Did you have a good time compiling and filing your taxes last month? As much fun as I did, I’m sure. Most Americans agree (link to Gallup poll) that it’s time for a change to the tax code.
T.R. Reid’s A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System (Penguin, 2017) breaks down the complicated subject of income taxation with a cursory global compare and contrast of other countries’ taxation efforts with those of the United States. This type of formula worked well in his previous effort, The Healing of America (Penguin, 2009), exposing America’s inefficient and disjointed healthcare system. Reid invites us to see how other countries do healthcare and taxation and asks: What best practices can we adopt to make our systems better?
A bit of history: Property and consumption taxes (excise, duties, tariffs, and sales tax) have been around since colonial days. A temporary federal income tax existed during the Civil War. Corporations have been taxed since 1909. In the wake of the Second Industrial era’s Gilded Age, and its previously unrealized economic inequalities, the Progressive era birthed the federal income tax in 1913 via the 16th Amendment, empowering the federal government to tax Americans’ personal income. Only 4 percent of Americans – the country’s highest earners – paid an income tax that first year. I call the federal income tax the original inequality equalizer – those who had “the ability to pay” did so for the common good. It was only after WW II that a broader base of Americans paid federal income taxes. In 1927, Supreme Court Justice Oliver Wendell Holmes opined: “Taxes are what we pay for a civilized society.” As our bridges and rails and other structures deteriorate, a collective reset on our attitude about taxes could help.
A bit of reality: Of the thirty-four richest countries in the world, as measured by the Organization for Economic Cooperation and Development (OECD) in 2014, the United States ranked thirty-first in taxes paid at slightly more than 25 percent of GDP. Only in South Korea, Chile, and Mexico is there a lower tax burden than in the United States. Reid also reveals that US government spending is comparable low at 15.5 percent of GDP, ranking thirty-second among OECD nations. Reid says the dual argument that Americans are overtaxed and the size of government is out of control is fictitious. More genuine would be for Americans to admit that our societal DNA – “no taxation without representation” – makes us skeptical about paying taxes. We prefer to do some things with private rather than public funding. Americans privately give more to social programs and charities (than do citizens in other countries), but none of these good works fixes bridges or roads or public structures.
Reid explains that there have been major revisions to the tax code in 1922, 1954, and 1986. The mathematical symmetry of a significant change every 32 years targets 2018 as the year for the next reset to the code. While President Trump promotes a revision to the tax code as a major agenda item, a polarized and dysfunctional congress will make it difficult to attain.
The 1986 revision – a bipartisan effort – was widely hailed as a needed breakthrough. Reid says other countries adopted its main thrust of slashing income tax rates for the highest earners. The code has since, however, been overburdened with loopholes, breaks, and complexities. Yes, it’s a mess. The majority of US taxpayers hire professionals to do their taxes, and Reid says that the “Tax Complexity Lobby” (Jackson Hewitt, H&R Block, Intuit, and others) strenuously opposes innovations like pre-filled tax forms that save billions of hours and fees for citizens of Japan, Britain, Sweden, Spain, and Portugal.
Reid discusses three main options from his global survey: BBLR (broad based, lower rates), VAT (value added tax), and flat tax.
Quoting Reid on BBLR (all the hyphens are his): “The tax base – that is, the total amount of income, or sales, or property that can be taxed – is kept as large as possible, then the tax rate – that is, the percentage that people have to give to the government – can be kept low. Virtually all economists and tax experts agree that this is the best way to run a tax regime.” Remember Bowles-Simpson (aka the National Commission on Fiscal Responsibility and Reform) from 2010? Even though it died in committee (it had its bipartisan supporters and opponents), it featured a BBLR approach to reduce the national deficit. A BBLR approach buttressed the 1986 tax reform law. One of its architects, former Sen. Bill Bradley, a long-time BBLR advocate, says, “The key to reform was to focus on the attractiveness of low rates, not on the pain of eliminating reductions.”
The two main deductions needing elimination in 2018, according to Reid, are well-loved by middle and upper class Americans: the mortgage interest deduction (MID) and the charitable contribution deduction. Reid claims the familiar rationale behind the MID – it encourages home ownership – is now passé; other OECD countries without an MID have home ownership rates similar to ours (about 65%). Reid also contends that Americans will continue to support charitable organizations whether there’s a tax break for itemized deductions or not. His rationale for this latter assertion seems mostly to be personal opinion. I do strongly agree, however, with his overall assessment: “Like the charity deduction, the benefits for home ownership are strongly skewed to the richest taxpayers.” This turns out to be – let me use a loaded phrase to make a point – government dole mostly for the well-to-do to the tune of $200 billion in 2016, with three-quarters of the MID tax break going to households that make more than $100,000/year.
