Our country has a progressive income tax on earnings and has had such a system since that federal tax's inception in 1913. A progressive tax means that that the tax rate is different and higher for those who earn more. Until recently, I thought that this arrangement was generally accepted across a wide range of the populace (most surveys show upwards of 80% support it). Lately, it seems that this concept of a progressive tax which has its roots with Adam Smith, one of the founders of capitalist theory, is being portrayed as unAmerican. But Smith himself ...
... wrote in Wealth of Nations, The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.
Small business owners are often cited as being hurt by our progressive tax. But is it really unfair to those small businesses? Or for that matter, large businesses or individuals. Remember that Smith wrote his support of progressive tax at the dawn of the Industrial Revolution before the growth of wide areas of public infrastructure or even public education that supports business and residents. I'd like to have your comments.
Wednesday, October 29, 2008
Are our income tax systems unfair?
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8 comments:
I think the IRS tax code has gotten ridiculous and too complex. There is too much interpretation which creates loopholes and confusion on whether the correct tax is actually paid. Even tax professionals come up with different numbers compared to each other.
I believe that a flat tax is much fairer as well as easier to implement. There should be a minimum threshold under which there is no tax paid. Each dollar earned is much more meaningful to the working-poor than those at the other end.
Above that threshold there should be minimal deductions, perhaps only exemptions for the number of dependents, some business deductions for the cost of running a business, then everyone should pay the same percentage tax of what is left. Someone should pay more simply because they earned more, not because they crossed a bracket.
If a family of 2 has an income of $45K and they decide they need more income, and go earn another $45K, then they should pay twice the tax. The way the system is now they would have to pay not only that but a penalty because they crossed over into the 25% tax bracket. The current laws force a situation of diminishing returns for anyone who works harder to increase their income. This has never seemed fair to me.
Making the system simpler would generate more revenue by eliminating loopholes for those at the top. It would also allow the IRS bureaucracy to streamline itself because there would not be a need for so many "experts".
A while back I read an article that talked about a system similar to what I have mentioned, and they said that this would allow a tax rate of about 17% across the board, and more money would be raised because of the lack of loopholes and deductions only the very rich can afford to take advantage of.
This system would give relief to those in the middle without being unfair to anyone else. You simply pay based on what you earned.
I went to high school in Pennsylvania and that state (actually it is one of the 4 commonwealths in the country, can you name them?) has a flat tax on income. No exemptions, no deductions, the current income tax rate is 3.07%. That rate is quite a bit lower than mine is in Massachusetts as is typical with flat tax schemes. The time needed to fill out your tax form is greatly reduced as well. You take your gross income from IRS form W2 and multiply it times .0307. That's your tax. If I were designing my ideal tax system, it would be similar to that, but with a minimum income requirement to pay tax at all. Again, now we are getting into tax rates since that has two, one being zero.
Now that I think about it, my actual tax rate in Massachusetts may be lower than what I experienced in PA due to deductions and exemptions.
The idea of only having sales taxes intrigues me. If you have money to buy stuff, you pay tax on it. Wealthy people buy lots of stuff and therefore would pay higher taxes. Poor people buy less stuff and therefore would pay lower taxes. People would not be able to cheat on their taxes in order to buy stuff for themselves. People who profit from the sale of illicit goods would pay when they spend their profits.
Sales taxes in lieu of income taxes would encourage responsible borrowing and saving. Isn't the fact that we built a false economy on debt and consumption the reason for the financial mess we are in right now?
A sales tax to replace the income tax is one way to solve our complex often unfair tax structure. It will not, however, address the culture of overspending and living on credit. Those that have lived on credit before will now simply have a tax bill added to their credit card bill. When those same people go bankcrupt the state/feds will now have to setle with the credit card companies for what they are owed.
A flat tax is another alternative to look hard at. It is absolutely crazy for people to have to spend the time energy and money they do to settle their taxes every year. There's got to be a better way.
The trouble with a sales tax only system is that it is highly regressive. It falls more heavily upon the poor than the wealthy. The poor must spend all of their earnings to buy goods and services and the wealthy spend only a percentage of their income. Therefore, the effective tax rate is higher on the poor than the wealthy in that system. The net effect of a sales tax only system would be to shift the overall tax burden to lower income earners than is currently the case. That does not mean that the poor would pay more tax, just that the effective tax rate ends up being higher for them than for the wealthy.
Here is an example. A wage earner makes $40K and spends it all, paying 5% tax on the purchases or $2,000 in tax. His tax rate is 5%.
Another earner makes $200K and spends $100K. Again paying 5% sales tax, the total tax is $5,000 but the tax rate paid is 2.5%. The low wage earner ends up paying tax at double the rate of the higher earner.
Who was it that said "Life is unfair?"
Sorry but I disagree. The percentage of tax doesn't matter. It's what you pay. Want to collect taxes from illegals? How about those drug dealers and prostitutes? Anyone who does not pay taxes now because they are under the radar would pay them if we had a sales tax because they spend money purchasing goods & services. No loopholes, no avoiding taxes. If you have the money to spend, you pay taxes.
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