If there is such a thing as a Law of Unintended Consequences, the US Tax Code is full of them. Virtually every tax on the books is there for a purpose (I say virtually all, because with the size of the code, there have got to be accidental laws in there). The primary purpose of taxes, in general, is to raise revenue so the government can operate. Think of homeowner associate fees. The secondary purpose of many taxes it to influence behavior. For example, in order to encourage charitable giving, the government has made donations to qualified charities tax-deductible. In order to reduce consumption of alcohol and tobacco, there are additional "sin" taxes tacked on. There are also attempts to make the tax burden as fair as possible, while still funding the government. Of course, "Fair" is in the eye of the beholder...
The Alternative Minimum Tax (AMT) was an attempt to make things more fair. Outraged that a number of the wealthiest Americans weren't paying a penny of income tax in 1966, the federal government created a parallel tax system to catch the people who were overusing deductions. They made sure it would apply to only the wealthiest Americans. Of course, today, we all know what's happening to the AMT. It is applying to more and more Americans each year as inflation boosts the salaries of ordinary Americans into the 1966-wealthy range. One reason Bush was able to say his tax cuts over the past few years haven't had that much of an impact on tax revenue was because those extra deductions threw a lot of people into the AMT, which meant that they paid more tax anyway. Now a presidential tax panel has recommended eliminating the AMT altogether. It's just too much for the average American to deal with, they said. Scrap the thing and the only losers will be tax accountants. Hey, the government bureaucrats are on our side for once! Or are they? Clearly the AMT was never meant to apply to the estimated 21 million families it will hit in 2005. Most of those people pay taxes and have no weird tax-avoiding deductions other than state income tax or large families. But lets not forget the original purpose behind the AMT - as a band-aid over holes in the regular income tax that allowed the wealthiest Americans to pay less tax than the local schoolteacher or mechanic. Simply getting rid of the AMT will once again open the door for people who make hundreds of thousands of dollars a year to deduct 100% of their salaries. And then who will it fall on to make up the rest? The Treasury Department estimates that killing the AMT will cost $1.2 trillion (with a "T") over the next 10 years. Some of that was the hidden cost of the Bush tax cuts. And the rest is legitimate tax that will no longer be paid by the wealthy.
I'm not saying that Congress failed to fix the AMT in order to get the public support for scrapping it. But it's awfully convenient that the biggest winners will be the rich, while the upper middle class merely dodges the bullet. The AMT isn't the only convenient, "We're from the government and we're here to help you" issue today. I'm sure you've heard of the estate tax, which the Right has dubbed the "Death Tax". A better name would be the "Inheritance Tax", since it's absurd to suggest that you're being taxed for dying. Only the people inheriting money are taxed, and then only if you A) failed to plan correctly and B) left behind a large sum of money. The Estate Tax was designed to prevent dynasties. It's aimed at the super-rich, not to penalize them, but to encourage them to spend their money while they live, either by investing it or enjoying it. I won't argue the pros and cons of such an approach. I will say that again it had unintended consequences. After years of not keeping up with inflation, it became nearly impossible to pass down small family businesses whole. The Republican response has been to push to abolish the tax altogether. They've done an excellent job convincing a lot of Americans that the tax was going to financially ruin their children. The Truth is that the biggest beneficiaries are going to be the super-wealthy, which the upper-middle class dodges another bullet. The family farmer with $5 million worth of land but few liquid assets will be saved, but so will the $5 billion bequeathment from Bill Gates Senior to Junior.
For better or worse, the American public is being sold a bill of goods. They're being encouraged to choose a small gain today that will come with a large pain tomorrow. If abolishing the AMT and the Estate Tax is really in the middle-class's favor (as I'm sure our friends on the Right will vigorously argue), why not trust them with the truth. Why not tell them how much the people in charge stand to gain personally from these abolishments? Why not share with them where the extra $1.5 trillion will come from? Why not tell them that the reason they are in danger of being hit by taxes that were never meant for them is because Congress dropped the ball? What are they afraid of?
23 comments:
I am going to admit a certain amount of idiodacy in regard to taxes (as in ... I let HR Block do mine every year and hope I don't get screwed!).
