Friday, March 18, 2011

The Distorted Picture of Tax Equity

I would like to see a tax analysis organization initiate a project to present a true picture of tax equity which I have been unable to find anywhere.

There is a lot of misunderstanding and controversy over tax policy in this country because people don't have a clear picture of who is paying the taxes and whether or not it comports with their share of income. Most of the interest centers on the income tax, whereas payroll, sales, and property taxes have an equally important role in fairness. If people knew that taxes were being levied fairly and used properly they would more easily see and understand the need for taxes.

What organizations that analyze taxes need to do is present a complete picture of the total taxes people pay vs. their income. Current presentations of this picture use only the income tax and broad categories, the smallest being the top one percentile. Other taxes need to be included and the picture at very high incomes to 0.1 to 0.01 percentile brackets need to be shown.

Consideration also needs to be given to the disparity between taxes on earned income and capital gains. If capital is in short supply capital gains taxes should be lower. If consumer demand is low taxes on earned income need to be lower. In the present situation we have glut of capital and a shortage of demand, yet capital gains taxes have remained much lower than taxes on earned income.

Tax analysts need to do a better job of presenting a true picture of tax equity if we expect to minimize tax avoidance and prevent tax revolts.

As an example compare the two tables below. The top one is from the Tax Foundation. Looking at the shares of income and taxes you would think people in high tax brackets are overpaying their taxes. But, if you assume that taxes should be paid on net income rather than gross income the picture looks much fairer as shown in the bottom table. In this case it is assumed that it is necessary for a taxpayer to be making at least $33,000, the income of the median return, to hold a job, provide a home, transportation, and other expenses necessary to stay employed. Since other taxes are less progressive than income taxes the picture will appear even less fair if these taxes are included. We need fresh thinking on tax policy.

You may argue about what income it takes stay healthy and hold a job, so $33,000 may not be the right number. But, it’s certainly closer to the truth than the exemptions and deductions we now allow for low income people, while corporations get to deduct their martini lunches and other expenses that could hardly be considered necessary in the normal course of business. If everyone below the median tax return were taken off the tax rolls and all the deductions and exemptions were removed think of the money that could be saved on wheel spinning to avoid taxes. This together with higher taxes on the highest 0.1 percent of earners would go a long way to making up the taxes lost by taking everyone below the median return off the tax rolls.


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