paying taxes even after they die.
You have the ability to change this stuff, you know.