Matthew Desmond, Pulitzer Prize-winning author of Evicted (see my review here), goes farther than Reid and claims that the MID is greatly exacerbating American inequality. His NYT article of May 9, “How Home Ownership Became the Engine of American Inequality,” details the cases of four homeowners and three renters in various American locales. Desmond calls the MID “public housing for the rich.” That’s not all: “A 15-story public housing tower and a mortgaged suburban home are both government-subsidized, but only one looks (and feels) that way. It is only by recognizing this fact that we can begin to understand why there is so much poverty in the United States today.” Desmond’s work is provocative and well worth reading.
Reid says that 175 of the planet’s 200 countries employ some version of a value added tax (VAT). Essentially a sales tax on consumption, the VAT is applied to every stage of commercial production, not just to the final sale in a retail store. Two advantages emerge: there is less incentive to evade the tax for producers, and its collection is more steady. That it tends to be a regressive tax is its main disadvantage.
While praising its potential simplicity, Reid rejects the flat tax outright. He says it can work in countries where a polarity of income doesn’t exist (like the former Russian satellites in the last half of the twentieth century), but not in highly unequal societies like the United States. The flat tax takes in precious little income, and it further increases inequality. Slovakia and the Czech Republic initially utilized the flat tax but them dumped it as an oligarchy class gained prominence.
Reid additionally suggests that the US corporate tax rate be lowered (which would help deflate the current rampant incentive to avoid the tax), that our very richest citizens be taxed progressively, and that a financial transactions tax be implemented on Wall Street. He also says increasing the gasoline tax is a no brainer that can easily help bolster sagging US infrastructure.
Mr. Trump’s Treasury Secretary, Steven Mnuchin, has said the administration is confident that it can create a new tax plan that “pays for itself” with economic growth. Flat taxers, like Grover Norquist and Ted Cruz, spout the same type of fervor – that tax breaks will unleash economic growth like never before. This type of dogmatism has dutifully entered the realm of bogus cliché. The days of robust growth are over – see my five-part blog series on Robert Gordon’s The Rise and Fall of American Growth – and it’s time for Americans to hold political leaders accountable to a responsible and sustainable understanding of economic development.
How a country structures its taxes matters for inequality, economic development, and social spirit – all these included in an understanding of common good. In the earliest days of federal income taxation, “the ability to pay” was recognized by Woodrow Wilson and Franklin Roosevelt as a patriotic duty of the economically advantaged. The tax also helped America maintain some sense of egalitarianism. Today, with a federal poverty rate of 13.5 percent, the majority of Americans can claim status as economically advantaged. Taxes are what we pay for a civilized society – a tax code that is simplified, more equitable, broader-based, and progressive toward the top can help this society recover some much needed civility.
This blog and website are representative of the views expressed in my book Just a Little Bit More: The Culture of Excess and the Fate of the Common Good. Distributed by ACTA Publications (Chicago), JaLBM is available on Amazon as a paperback and an e-book. It’s also available on Nook and iBook/iTunes, and at the website of Blue Ocotillo Publishing.
If you’re a member of a faith community – Christian, Jewish, Muslim, Buddhist, or other – consider a book study series of Just a Little Bit More. The full-length book (257 pgs.) is intended for engaged readers, whereas the Summary Version and Study Guide (52 pgs.) is intended for readers desiring a quick overview of the work. It also contains discussion questions at the end of all eight chapter summaries.
Readers of both books can join together for study, conversation, and subsequent action in support of the common good.
The Spanish version of the Summary Version and Study Guide is now available. ¡Que bueno!
¡El librito de JaLBM – llamado Solo un Poco Más –está disponible en Amazon y el sitio web www.blueocotillo.com!
One thought on “Income Tax – The Original Inequality Equalizer”
Good thoughts Tim, I agree we need some tax revision. It’s ironic isn’t it that clergy get a double subsidy on housing with the MID and housing allowance. Of course we justify that as a partial offset to our fantastic salaries! I agree that the charitable deduction is very helpful to charities of all kinds and I think the contributions would go down significantly.