The American Federal Tax System: Fair?

[Romalae]

In honor of my 2015th post, I post this topic for the discussion of something that income-earning Americans will be focused on right about this time of year in 2015 — income taxes!

Yesterday, Pew Research Center posted an article referencing a report about how Americans view the amount they and others pay in federal taxes. It also presented a visualization of how the federal government is funded, which is as follows:



Herein, it can be seen that the majority of tax revenue (nearly half of the total) comes from individual income taxes, which as a whole have remained relatively constant percentage-wise since the WWII era. On the other hand, it can also be clearly seen that corporate income taxes have gone down significantly over that same span of time and payroll taxes (trust funds mainly meant to pay for programs like Social Security and Medicare) have increased as a sort of compensation.

In their analysis, interestingly enough, it turns out that more than six out of ten Americans are heavily bothered by the feeling that “some wealthy people” and “some corporations” do not pay their “fair share” of taxes.

The latter part sure seems to be corroborated in the report, given that corporate income taxes as a percentage of total tax revenue have decreased from around 30% to nearly 10% since the 1950s, and that corporate income tax rates haven’t remained proportional to the growth of the US economy since 1980.

Unfortunately, the analysis about the individual tax rates for wealthy people is somewhat lacking in their report, because it does not take into account the percentage of total taxable income; rather, it just factors in the number of returns filed and the percentage of the overall income tax paid. Nonetheless, it is kind of a foregone conclusion that this is the case.

Fortunately, it does indicate that there is a gray zone between determining whether or not something falls under the category of a corporation or an individual, like for example sole proprietorships, partnerships, and “S corporations”, which end up under the individual income tax code. The system is really complex and hard for the common person to really understand fully.

These are the results of the survey of Americans:



Based on this article and the above analysis, do you believe that some corporations and wealthy individuals do not pay their “fair share” in taxes? Why or why not? If so, what should be done about it?

Personally, I am in agreement with the 64% and the 61% who, respectively, feel that some corporations and wealthy individuals do not pay a “fair share,” whatever the hell you interpret that as. There are more than 200 deductions and loopholes in the American tax code, which of course benefits the top earners. According to the National Priorities Project, up to $1.2 trillion of tax revenue will be “siphoned off” via these deductions and loopholes just in 2015, which is an inordinate amount. Other sources have it in the hundreds of billions, which is still quite high. It should be quite apparent to any observer that this is the real problem with the tax system, and those who say otherwise must either have blinders on, or are intentionally refusing to acknowledge this issue in favor of a certain political narrative or a paycheck that is waiting for them.

Thoughts?

Sources:
Pew Research: How the government is funded
Pew Research: Public opinion about federal tax system
National Priorities Project: Source of federal revenue explained

[Occupied Deutschland]

It seems to be rather common knowledge (at least, outside of some political circles that carve out exceptions for their donors) that corporations and more wealthy individuals tend to have a much easier time of it under the tax code as organized. Particularly the very wealthy (and by this I mean those exceeding the tens of millions mark, not asset-'rich' 'millionaires') who can tie up a lot of assets in other things for tax break purposes and/or pay tax accountants/lawyers bookoo buckaroos to find loopholes for them. Which only becomes more true in the case of corporations.

Anyone who thinks the US tax code doesn't benefit corporations and the rich is deluding themselves. The real rub comes in how to try and address that. The influence such corporations and/or donors have in the political system makes broad reform of the tax code to eliminate loopholes, even as some kind of deal that involves reducing rates, very unlikely (see: GE with regards to energy taxation/subsidy, the military-industrial complex in general, healthcare and drug companies with regards to healthcare/prescription-drug/Medicare/etc. reform, banks with what is probably the home-run example of this problem, et. al.).

[Atlanticatia]

I think a huge problem is deductions and tax breaks. We need to make it so tax rates are more closely aligned with what people actually pay effectively.

