The United States must end “tax cuts for the rich”

Some public officials have condemned “tax cuts for the rich,” because they say that wealthy taxpayers keep getting tax cuts, don’t pay their fair share and are getting off easy, while the rest of us are shouldering most of the tax burden.

Indeed, President Barack Obama won the election promising to change nearly everything about the United States, among which was the tax system. He promised to lower taxes for 95 percent of Americans, and plans to raise taxes on Americans making $250,000 a year or more.

Is it really true that taxpayers in the lower and middle earnings sectors are bearing the brunt of the federal tax burden while upper income earners keep having their share reduced through these “tax cuts for the rich,” bestowed upon them by politicians who favor rich people over the everyday folks out there working their fingers to the bone trying to get by?

In a word, “No.” Rather than seeing their share of the tax burden shrink because they are continually receiving tax cuts, the tax burden of the rich has grown steadily since 1980.

A report by The Tax Foundation last August gives a detailed picture of taxpayers in 2006, the most recent year for which complete data were available. The report tells us that Americans making $388,806 or more each year are in the top one percent of earners in adjusted gross income; those making $153,542 or more are in the top five percent; and those making $108,904 each year are in the top ten percent.

There were only 1.3 million filers in the top one percent, 6.6 million in the top five percent, and 13.3 million in the top ten percent.

In 1980 the top one percent paid 19 percent of all federal taxes, the top five percent paid about 37 percent and the top 10 percent paid just less than half of all taxes.

Those numbers had grown substantially by 2006, with the top one percent paying almost 40 percent, the top five percent paying 60 percent and the top ten percent paying about 71 percent. Over 26 years, “tax cuts for the rich” have increased the proportion of federal taxes paid by the rich by 42 percent, from 50 percent to 71 percent.

“But,” you may be thinking, “some Americans don’t make enough money to pay any taxes, and other taxpayers have to make up the difference.” But important questions of fairness arise when we try to avoid unnecessarily burdening those at the lower end of the earnings scale. “Where should the line be drawn; at what earnings level should income taxes no longer be collected?” And, “How much of total taxes should the wealthy be expected to pay?”

Those at the lower end of the scale have seen their portion of the tax burden drop dramatically. The bottom 80 percent of households (approximately 90 million) pays less than one-third of federal taxes while the top one percent (approximately 1.3 million) pays about 71 percent. The bottom 50 percent paid seven percent of the taxes in 1980, and just three percent in 2006. And, in 2004 the filers of 32 percent of returns paid no federal tax. That proportion increased from just 18 percent in 1984.

Since 1980 the bulk of taxes to support the activities of the federal government have been paid by fewer and fewer citizens, while more and more citizens pay nothing to support their government. Even the most starry-eyed liberal must realize that this trend cannot continue.

Mr. Obama said recently that “most Americans meet their responsibilities [to pay taxes] because they understand that it's an obligation of citizenship, necessary to pay the costs of our common defense and our mutual well-being.” He is correct that paying taxes is an obligation of citizenship, and there is no free ride. Or is there?

What about the 32 percent of households that paid no tax, not even $1 toward the support of their government? Can’t some of those households afford to pay something?

This problem centers on taxing the income of individuals and businesses. One school of thought holds that taxing someone on the fruits of their hard work is immoral. And our current earnings-based tax system somewhat endorses that sentiment: It taxes some of us, but does not tax others.

The US could make taxation much simpler, more efficient and more effective – and save a fortune in administrative costs for government, and tax preparation costs for individuals and businesses – through consumption taxes and use fees, and not taxing earnings.

Purchases of necessities like food, medicine and other basic needs can be exempt from taxation, so as to not unnecessarily burden those in the lower economic sectors, but tax the purchase of non-essential items.

That would be a truly proportional tax system, and a fair tax system: The more money you have, the more you spend, and the more you pay in taxes, and vice versa.

This system holds great advantages for taxpayers, but will remove a popular tool from the kit of politicians who like to use the tax code as a weapon.

And that’s why it will never become reality.

Cross-posted from Observations