What is wrong with imposing a flat tax? If you make $X amount then you pay X% in taxes. I know there's a logical reason we don't but it's never been fully explained to me by someone who understands the economic downfall that it would cause.
All I know is that Clinton law regarding taxes means my commissions are taxed at 40%. I'd like to have that abolished too please.
Briefly, the sliding scale of tax percentages we use is called a "Progressive Tax. The basic idea is that expenses are not necessarily proportionate to income. That is, minimum housing costs may be $500 a month (for example). Minimum food costs might be another $500 a month for a family of 4. If the wage earner is making $2000 a month, these two necessities represent 50% of his/her income. However, for someone making $4000 a month, this only represents 25% of their income. The person making $4000 a month has more "discretionary income". That person has a higher ability to pay, whereas paying 17% income tax would present a real hardship for the first person (as in can't eat or homeless, not can't send kids to private school or afford Air Jordans).
Also, while taxes are sometimes used to change behavior (see charitable donations and sin taxes), income tax has no effect on earning behavior. Everyone wants to make more money, so even if 3 out of the next 10 dollars you earn go to the government, you still want to earn more.
Keep in mind that even if your taxes are abolished (a special Alisa tax law), your take-home wouldn't necessarily go up, at least, not for long. Companies pay wages based on what people demand from the job. You're living on 60% of your commisions. Your employer won't necessarily sit back while its employees are getting 40% more take-home than before - they're going to want a cut of it too. Before you know it, wages will have readjusted to the new level - 60% of what you made before. (Keep in mind this is theoretical, would not happen immediately, and for that matter, never happen because, lets face it, tazes will never go away)
a small gain today that will come with a large pain tomorrowI really like that.
Why is it that whenever there is a problem with a program the first reaction by the government lately (and by government I guess I really mean Republicans) is to get rid of the program entirely instead of trying to fix the problem? Couldn't we just adjust the AMT to meet the inflation since 1966?
One, tax revenues have undeniably gone up since Bush made his cuts, as they did when Reagan made his. You'll find all kinds of excuses why other things caused this, but facts are facts, and plenty of economists can back this up with thought-out theories and math, and not just actual history.
Two, even if they cut the AMT out, the top 10% of income earners will still be paying something like 70% of all taxes. That's a pretty fair share, I think.
Three, it's a step in the right direction toward simplifying things. I have read that something like $0.50 is paid in expenses for every $1 collected in taxes. By that I mean IRS salaries, paying H&R Block to doyour taxes, corporations having to pay extra accountants just to do their taxes, all the associated drama involved with April 15 every year. That's why I favor the Fair Tax plan, which would eliminate virtually all of that with a simple 23% sales tax on all goods.
Do you realize that a sales tax of that magnitude would crush the poor and lower income brackets as well as seriously hurt the middle class? People who are already living paycheck to paycheck using all their money to buy the goods that they need to get by should not be asked to fork over more for those goods simply to make it easier for those with complicated taxes. The vast majority of those with complicated taxes have them because they have a lot of assets and investment income coming in, as well as trying to deduct their vacation to Florida as a business expense.
Saying that the top 10% of taxpayers pay 70% of the taxes doesn't mean anything if you don't also add what percent of the income they make. It's so easy to be misleading with statistics if people aren't willing to pay attention. If that 10% make 70% of the income in the US, well, then they aren't really being screwed, are they? Did you know that 1% of the people in this country have over 40% of the wealth?
I did know all that, Sylvana, and I'm very well read on tax stuff. The 23% sales tax will cause actual prices to go down. Not immediately, but soon, as companies that are selling products won't be triple taxed or more on everything they produce. They'll pass the tax savings on to the consumer, and if they don't, someone else will, and the competition will cause them to ahve to reduce. The Fair Tax plan also comes with an automatic refund equal to the taxes that would be paid for the necessities for one human to live for a year. So everyone would get an automatic refund each year.
Boortz and John Linder have a book coming out next week that explains the Fair Tax plan in detail. Obviously they favor it, so you could say it's biased, but then people speaking against it are biased, too. But read up on it before you knock it. Since you've already said that this would be a terrible burden on the poor, which is not true at all, then you obviously don't know much about it. I'm not criticizing you, jsut saying that if you more about it, you might end up liking it.
