Progressive Tax Reform

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Are “the rich” paying their “fair share” of income taxes? The perpetual cry of Democrats, socialists, liberals, and progressives is that they are not.

But according to the latest data from the IRS, in tax year 2011, the top 1 percent of taxpayers (in terms of adjusted gross income) paid 35.06 percent of all federal income taxes. The top five percent of taxpayers paid 56.49 percent. The top 10 percent of taxpayers paid 68.26 percent. The top 25 percent of taxpayers paid 85.62 percent of the taxes, and the top 50 percent paid a whopping 97.11 percent.

So, not only are “the rich” paying their “fair share,” they are also paying the share of most everyone else.

Nevertheless, the solution that is always offered to solve this non-existent problem is to raise taxes on the rich, usually by making the tax code even more progressive; that is, even more Marxist than it is now.

True to their ideology, the progressives at the Center for American Progress (CAP) have issued a comprehensive tax reform plan that calls for doing just that: “Reforming Our Tax System, Reducing Our Deficit.”

Because accomplishing the “critical goal” of reducing the deficit is always hard—“after all, it means cutting back on public services and programs that are important to the nation, and it means raising taxes”—the CAP report “offers a plan to achieve meaningful deficit reduction over the next 10 years that rests on two pillars”:

  • Progressive, revenue-enhancing, efficient, simplifying, and pragmatic tax reform.
  • Pragmatic spending cuts that do not undermine the middle class, the poor, or seniors.

Because the main focus of the CAP plan is on progressively reforming the tax code (“Our plan accomplishes its deficit reduction primarily through a wide-ranging reform of the personal income tax system that raises adequate revenues progressively while making the tax system more efficient, simple, fair, and comprehensible”), I want to focus on the tax aspect of the plan. I say “aspect,” singular, because the specific details of the CAP’s tax reform plan are irrelevant. It is really only about one thing: soaking “the rich”:

When thinking about where the revenue we need should come from, the starting point should be that our tax system must be progressive. From Adam Smith down to today, it has been a long-recognized principle that those with higher incomes should pay a higher share of their income in taxes because they have the ability to pay and have benefited the most.

And, in fact, our tax system is progressive. But over the last several decades, the trend has been to ask less and less of those at the top. The very highest-income households have enjoyed substantial tax cuts, even as their incomes have risen: From 1979 to 2007, for example, the pretax incomes of the top 1 percent more than tripled, while their tax rates declined by about one-fifth. And while, on average, higher-income Americans do pay higher federal tax rates than middle-income Americans, there are too many high-income households for whom that general rule does not apply.

Finally, it is important to remember that the federal income tax is only one piece of a larger national tax system. Most of the other pieces—excise taxes, payroll taxes, state and local taxes—ask much less of high-income households than they do of low- and moderate-income households. Taken together, our national tax system is already less progressive than it might appear, which is one reason why it’s so important for the federal income tax to be substantially progressive.

Our tax plan would raise this revenue in a progressive way, asking those in the top income brackets to pay more. On average, households making less than $100,000 would pay a little less than they do now, those making between $100,000 and $250,000 would see only tiny increases, and the tax hikes up to $500,000 would be small.

I want to raise a few questions and make some general comments before providing some specific real-world examples of just how progressive the U.S. tax code is.

1. Why should the “starting point” be that the tax system should be progressive? Because the CAP says so?

2. A “long-recognized principle” by whom? Progressives, socialists, and others envious of “the rich”?

3. What this “long-recognized principle” really means is that those with higher incomes should be punished for their success.

4. There is no doubt that those with “higher incomes” have “the ability to pay” a higher share of their income in taxes. But why should they? Because Democrats, socialists, liberals, progressives, and the CAP say so?

5. “Benefited the most” from what? The government redistributing their incomes?

6. It is not true that those who “have the ability to pay more” necessarily benefit more. “The rich” don’t receive food stamps, WIC, section 8 housing vouchers, Medicaid, TANF, SSI, refundable tax credits, or government assistance to pay their utility bills. They don’t send their kids to public school or use hospital emergency rooms as their primary care physician. They also have the ability to hire private security.