Also capital gains should be taxed the same as any other income - that's a huge giveaway to the wealthy. I'd cap the mortgage interest deduction, making it a 15% tax credit only up to mortgages of $500,000. I'd also remove the 'cap' on social security taxes so everyone pays the social security tax on all their income. I'd increase taxes on everyone earning above $200,000 and heavily on people earning above $500,000 and especially $1,000,000. The top marginal rate, including social security and medicare, would probably be around 55-60%.

[The Black Forrest]

Well? The one percenters take in 40 percent of the national income and for whatever reason everybody thinks they need tax breaks.

The weight of the tax system in paper alone is an idea something is wrong.

[Romalae]

It seems to be rather common knowledge (at least, outside of some political circles that carve out exceptions for their donors) that corporations and more wealthy individuals tend to have a much easier time of it under the tax code as organized.

It's common knowledge among some people. But incredibly, there are run-of-the-mill fiscal conservatives out there who deny that this is even a problem, and that people who want to increase taxes on the top earners are "punishing success." I've heard this rhetoric far too often that it becomes disheartening.

Anyone who thinks the US tax code doesn't benefit corporations and the rich is deluding themselves. The real rub comes in how to try and address that. The influence such corporations and/or donors have in the political system makes broad reform of the tax code to eliminate loopholes, even as some kind of deal that involves reducing rates, very unlikely (see: GE with regards to energy taxation/subsidy, the military-industrial complex in general, healthcare and drug companies with regards to healthcare/prescription-drug/Medicare/etc. reform, banks with what is probably the home-run example of this problem, et. al.).

So what you're saying is that for any hope at all of solving this, big money has to be removed from politics? I would certainly agree with that. But it's hard not to be cynical about that ever being successful.

Also capital gains should be taxed the same as any other income - that's a huge giveaway to the wealthy. I'd cap the mortgage interest deduction, making it a 15% tax credit only up to mortgages of $500,000. I'd also remove the 'cap' on social security taxes so everyone pays the social security tax on all their income. I'd increase taxes on everyone earning above $200,000 and heavily on people earning above $500,000 and especially $1,000,000. The top marginal rate, including social security and medicare, would probably be around 55-60%.

Historically, it's been much higher than 55-60%, especially in the 1950s. I like your suggestion of 55-60% but I might find it apropos to take it even farther.

Well? The one percenters take in 40 percent of the national income and for whatever reason everybody thinks they need tax breaks.

Well, to be fair, not "everybody". Just a disturbing number of right-wingers.

[New Werpland]

How odd, I'm under the impression that Corporations pay a little too much, and that the Rich don't pay anything near enough. But the statistics in this say otherwise about what other people think. But then it isn't abnormal for other people to have different opinions.

[Greed and Death]

It seems to be rather common knowledge (at least, outside of some political circles that carve out exceptions for their donors) that corporations and more wealthy individuals tend to have a much easier time of it under the tax code as organized. Particularly the very wealthy (and by this I mean those exceeding the tens of millions mark, not asset-'rich' 'millionaires') who can tie up a lot of assets in other things for tax break purposes and/or pay tax accountants/lawyers bookoo buckaroos to find loopholes for them. Which only becomes more true in the case of corporations.

Anyone who thinks the US tax code doesn't benefit corporations and the rich is deluding themselves. The real rub comes in how to try and address that. The influence such corporations and/or donors have in the political system makes broad reform of the tax code to eliminate loopholes, even as some kind of deal that involves reducing rates, very unlikely (see: GE with regards to energy taxation/subsidy, the military-industrial complex in general, healthcare and drug companies with regards to healthcare/prescription-drug/Medicare/etc. reform, banks with what is probably the home-run example of this problem, et. al.).

You can't really compare corporate and individual tax because corporations are taxed on profit margin instead of revenue. It is needed because every industry has a different profit margin, typically with safer industries have a low single digit return and riskier industries returning 100's of times on an investment.

Also the rich do not rely so much on loop holes they rely on long term capital gains which gain varies from income as it is earned over a period of years and can in theory be still be taxed even when there is a loss due to inflation.