And Scott, I see we have a major disconnect, perhaps one of the things that distinguishes us as a liberal and a conservative. You seem to think that stopping dynasties from forming is a bad thing, 'nuff said. I, on the other hand, think that one of the great things about this country is that you can pass your wealth on to your child. Thus I do see the inheritance tax as a death tax. After all, no one EVER has to pay it unless someone has died. And I should be able to pass down every cent I have saved to my children instead of a large percentage getting stolen from me to give to poor people. Why do they deserve it more than my kids? I earned it, not them, so I should be able to pass on my money to whomever I want when I die, with no restrictions.
That's a really weak argument, Ben. You'll have to do better. "I earned it ... so I should be able to pass my money on ... with no restrictions" No restrictions? Are you allowed to send it to Al-Qaida? Are you allowed to hire a hit man? Obviously we have restrictions on where we spend our money. You can't say the government has no right to put restrictions on you. The question is, what level of restrictions are appropriate?
What's really funny is that you seem to think dynasties are as American as apple pie. Actually, that was one thing many colonists were trying to escape when they came here from the old world. All of the land in Europe was held by a few rich families. Class distinctions were becoming severe and class mobility was virtually nil. The United States was one of the first modern countries not to have a hereditary ruler. Massive inheritence is not an American ideal. Pulling yourself up by the bootstraps is.
But it's a free country, so go ahead and believe that all the mechanisms we currently have that might allow you to make your fortune should be abolished.
So our high taxation, and inheritance tax specifically, are what will allow me to become rich? I just can't figure out how stealing my money is a mechanism for making me rich. Please explain.
A history lesson... The founders of America came here for many reasons, but few came to escape rich people in Europe. Some came for religious freedom, some came to be on the frontier, and to have the oppotunity to succeed, some came to escape the tyranny of monarchy.
Perhaps "whomever" was a bad choice of words, but since I spent the entire comment talking about passing my money down to my kids, it's nice that you decided to find the one place where I wasn't specific to trash my arguement. Obviously "restrictions" referred to the inheritance tax, not to giving my money to terrorists.
Pulling yourself up by the bootstraps is an American dream, but so is being able to hand down your earned wealth to your children so that they can live happier lives, something our founders also favored. I was a history major, and don't need lectures from an engineer on history, especially when it's not true. I find it funny that you are so concerned about what people came here for two hundred years ago, yet at the same time have so little regard for what they meant when they wrote the Constitution (like your point that "public use" can mean "purpose" durign the Kelo discussion, yes it can mean purpose, but that's not what it ws meant to mean when it was written). You discount what was actually written on paper, but cite the much more subjective reasons why people came here as solid evidence for an inheritance tax. If you examine the Constitution carefully, you'll notice no power to tax inheritance was ever given to the government. I think what they wrote is far more an example of what they felt about things than your subjective "why they came" BS. Can you explan this?
At any rate, it's definitely a death tax. Someone dies, it gets paid, no one dies, it doesn't get paid. A tax that only happens when someone dies is a death tax. Calling it an inheritance tax just tricks people into not realizing how ridiculous it is.
Your arguments are moronic Ben. First of all, you were a history major at an engineering school. For the record, since you bring it up, your degree is is "History, Technology, and Society" - not exactly the same credentials as a Harvard historian.
Second, I don't give a rats ass what the founders thought or what the original colonists thought. Personally, it's totally irrelevent to my life. However, I was refuting your stupid comment that implied that a major difference of this country was the ability of wealthy people to pass down wealth. The reality is that the US is the least hereditary society in the world. Americans have the opportunity to stand on their own. Children are not held responsible for the actions of their parents and inheritances are restricted. Now, I guarantee that when you (God forbid) inherit your parents' estate, you won't pay a cent of Estate Tax. Why? A) because your parents are not super-wealthy and B) they're intelligent enough to make plans for their money, including setting up trusts and donating to charities.
Thirdly, stop blaming me when your arguments are too weak to stand up to scrutiny. Of course I'm giong to attack the things you say that make no sense. In addition, I can't possibly refute everything you say since the sheer volume of falsehoods is overwhelming.
