In another social and governmental area with arguments as
old as politics, taxes will continue to be an issue; paraphrasing Benjamin
Franklin, the only thing other than death which is a certainty. This is of special interest now because of
the recent Congressional decision on the payroll tax cut. Wikipedia has an interesting
pseudo-definition for taxes, “A nation’s tax system is often a reflection of
its communal values and/or the values of those in power…making choices
regarding the distribution of the tax burden; who will pay taxes, how much they
will pay, and how the taxes collected will be spent.” Certainly there is some disagreement between
the two parties (and all Americans) on how tax revenue should be spent (but that
is not the topic under discussion). For
further edification on a related topic, here is an article with the gist of how
the Republicans and Democrats see tax cuts.
Since 1789 there have been various times when the U.S. government
either collected taxes, or didn’t. One
notable period lasting 44 years, from 1817 to 1861, was completely without internal
revenue by taxation; instead, the government relied on customs duties and land
sales (see below for how this is similar to Ron Paul’s tax plan). See History of the U.S. Tax System more information.
During the Civil War congress passed the Revenue Act of 1861, which
first levied taxes on personal income at 3%.
1862 saw the introduction of tax brackets: 3% up to $10,000; and 5% for
higher incomes. In 1872, income tax was
abolished and then again reinstated in 1894, during which time revenue was
mostly from excise taxes on liquor and tobacco.
By 1909 Congress had what they considered a workable plan, but it
languished until 1913 when finally ratified.
Here is a site that has both the signed resolution for the 16th
amendment and the original tax form.
Moving into what I would consider the modern age of government and taxes, starting in 1913 forward to present, this chart shows the upper and lower brackets (left axis), the rate for the brackets (right axis), and for 1969 to present, the mean income (left axis). Just because it didn't seem complicated enough, I overlaid the DJIA for the period, the recessions of note, and major military actions (time axis only). There are some interesting possible correlations, but those may only exist in my mind; draw your own conclusions. Click here for a larger view.
As taxes have evolved throughout the years, from zero early
on to a maximum of 94% (for income over $200,000 during World War II), both the
rates and the thresholds have changed very frequently. The current U.S. rates are 15% for the lower
bracket and 35% for the upper, which seem reasonable compared to other
countries. In looking at the countries
with the ten highest Gross Domestic Products, only Brazil, India, and Canada
have higher upper bracket taxes (see chart).
For the lower bracket, which is likely more important since more people
are in that bracket and therefore more taxes are collected, only Italy has a
higher rate. Further down the list is
Belgium, 21st in GDP according to Wiki and 18th as judged
by the IMF, but with a marginal tax rate of 54%; now the U.S. starts to look
even better. In fact, this site
indicates that America has the second lowest marginal tax rate.
So it would seem that all-in-all the U.S. fares better
than many first-world countries when it comes to taxes. As much as we would like to complain about
this topic, things could be much worse.
Given all of the above, what do the GOP candidates have in store for the
future of taxes?
Michele Bachmann
believes that taxes are too high (which she should know about, being a tax
attorney), people have less to spend on priorities, and that having taxpayers
keep more of their earnings would strengthen the economy and stimulate job
growth. She has sponsored several bills in Congress to relieve the tax burden,
unfortunately none of them passed. With
typical Republican histrionics, Michele has claimed that “not one shred of
evidence that lowering the payroll tax rate created jobs” exists, although BLS data shows more than 1.4 million
jobs were created or restored during the 11 months since the tax holiday began. One of her ideas, for cutting capital gains rates, would seem to add to the deficit
rather than help reduce it, but maybe she has other ideas for deficit
reduction. This article is a little inflammatory, but has an intriguing slant,
saying that Bachmann’s advice for Americans to flaunt the law borders on
treason. Maybe the most telling words
come from
fellow party member and Minnesotan, Tim Pawlenty, saying “"Her
record of accomplishment in Congress is non-existent.”
“Food stamp president” is what twenty-year political
veteran Newt Gingrich called Obama
in this article saying, “We’re at
the crossroads…down one road is a centralized bureaucratic socialist welfare
system… Down the other road is a proud,
solid, reaffirmation of American exceptionalism.” He too favors the elimination of capital
gains tax, and reducing corporate and death taxes; accelerating economic growth by encouraging investment. His plan is said to be too aggressive and could lead to huge deficits by giving the
richest Americans gigantic tax breaks; reducing government revenue by $1.3
trillion in 2015. Gingrich has plans to
keep taxes low, essentially by keeping the “Bush-era” tax cuts, and instituting
a flat 15% rate. Some suggest that a
flat tax would cause the loss of more than 800,000 jobs almost immediately, as explained here.
Is the fact that Jon
Huntsman served as Obama’s ambassador to China the only reason Republicans
won’t support him, or is it because he is a rich, moderate? He says it’s
because, “I don’t sign those silly pledges.
