Posted by: dstieglitz | March 30, 2011

To Tax – Or Not To Tax

    After collecting W-2s, 1099s, K-1s, check stubs and receipts, and enduring meetings with the CPA, I finally filed my 2010 federal income tax return electronically and mailed a check to IRS.  Income taxes are by far my family’s largest expense – way more than the cost of our home and cars added together. 

    Receipt For Taxes.  I’d like to know how the federal government plans to spend the money I just paid. The IRS should issue a 1-page Taxpayer Receipt to each family that paid taxes. Allocating my payment based on percentages of the federal budget, the receipt would show exactly how much I personally paid this year for defense, NASA, Homeland Security, education, Medicare, Social Security, interest on the debt, environmental protection, foreign aid, etc. The receipts would give us accurate numbers to consider as we debate national priorities. For example, many people think the deficit could be eliminated with budget cuts that leave Medicare and Social Security untouched. The receipt would show us how much of our taxes really go toward those two entitlement programs. 

    Biggest Ponzi Scheme in History.  By promising services and benefits today and hoping our kids and grandkids will pay for them, Congress is running a Ponzi scheme that makes Bernie Madoff’s $18 billion scam look like child’s play. The CBO says the U.S. faces a shortfall of $200 trillion in perpetuity – that’s the gap between revenue and expenditures under current policies. Last fall, two blue-ribbon panels in Washington proposed actions to reduce the deficit. Those recommendations gave Senators and Congressmen political cover to make hard choices and renege on promises they made to get elected. Unfortunately, the White House and both sides of the aisle have repudiated the recommendations. Avoiding decisions must be easier than standing up to special interest groups that will passionately defend their sacred cows and refuse to share the pain for the common good. Washington still isn’t ready to grow up and face spending that is too high and taxes that are too low. 

    Cuts Are Unpopular.  Everyone agrees to cut fraud, waste and abuse, but cuts become unpopular when they get specific. For example, farm subsidies don’t seem wasteful to farmers; and welfare isn’t a giveaway to recipients. The truth is everything in the federal budget is defended by some special interest group or it wouldn’t be there in the first place. If zeroing discretionary spending won’t to balance the budget; if reductions in defense spending are taboo; if trimming Social Security and Medicare are off-limits; if tax increases are forbidden; then the deficit can only go up. Apparently, the recipients of government programs (that’s you and me) aren’t ready to grow up either! 

    Tax Increase Boogeyman. Imagine that a year ago Congress raised the Federal gas tax (18.5 cents per gallon since 1993) to a dollar per gallon to fund highway projects. It’s easy to see special interest groups uniting against the increase by warning it would cost millions of jobs, jeopardize small businesses, reduce auto sales, and force the economy into recession. But the sky hasn’t fallen even though gas prices have increased 78 cents per gallon since March 2010. Sadly, there is one major difference: our highways are still falling apart because the hundred billion dollar increase in gas prices went to Libya, Iran, Russia, Venezuela and Saudi Arabia.  The point is: we don’t like tax increases, so we mindlessly resist an proposed increase without appreciating its necessity or benefits. 

    Most Complicated Taxes on Earth.  The National Taxpayers Union estimates U.S. businesses and households will spend $103 billion dollars and 7.5 billion hours to prepare 2011 tax returns that comply with the world’s most complex tax code. Our tax system also is inefficient because it’s a narrow base of income taxes warped by a mind-numbing array of deductions and credits. The Blue Ribbon panels suggested changing the code in a way that impacts everyone: eliminate cherished deductions like interest on home mortgages, implement a Value-Added Tax (VAT), increase taxes paid by the upper class, and lower corporate taxes. It remains to be seen whether President Obama will deliver on his pledge to restructure the tax code into a growth-friendly system that doesn’t distort people’s consumption choices and investment strategies. 

    Axing Deductions.  The U.S. tax code is a 20th century relic. Huge shifts in global economics have been handled with band aid patches and a potpourri of deductions and credits that cost $1 trillion a year. The two most expensive deductions, home mortgage interest and employer-paid health care, are also the most inequitable since they preferentially benefit upper-class families. Further, the mortgage interest deduction fueled the explosion of sub-prime mortgages and equity lines-of-credit that caused the housing bubble.  Since flat tax rates on a broad base are less distortive than high marginal rates on a narrow base, the Blue Ribbon panels suggested eliminating the 300 current deductions and credits, and canceling the obnoxious Alternative Minimum Tax (AMT). Those actions would allow the top rate to be reduced from 35% to 23%, and still raise more revenue! Deductions and credits are immensely popular, so their elimination will be opposed by a coalition of special interest groups. An easy way out would be to put a ceiling on such deductions and gradually reduce the ceiling to zero over 3 to 5 years. 

    Implementing a VAT. Economists say consumption taxes (e.g., a VAT) are the best way to fund government because they are more growth-friendly than income taxes, especially corporate income taxes. U.S. income taxes are high by international standards, because we don’t have a VAT like most OECD countries. In the U.S., just 15% of government revenues come from consumption taxes, mostly state-level sales taxes. In other OECD countries, VAT produces nearly 50% of the revenue. If Congress were to rely on income tax increases alone to balance the budget, the average family would have to pay $11,000 more, an increase over 50%. While a VAT would raise the prices we pay for everything from cars to food, it would improve our global competitiveness since a VAT only applies to goods consumed in the U.S.  Therefore, a VAT wouldn’t apply to exports, but it would be added to imported goods consumed in the U.S. – thus making U.S. exports cheaper for the world to buy. A VAT should be part of any tax reform plan. 

    Taxing the Rich – A Populist Pipedream. During his 2008 campaign, President Obama won votes by promising to spread the wealth through higher taxes on families earning over $250,000 per year. While high-income families must and should bear more of the tax burden, it’s a pipedream to believe such increases could balance the budget.  According to the Tax Policy Center, even if the top tax rate was an outrageous 91%, the government still would have an annual deficit of nearly $500 billion. In 2008, the average tax rate for all households was 16.6%, the lowest since the IRS began reporting the data in 1992 – obviously, all of us must pay more taxes. The country doesn’t need higher taxes, rather we need policies that increase the amount that Americans earn by improving workforce skills, investing in new technologies, creating millions of new jobs, and promoting small businesses. 

    Lowering Corporate Tax Rates.  Washington rhetoric makes people think U.S. companies are tax cheats who off-shore operations and hide cash in tax havens, which the Treasury Department defines as any country with a lower tax rate than the U.S. – that definition currently includes every country except Japan. The reality is they are attacking good business practices that are entirely legal. The problem with sticking companies with high taxes is the ultimate stuckee isn’t the company, it is employees and customers. Economists estimate that when corporate taxes increase by a dollar, 75 cents comes out of employee pay and benefits and 25 cents is passed on to customers. How many more companies must move operations overseas to escape a 35% tax rate before Congress passes a tax rate that helps U.S. companies be competitive in global markets? 

    Ponder these ideas while you’re finishing your 2010 tax return. Balancing the federal budget isn’t just program cuts and tax increases; rather it’s about setting national priorities and policies to stimulate investment, promote growth, and create future prosperity. Is there hope? Absolutely! Our job as taxpayers and voters is to help Congress to do the right things. What do we want our government to do? How much are we entitled to? How much are we willing to pay? And what are we willing to do without? Until we answer these questions and communicate the answers to Congress, we can expect more of what we’re currently getting. In short, Washington can’t grow up until we do.

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  1. […] To Tax – Or Not To Tax « Dick Stieglitz's Change Blog […]


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