Just becuse I majored in history at an engineering school doesn't mean I don't know anything. I've read book after book after book on the founding of this country, as well as taking many classes both in high school and college. It certainly makes me more of an expert than you. For the record, I never claimed to be on the level of a Harvard historian, merely more knowledgeable than an engineer. And your statement that we were founded by people who wanted to escape the concept of passing their money to their kids is moronic. Oh no, here in Europe I can give all my money to my kids, I better move to the US so the government can steal it instead! Anyway, if it's so irrelevent, why did you bring it up?
If it's so easy to set up trusts and such to avoid the inheritance tax, then why does anyone pay it? Why bother having it? Because people do pay it, and when my parents die, I will pay it unless a sensible tax system is out in to place.
Instead of attacking my argument, you found an obvious bad choice of words and attacked that instead of the substance of what I was saying. Sounds like something you accuse Bush/Rove of doing all the time.
Find a single faleshood in what I say. You basically decided you didn't like what I said, so you called me moronic and full of falsehoods. You attacked my education and everything I wrote without actually saying anything that refutes any of it. But then it's your blog, so I'm going to leave the discussion since facts on the matter are obviously not welcome here.
Scott,
Rough week? Damn...
Ben,
I actually agree with you on this one. Well, not with your first comments on a sales tax, but more on the last couple threads where you and Scott were calling each other bitches. Not sure how the discussion on revoking AMT, possibly starting a flat tax or sales tax only somehow morphed into an argument on inheritance/death tax.
But as far as a sales tax only, to me it's just a different name for a flat income tax. In fact, I think it's worse for both lower income people and business. Actually, I can't see who this benefits at all. Like Alisa, I am no expert on tax codes and I don't claim to be or care to be. I'm just thinking, if I pay 23% tax on everything, then wouldn't it make sense for me to buy the bare minimum of stuff I need?? What would I do with the money I save you ask? Travel! Go all over the world and spend my money abroad, on tax free income. That can't help the economy of the US, for me to save my money and spend it abroad. And for the money I do spend, on necessities such as groceries, gas for the car, etc....again, like with the flat tax a 23% tax on groceries hurts a poor man more than a rich man. Case in point: Here in Norfolk, the grocery tax is low (around 4%). Restaurant tax is over 10%! I'm not saying that because of this I never eat out, but I eat out less. The richer I am, the less I would care. The poorer I am, the bigger the difference would make. If this 10% tax were applied to groceries, which is not a luxury like restaurants, this would really hurt the poor.
Yowza! Deep breath, count to 10.
It makes it hard for me to take the other perspective seriously when my view point is being called idiodic. I want to hear the other perspective.
That said:
I don't see how a 23% sales tax is good for the economy.
I've been thinking about this AMT post for a couple of days...I tend to believe that whenever a politian of any affliation says "Just get rid of it," it's an attempt to avoid fixing the problem. I don't have a solution. I'll just sit back and be cynical ;).
Mike,
I really wouldn't point to Russia as a sucessful model of your flat tax. Things might have changed recently, but when I lived there most people avoided paying their taxes, small businesses were crippled by them so paid people off so they didn't need to pay, and the whole system still encouraged a number of oligarchs to emerge while the middle class diminished. Of course, from what I've read, the economy is getting better, but mostly in the major cities and poverty is still rampant.
The tax situation was pretty bad- My favorite billboard read "Come out of the dark, pay your taxes." I'm still sad I never got a pic of it...
Mike, I completely agree with you on the death tax thing.
And completely disagree with you on the flat tax. First of all, does this flat tax apply to individuals and corporations, or are we just talking individuals? As for a sales tax only, my post above states my opinion that this will hurt individuals and corporations, so I'm not trying to kill the corps.
But if you think Russia's economy is so great, and a shining beacon to the rest of the world, I'm glad you aren't making tax decisions for my country!
Oh, and I still don't see how a 23% sales tax won't hurt businesses...since it'll increase their costs...for materials and labor. My god, the possible price of copy paper alone scares me. Businesses will need to increase wages, especially for more blue collar positions (people who will suffer most from the sales tax), to make them livable. How exactly will this be good for business, especially small business? Note, I'm not defending the current system, I fail to see how the alternative is better.