I don’t pander. I won’t do Don
Trump’s silly debate.” Along with the
now common flat tax (although in three rate brackets) and eliminating capital
gains tax, Huntsman wants a tax form that, “resembles a postcard”, and to get rid of “all deductions and
loopholes.” He claims that since this
worked Utah it can work nation-wide; assuming that this can scale upwards, of
course. Earlier this year he acknowledged
that this would constitute a tax increase, saying
that he would, “…invest that back into the tax code.” Here
he has a few more words on his tax plan and the economy in general.
Ron Paul goes
beyond the Republican pale, planning the complete elimination of income tax and
the IRS saying that, “…55%, over
half of all revenue, comes from other sources like excise taxes, fees, and
corporate taxes…We could eliminate income tax… and still fund the same level of
government we had in the late 1990s.”; according to PolitiFact, this is mostly true – a difference of only $150 billion. He calls income tax “a form of involuntary servitude, which was supposed to have been
outlawed by the 13th amendment.”
There is some possible flip-flopping with Paul’s tax plan (called
“paulonomics” by some), as shown in this article, which also highlights some of his stances on other issues.
Fox News calls Rick
Perry’s tax plan “fiscally irresponsible” and unable to jump start the economy. According to Fox, the plan calls for
taxpayers to choose between a 20% flat tax, and staying with the current system;
it seems highly unlikely that most would choose the flat tax. By his own words, printed in the Wall Street
Journal, he says, “The mind-boggling complexity of the
current tax code helps large corporations with lawyers and accountants devise
the best tax-avoidance strategies money can buy.”, but it seems that
little would change in that regard, either.
Perry’s plan also calls for increasing both personal and dependent
exemptions, up to $12,500 each, which would seem to lower tax revenue, but
according to him, would stimulate economic growth. This site explains why the tax won’t be as flat as Rick makes it out to be.
Mitt Romney is
in favor of tax cuts similar to the ones enacted in 2002 by Bush, claiming that
he supported them at the time, and pledges to roll back taxes to 5% by the end of 2012. In this article he explains how his vision of
a “merit-based opportunity society”,
compares to Obama’s “European social democracy”, by reducing corporate tax
rates and eliminating capital gains, which seems to be very popular among the
candidates. It may be that Mitt feels
that his business acumen will give
him insight into the workings of the tax codes, which he certainly used to his
advantage while working at Bain. Here
are some statements Romney made on
taxes and the economy.
Another proponent of lowering taxes, Rick Santorum claims to have always voted in favor of lowering
taxes, removing the death tax, and cutting corporate rates. Know as the “Made in America” plan, it focuses primarily on the manufacturing
sector by, in one instance, repatriating off-shore companies and zeroing their
tax rate. Rick plans on making U.S.
businesses more competitive by cutting corporate tax rates in half, down to
17.5%. His personal tax rates, just two
brackets, would be 10% and 28%, which is a return to Reagan era rates.
Disregarding corporate taxes, not that they aren’t important
to the economy, and also economic stimulus which is equally important, the next
most critical aspect of any tax changes, to most Americans, will be the
personal income tax rates. Here is why I
think the inequality of income, and of taxes, makes more of a difference than
most Republicans give it credit for.
Let’s look at two groups of American families, one close
to average and the other high, upper-middle class. The average group (Group A) makes between
$40,000 and $60,000, and consists of approximately 20,000 families; we will say
that their income is $50,000. The upper
group of about 17,000 (Group B) has a lower income level of $100,000 and a top
level of $250,000; we will call their income $150,000, on average, for the
group. Using census data, this chart
compares expenses for the two groups, with Group B spending 20% more on each
expense type (probably not accurate, but I don’t make $150,000, so I’m just
guessing). Now, let’s take, for example,
the cost of a home for $150,000; according to this site, it should be a little higher, but this is a good round
number. Group B has, according to the
census data and my calculations, almost 5 times the money to spend towards
housing, $120,000 per year, while Group A only has $25,000 to spend. It is clearly much easier for Group B to
afford a down payment and mortgage, than for Group A. This concept extends to any expense that is
not considered a need by the census bureau; savings, education, leisure
activities like vacations, or emergencies.
While the basic necessity costs are very similar regardless of your
income, the amount available for luxuries or niceties is drastically different.
This analysis does not take into account the very rich or
the marginally poor, where the differences are even more extreme. I do not advocate for a socialist system; no
sharing of the wealth or redistribution.
One of the few things that can be controlled, to help the lower classes to
be able to live just slightly more comfortably, is the amount of tax burden. Keep this in mind while evaluating each
candidate’s plan.
I believe that the first and most important goal of the
future president should be reducing waste, fraud, and abuse in all government
agencies, followed by examining the efficiency of each federal agency. Given that the government needs revenue to
operate, and if we have learned anything over the years about our government,
it is that they rarely cut spending, we will need taxes. If we believe that the examples we see from
other first-world countries are remotely accurate, then U.S. taxes are near
reasonable levels. Assuming that reductions,
savings, and gains in efficiency can be made, then we will be better prepared to
look at lowering the tax rates.
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