[Romalae]

How odd, I'm under the impression that Corporations pay a little too much, and that the Rich don't pay anything near enough. But the statistics in this say otherwise about what other people think. But then it isn't abnormal for other people to have different opinions.

Why is it that you say corporations pay a little too much? Corporations fund a much smaller percentage of the total federal tax revenue than they did in the past. In FY 2014, the federal government collected $320.7 billion from corporate income taxes, which is 10.6% of the total revenue. In the 1950s, however, corporate income taxes contributed in the range of a quarter and a third of federal revenues.

Not to mention that oftentimes corporations employ tax lawyers to exploit all the various ways to reduce their tax burden, like tax inversions, reincorporating abroad, and funneling income to subsidiaries in lower-tax places overseas.

[AiliailiA]

None of those options. What bothers me about the US Federal Tax System is the regressive tax.

I'm referring to Social Security contributions. The trick of calling them something else doesn't work for me. They're compulsory, so they're a tax. Social security contributions take the same amount as income tax overall, but the contributions are a regressive tax. They would be a flat tax, except that "taxable" income is capped at $117 K and above that the effective rate goes down.

Considered together, the social security and income taxes are a lot less progressive than the income tax alone. The latter of course is the tax that flat-tax enthusiasts rail against for being "unfair" to high income earners. I've never heard them propose to remove the cap to make social security "tax" more flat.

I prefer the British system of a means-tested age pension paid out of general revenue.

[Arkotania]

I think the idea that investments are beneficial to the economy, and thus deserve lower tax compared to labor income has done some damage.

I understand now investments are helpful, but when it pretty much restricts investment income to the wealthy (because how many lower and even middle class people have a good deal of money laying around for profitable investing) and thus gives them a nice tax break on top of whatever loophole they can find, it certainly tips the scales.

Same goes for corporations. They complain US corporate tax is high while realistically paying a significantly lower rate. If they arent even paying at the rate they should be, how is it they can use it as a justification?

[Romalae]

Same goes for corporations. They complain US corporate tax is high while realistically paying a significantly lower rate. If they arent even paying at the rate they should be, how is it they can use it as a justification?

Because not all observers look into it that far; they're happy to just leave it at the statutory rate and not look at the effective rate. Statutory rates really don't mean much in the end, considering that tax deductions on things like health insurance, pensions, operating expenses, and investment returns enable corporations to decrease their amount of taxable profit. But that's complexity, and it's much easier and more digestible to use the talking point that the US has the highest corporate tax rate in the OECD to an audience that willfully won't look into it any deeper or will just accept anything they're told at face value.

[Imperium of the Gliusor Species]

The fact that people can, and do, buy up sophists to argue that they deserve a bloody break on corporate jets that are actually personal jets made in a factory east of Berlin (for an example! I don't know if such a break exists) that cuts their effective rate in half while others pay the full rate and have less money to expend on it shows tremendous stupidity on the part of the parties who hire said sophists- they're wasting money on not having to pay it to the government- as well as the fact that the system is unfair and easily manipulated. I can tolerate the lack of fairness, but not to this extent.

[95X]

What bothers me the most about the American federal tax system? Complaints regarding it.

[British Home Counties]

> Too much tax

Wealthy people are completely barricaded with the amount of taxes, and I am completely not surprised that they flee to Bermuda, Cayman Islands and Panama. Good for them, I support them in their cause in widening the US budget deficit.

The thought that a corporation tax can, at maximum, amount to 52% of income, is horrible.

> Tax going the wrong way

Taxation has too much of a burden for the poorest, people within $3 / 4 of the state minimum wage shouldn't be paying taxes.

[Arkotania]

The poor pay so much because labor income is taxed more. Since the poor are obviously to actually make money via investments, they get a brunt of the taxes.

In 2013 the Net Investment Income tax was put into place, and mainly focuses on the wealthy since the threshold is quite high (about $200k) and the tax rate is only 3.8% (so the wealthier you are, the more you have to pay on investment income).

A decent change but you can expect them to be scouring for loopholes to avoid paying.