7. What is a “high-income household”? How many “high-income households“ are “too many”? Who should determine these things? Why, the CAP, of course.

8. Our national tax system is not “already less progressive than it might appear.” It is in fact more progressive than it might appear because of the personal exemption and itemized deduction reductions, the phase-out of tax deductions and credits, and refundable tax credits like the earned income credit.

9. The real reason the CAP thinks “it’s important for the federal income tax to be substantially progressive,” is because at the end of section two of Marx’s Communist Manifesto, in addition to calling for the abolition of private property and the centralization of the means of production in the hands of the state, he petitioned for “a heavy progressive or graduated income tax.”

10. The last thing the bloated, evil, monstrosity known as the U.S. federal government needs is to raise more revenue.

11. Those in “the top income brackets” are not going to be asked to pay more. They are going to be forced to pay more via coercion, threats, fines, and imprisonment.

12. Under the CAP’s tax reform proposal, those who make under $500,000 would pay “a little less” or have “a tiny” or “small” tax increase. No mention is made of the fate of those who make over $500,000. Why? Because they are the ones who will be soaked and shafted.

So, just how progressive is the U.S. tax code? Consider the example of a typical family with two children that I recently wrote about in “Taxes: Are the Poor Paying Their ‘Fair Share’?”:

For tax year 2013, there would be no taxes due on an income of up to $47,849. From an income of this amount, this family receives personal exemptions totaling $15,600 ($3,900 x 4), and is entitled to a standard deduction of $12,220. Although this leaves a taxable income of $20,049, the tax liability on that amount is $2,111. But thanks to a child tax credit of $1,000 per child, that amount is reduced to just $111. And then, because of an earned income tax credit of $116, this family not only owes no income tax, but receives a $5 refund.

“The poor” not only aren’t paying their “fair share,” they aren’t paying anything at all.

The U.S. income tax has been progressive from the very beginning, but not anywhere near what it is now. The income tax began with a 1 percent tax on all taxable income followed by a series of surcharges of up to 6 percent applied to higher incomes. The maximum rate was applied to taxable income over $500,000. There was an exemption of $3,000 for a single person and $4,000 for a married couple (there were no exemptions, credits, or deductions for children).

Just for fun, let’s look at the taxes of the same typical family, but this time using a 1040 tax form for tax year 1913—the first year of the new income tax under the Sixteenth Amendment.

From an income of $47,849, this husband and wife receive a “specific exemption” of $4,000 This brings taxable income down to $43,849. The “normal” tax (1%) owed on this amount is $438.49. The “additional” or “super” tax owned on the income above $20,000 ($27,849) is $278.49. This gives this family a tax bill of $716.98.

The tax code is already “substantially progressive.”

So, who is to blame for the excessively progressive nature of the tax code? Progressive income taxation has enjoyed wide bipartisan support over the years. As usual, we can blame the Republicans, the “lower taxes and less government” Republicans. Yes, they gave us the so-called Bush tax cuts. But that still gave us a highly progressive structure with brackets of 10, 15, 25, 28, 33, and 35 percent. Regardless of who was responsible for the tax code before the election of George W. Bush in 2000, Republicans had a majority in both Houses of Congress for over four years under Bush. They could have easily eliminated all of the tax brackets or at least lowered the number of tax brackets down to what they were under President Ronald Reagan.

As usual, the Republicans failed miserably to decrease government and increase liberty.

I should point out that the remedy for “fixing” the tax code so that it is no longer progressive is not to raise taxes on “the poor” so they pay their “fair share,” but lower the taxes on “the rich.” This is the Ron Paul approach. In an interview with NPR, here is how Paul responded to a question about things being taxed at different rates: “But as far as what the rates should be, I think it should be as low as possible for — for everybody.” And as for half of Americans not paying any income tax, Paul said in an interview on The Tonight Show: “Sometimes they complain, you know, the lower-half income people, they don’t pay any income tax. And I say we’re halfway there.”

The only legitimate tax reform is that which follows the Rockwell rule: Does it reduce or eliminate an existing tax? The CAP proposal, “Reforming Our Tax System, Reducing Our Deficit,” fails miserably, just like Republican plans for revenue-neutral tax reform.

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