Russia's problems are greater than just taxes, but any tax is only as sucessful as the system in place to collect and hold people accountable.
I'm not sure that a tax/credit or rebate would really address the issue of the "poor" or even just the middle class being able to handle a 23% sales tax on everyday goods. From what I understand, this rebate/credit would come at the end of the year, thereby leaving less money in individual's pockets through out the year. This will also hit those with severely fixed incomes- the disabled and the retired for example, those who do not pay 23% of their income in taxes...they couldn't wait for a year end rebate.
I understand that not paying income tax would leave more money to individuals to pay this sales tax, but I suspect that it doesn't even out.
Nobody has to wait until the next year to get their refund. If you fill out your withholding forms correctly, you won't even get a refund and you'll see a higher take-home in every paycheck.
Anyone ever ask a national sales tax proponent what they would do if there were a national sales tax? I did. A millionaire I work with told me, "I'd buy less so I could keep more money. Or I'd find ways to buy things without paying sales tax." I know he'd do it. He liks to collect Corvettes and has successfully avoided paying sales tax on a few by ordering them in one state, delivering them to a second, and driving them home to a third. He'd find a way to avoid a national sales tax, too.
A high sales tax would only serve to depress consumption.
Actually, a LOT of our tax burden could be overcome if the government were more willing to make corporations responsible for a larger share of taxes. Corporate write-offs are rampant in the tax code and it's astonishing to me the relatively small percentage of taxes a company like, say Wal-Mart, has to pay when you look at their revenues. Companies get write-offs for loads of things that you'd never even think about. For example, let's say McDonald's wants to build a new stand-alone restaurant on I-85 in North Carolina. If they buy a large piece of land and then put half of it into a conservation easement, they can get a big deduction on their real estate costs. Robert Congel, a megamall real estate mogul who is trying to build the biggest mall in the world outside Syracuse, NY got nearly $100 million in tax breaks in a recent Congressional bill for agreeing to use "green" resources in building the place. I find his entire approach laughable and disgusting seeing as how not three years ago, the state of NY barred him from building on the site he'd initially scoped out because he was dumping toxic chemicals into the water table from another development nearby.
But I digress...my point is, NYC is about to do away with the sales tax in the city, the speculation being that purchases will go up for merchants. If we had to pay nearly 25% for everything we bought, I think that whole luxury culture of people buying $2,000 Louis Vuitton bags on a $25,000 salary would stop forthwith. I realize the idea is that if sales taxes are so steep and income tax is nonexistent, then it's really just a matter of having one's money taken out of the paycheck to begin with or spending it oneself, so ultimately, it's a wash, but what happens during when consumer confidence takes a shot in the arm one winter and the economy takes a downturn? It seems to me that leaving our tax revenues to such chance would be a bit of a gamble.
Finally, Ben, I really do think you should review your history books because the Pilgrims might not have come here out of economic distress, but the country itself was most certainly founded due to monetary reasons. Hello, "Taxation without representation?" "Boston Tea Party??"
And for the record, Bill Gates is against abolishing the Estate Tax. As is Warren Buffett.
Good ahve embedded taxes already. Let's say it costs $1 to make a piece of paper. The company making it is taxed several times along the process so that they have to sell the piece of paper for say $1.50 just to break even, and $1.75 to make a decent profit, plus the normal sales tax makes it cost almost $2 to the consumer. Cut out the multiple layers of corporate taxes, and institute the 23% sales tax, and suddenly the company can make the same profit selling it for $1.25, which comes to $1.54 with the FairTax. The company makes the same profit, the consumer saves money, and the government gets a pretty decent cut of the action.
Also, if people buy less and save more... Well that means more money for banks to lend out, which means cheaper rates. Small businesses and large will all be able to get cheaper money, and use that money to expand, grow, innovate, hire more people. Plus they can fire most of their tax compliance staff and hire more people for useful jobs.
Like I said, don't just see 23% and freak out. Read up about it, get Congressman Linder's new book (comes out tomorrow). None of us are economics experts, so 23% is sure to shock you until you think about all the implications. Once everything settles down, prices will drop, and you'll pay about the same, or maybe even less, with the new system.