[Galloism]

> Too much tax

Wealthy people are completely barricaded with the amount of taxes, and I am completely not surprised that they flee to Bermuda, Cayman Islands and Panama. Good for them, I support them in their cause in widening the US budget deficit.

The thought that a corporation tax can, at maximum, amount to 52% of income, is horrible.

> Tax going the wrong way

Taxation has too much of a burden for the poorest, people within $3 / 4 of the state minimum wage shouldn't be paying taxes.

I didn't realize it was so burdensome for the rich to have the second lowest tax rate in modern history.

Incidentally, the highest federal tax rate for corporations is 39%.

[Romalae]

> Too much tax

Wealthy people are completely barricaded with the amount of taxes, and I am completely not surprised that they flee to Bermuda, Cayman Islands and Panama. Good for them, I support them in their cause in widening the US budget deficit.

You support widening the US budget deficit? How is this a good thing?

Also, if wealthy people are "completely barricaded" with taxes at this point in time, then what would you say about the pre-Reagan era top marginal tax rates? There is certainly little comparison to today.

The thought that a corporation tax can, at maximum, amount to 52% of income, is horrible.

Source?

> Tax going the wrong way

Taxation has too much of a burden for the poorest, people within $3 / 4 of the state minimum wage shouldn't be paying taxes.

So if you believe that taxation has too much of a burden on the poorest and the richest, then who is supposed to pick up the slack? Are you proposing that taxes be raised significantly on the middle class?

[Kelinfort]

Broad tax reductions should be limited to the poor and middle classes, both of whom consume far more of their income in the economy than the wealthy. The top tax rate should be around 50% overall, with deductions for investment and hiring.

As for corporations, their tax rate should be a flat 25% on all profits with deductions for domestic wage growth above inflation and domestic hiring.

[British Home Counties]

> Too much tax

Wealthy people are completely barricaded with the amount of taxes, and I am completely not surprised that they flee to Bermuda, Cayman Islands and Panama. Good for them, I support them in their cause in widening the US budget deficit.

You support widening the US budget deficit? How is this a good thing?

It is not, no one said it is. But it's a nice sign of protest.

Also, if wealthy people are "completely barricaded" with taxes at this point in time, then what would you say about the pre-Reagan era top marginal tax rates? There is certainly little comparison to today.

That they were too high and stifled growth.

The thought that a corporation tax can, at maximum, amount to 52% of income, is horrible.

Source?

Seems I was wrong, taken directly out of Wikipedia, or I just misunderstood it. Either way a 35% tax rate is already one of the highest on Earth.

> Tax going the wrong way

Taxation has too much of a burden for the poorest, people within $3 / 4 of the state minimum wage shouldn't be paying taxes.

So if you believe that taxation has too much of a burden on the poorest and the richest, then who is supposed to pick up the slack? Are you proposing that taxes be raised significantly on the middle class?

I am proposing that spending is cut. Debt + Inflation = Prosperity is not a long-term economic plan. You don't need to replace revenue with more revenue to continue absurdly high spending levels.

[Galloism]

You support widening the US budget deficit? How is this a good thing?

It is not, no one said it is. But it's a nice sign of protest.

Also, if wealthy people are "completely barricaded" with taxes at this point in time, then what would you say about the pre-Reagan era top marginal tax rates? There is certainly little comparison to today.

That they were too high andstifled growth.

Source?

Seems I was wrong, taken directly out of Wikipedia, or I just misunderstood it. Either way a 35% tax rate is already one of the highest on Earth.

So if you believe that taxation has too much of a burden on the poorest and the richest, then who is supposed to pick up the slack? Are you proposing that taxes be raised significantly on the middle class?

I am proposing that spending is cut. Debt + Inflation = Prosperity is not a long-term economic plan. You don't need to replace revenue with more revenue to continue absurdly high spending levels.

Strange. growth and income tax rate seem to have nothing to do with each other.

[AiliailiA]

You support widening the US budget deficit? How is this a good thing?