And Scott.... Poor people who get tax credits (i.e. money for nothing stolen from people who make it) do have to wait till April 15, I think. I've never qualified for that though. I do think it's sickening that people who already don't pay taxes then get credits on top of it.
OK, let's break down this graduate-level math of yours. You're saying that the paper company is making a 17% profit (.25/$1.50). That is, on each unit of paper, they make $0.25 of profit yet pay $0.50 of taxes. That's a 200% effective tax rate. Good numbers, Ben.
Now let's take a look at your "fair to the wealthy" tax. You say, "the government gets a pretty decent cut". Nice. But since we're using numbers like champs today, tell me this, does the government get exactly the same amount of cut as it used to? Because if not, then it's going to have to get it from someplace else. I wonder where..... And if it is, then the amount of taxes from that paper will be exactly the same amount.
Basically, the best you can claim is that we're putting tax professionals out of business and taking our our tax compliance costs. But, oh wait. Who's going to enforce companies paying the 23% sales tax? And how long do you think it will be before A) someone figures out a loophole ("hey, trade me that stereo for these video games and we have a deal") and B) some politician will create an exception for one of his or her constituents?
Regarding Linder's book: Oops - turns out Linder was trained as a dentist, not an economist. And he co-wrote the book with Boortz, who was, < gasp > a lawyer, not an economist. Sorry, I don't pay my opponents to read their false misleading propaganda. I can hear it again from the dittoheads who wander all around this great, educated state of Georgia.
Oh, and Ben, I do happen to know a thing or two about taxes. You're probably referring to the Earned Income Credit or EIC. Yes, people can get back more than they paid. However, the maximum payment is for a family of 4 making a total of $11,000 a year. That payment is $4300. I know, I feel the same way you do. Giving a family that makes $11,000 a year $4000 sickens me too. I mean, they're the garbage of the earth - we should be kicking them instead of giving them food money. Oh, and they can get that money throughout the year. It's called "Advance EIC" and they can get the credit paid through their paycheck.
Good research, though.
That would be why I said, "I think." I didn't feel like doing the research. Some of those people earning $11k with families are scum, because they shouldn't be having children if all they can earn is $11k. I understand some of them were in better spots when they had kids, but most people earning $11k did not earn enough to raise a child decently when they decided to have sex without protection, and that is child abuse.
I hadn't realized you were a trained economist, either, Scott. Boortz and Linder, I'm pretty sure, have more economic education and experience than you. I'll read their book and get back to you on the numbers. My example was cooked up in 10 seconds, the numbers are not realistic, but I didn't have time for a long study, which is why I recommended people read the book. I don't have all the answers, neither do you, but the book might. Or this site:
http://www.fairtax.org/
I never said you should have time for a "long study". But I do expect that if you're going to try to make a point, you do it without obvious lies and falsehoods. If numbers look so foreign to you that they're just gibberish without a "long study", maybe you should steer clear of them for a little while. Meanwhile, I don't know why you're so sure Boortz & Linder "have more economic education" than me. id they tell you this? Or is it just because one yells on the radio and one convinced enough Georgians he hates gays and abortion enough to be elected?
I apologize, Scott. I forgot you ahve an MBA, which should give you some economic knowledge.
The numbers I used were a quick and dirty example to make my point. Like what my professor did in class the other day with bonds... He used a bond with a 10% face, and a 112% market value, just to show us how it would work. Is that realistic? No. Did anyone stand up in class and tell him he shouldn't use numbers until he is more familiar with them? No, because we all had the common sense to realize it was to make a point, not to show us exact real life conditions. Too bad you seem incapable of thinking outside your box.
At any rate, I still think it's a good idea, but you are refusing to consider it, despite me saying I don't know every detail and suggesting you look further if you are interested. Instead you discount it and show no curiousity at all about a program that might work well.
Oh, if you change the sales tax in my example from $0.25 to $0.15 then it's about a 7.5% tax rate. Lower the embedded taxes (which includes compliance costs) to $0.14. With a $0.25 profit, that means it works out to $1.54, the same as the Fair Tax in my example. And you'd have no IRS, so none of that ridiculous April 15th crap. Is that realistic enough for you?
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