It is not, no one said it is. But it's a nice sign of protest.

I think X is bad, but most people don't seem to believe that! I will break it. When it's broken everyone will agree it is bad! Then they'll be unhappy because they lost something they valued. I won't be any more unhappy, because I always thought it was bad. In fact I'll be happy, because I was right all along!

Also known as smashing the toys because some other kid likes them. Well guess what? It won't make you happy.

[Sanctissima]

I think a huge problem is deductions and tax breaks. We need to make it so tax rates are more closely aligned with what people actually pay effectively.

Also capital gains should be taxed the same as any other income - that's a huge giveaway to the wealthy. I'd cap the mortgage interest deduction, making it a 15% tax credit only up to mortgages of $500,000. I'd also remove the 'cap' on social security taxes so everyone pays the social security tax on all their income. I'd increase taxes on everyone earning above $200,000 and heavily on people earning above $500,000 and especially $1,000,000. The top marginal rate, including social security and medicare, would probably be around 55-60%.

Wouldn't that just make people not want to succeed?

Because if I was rich, and was losing half my income to taxes, I wouldn't bother keeping my high-paying job.

[Kelinfort]

I think a huge problem is deductions and tax breaks. We need to make it so tax rates are more closely aligned with what people actually pay effectively.

Also capital gains should be taxed the same as any other income - that's a huge giveaway to the wealthy. I'd cap the mortgage interest deduction, making it a 15% tax credit only up to mortgages of $500,000. I'd also remove the 'cap' on social security taxes so everyone pays the social security tax on all their income. I'd increase taxes on everyone earning above $200,000 and heavily on people earning above $500,000 and especially $1,000,000. The top marginal rate, including social security and medicare, would probably be around 55-60%.

Wouldn't that just make people not want to succeed?

Because if I was rich, and was losing half my income to taxes, I wouldn't bother keeping my high-paying job.

Right...so you'd choose to make less money overall why? Remember it's all just marginal rates, so you're losing half of the income you make above $500,000. This makes no sense.

[Atlanticatia]

Also capital gains should be taxed the same as any other income - that's a huge giveaway to the wealthy. I'd cap the mortgage interest deduction, making it a 15% tax credit only up to mortgages of $500,000. I'd also remove the 'cap' on social security taxes so everyone pays the social security tax on all their income. I'd increase taxes on everyone earning above $200,000 and heavily on people earning above $500,000 and especially $1,000,000. The top marginal rate, including social security and medicare, would probably be around 55-60%.

Historically, it's been much higher than 55-60%, especially in the 1950s. I like your suggestion of 55-60% but I might find it apropos to take it even farther.

I agree with you on that. The Economic Policy Institute finds that a top federal tax rate of 68.7% would be revenue-maximizing. It would also lead to middle income growth and a reduction in both pre- and post-tax inequality.

http://www.epi.org/publication/raising-income-taxes/

So I think that over time, we would slowly raise income taxes back up. But we can't jump from ~41% to ~69% all at once.

Wouldn't that just make people not want to succeed?

Because if I was rich, and was losing half my income to taxes, I wouldn't bother keeping my high-paying job.

Because people didn't bother trying to succeed during the 3-4 post-war decades. Marginal tax rates were above 70% during that time, even reaching into the 90s at one point. And yet it was the most prosperous time in American history. When Reagan cut taxes in the 80s, he presumed that people would work harder and the wealth would trickle down. It's clear that that didn't work - trickle down was a failure.

[Sanctissima]

Wouldn't that just make people not want to succeed?

Because if I was rich, and was losing half my income to taxes, I wouldn't bother keeping my high-paying job.

Right...so you'd choose to make less money overall why? Remember it's all just marginal rates, so you're losing half of the income you make above $500,000. This makes no sense.

So, hypothetically speaking, you're saying that losing more than half of my income would be trivial. I think not.

No, I definitely wouldn't work as hard knowing that I'd just be losing most of my money anyway. In fact, eventually I'd probably just move to a different country where the tax income rates weren't so ridiculously high.