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Potomac Crossings
--By George Mason
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The Truth About Taxes
A part of the Washington Spring Ritual is to listen to the federal government and its handmaidens in the press
tell the citizens how fortunate they are, how lovely the federal income tax system is and how greedy they would
be to want to reduce their burden. In Presidential years, an additional treat is provided - advice to the Republican
candidate that lowering taxes is not a winning issue. Here are the facts about tax for your consideration.
After paying their federal and state income taxes, payroll tax and state sales tax, Americans retain no more of
their own income than 19th Century slaves and considerable less than medieval serfs, according to economist Paul
Craig Roberts. Law and custom limited the Lord of the Manor to taking no more than one-third of what was produced
and the landlord provided both protection and the use of his land. Even today, in agricultural areas, a land rent
of one-third is often considered fair value for the borrowed use of the means of production. Government, in its
various forms, will take more than 38% of everything we earn this year.
An income tax is different from all other taxes because it gives the government a prior claim on labor. The irrepressible
Alan Keyes says that the income tax is a slave tax. A slave is someone who does not own his or her own labor.
Our Founding Fathers knew that an income tax was a slave tax and that is why they forbade it. The history of the
16th Amendment is instructive. In 1913, the Republicans allowed the constitutional amendment to go forward because
they thought it would be defeated in the states. It wasn't. Few states had any voters with enough income to pay
the tax rate of 7% on the richest one-half of one percent of the population. The amendment was perceived as a way
to get even with New England for high tariffs. Revenge backfired. Once in place, the income tax regulations were
constantly adjusted, usually in the direction of higher rates and lower thresholds. By 1945, the top rate was 90%
and exemptions had been lowered to capture the incomes of the middle class.
Today we collect $1.95 trillion a year from a Tax Code that is 2,840 pages long. It takes 6.1 billion hours of
reporting and calculating labor to assure compliance. That is three million man-years of work at a cost of $200
billion. The existing written interpretation of the Code is about 46,000 pages long. There are 481 separate forms.
When a citizen calls them with a question, the IRS gives the wrong answer 27% of the time, but the taxpayer is
still liable, even if he or she uses the IRS answer.
Government apologists use an interesting sleight-of-hand. They say, "income taxes" are very low for the
average American, if you "don't count Social Security." (The Social Security payroll tax overstates current
needs by about two percentage points and accounts for the so-called "surplus.") Taxes are also very low
if you don't count property taxes, unemployment insurance taxes, workman's compensation taxes, sales taxes, excise
taxes, death taxes, sin taxes, telephone taxes and some 43 different hidden business taxes. We even have, with
American ingenuity, found a way to tax the poor without their complaint. We call it the lottery.
At the federal level, two-thirds of American families pay more in the flat payroll (Social Security) tax than they
do in the progressive income tax, according to the Tax Foundation. The Cato Institute has a method of measuring
the average effective tax rates on the middle class. Stephen Moore and Larry Kudlow suggest a measure that combines
federal income and payroll paid and divides that number by total family income in the economy. The federal family
tax burden has risen, under that measure, from 23% to 26.5% during the Clinton era and is at the highest level
in 40 years.
The total of taxes collected has nearly tripled in the Clinton years. In 1958, taxes consumed 17.9 percent of the
family budget. In 1998, that figure was 38%, a slight reduction from the 41.5% rate of 1996, according to a study
from Americans for Tax Reform. Tax Freedom Day (the day when Americans have paid off their obligations to government
and can spend their earnings on their own needs) has grown from April 20th in 1992 to May 3rd this year. It is,
however, lower than the May 11th date of 1998. The per capita tax burden, a confirming statistic, rose to $9,939
in 1998, an increase since 1990 of $1,679. On average, Americans spend more time working to pay their taxes than
they do to pay for food, clothing and shelter combined.
The final discordant bong from the tax apologists is the notion that "special interests" rule Washington.
As economist Robert Samuelson points out, if the rich were so powerful their tax burden would be falling. It's
not, its rising. The rich give to prevent further harm as much or more than to gain their way. The fact is, that
with the exception of the trial lawyers, the most powerful lobbying groups represent large numbers of voters, not
so much large chunks of money. Money is to grass roots politics as Astroturf is to lawns. Victory comes from volunteers
and voters in the district.
The rich are not politically strong enough to protect themselves from higher taxes. Their tax payments fund the
tax breaks of college tuition, retirement savings and child care targeted to the large number of voters found in
the middle class with a little left over for the poor. The latest Congressional Budget Office report for 1999 shows
that over the last 15 years the rich have paid a growing share of federal taxes. The money they pay in goes to
44 million Social Security beneficiaries, 39 million Medicare and 41 million Medicaid beneficiaries. Even under
flat tax proposals, the top 20 percent would pay more than one half of federal taxes.
The richest one- percent of Americans totals about 1.2 million households with average pretax incomes of $786,000.
They pay about 21 % of all federal income taxes, up from 15% in 1985. The richest 20% (which includes the top one
percent) has an average income of $144,000 and pays 65% of federal taxes, up from 57% in 1985. The bottom 60% (about
69 million families) have dropped from 22 to 17 % of total taxes paid.
The most recent study available uses pre-dot.com IPO figures from 1995. Barry Johnson, an IRS economist reporting
the srudy in their Statistics of Income Bulletin, notes that there are about 1.6 million people with a net worth
in excess of one million dollars. The upper 2.5% of the population are 4.4 million people with net assets in excess
of $600,000. This elite set has more than $6.7 trillion in assets or 27.4% of total U.S. personal wealth. The group
splits 63-37 men to women but their average net worth is essentially identical at $1.375 million. The wealthiest
1 % hold 22.5% of total personal wealth, about the same as they have held throughout the 1989-95 period.
When all federal taxes are combined, the top one- percent paid an average rate of 26.2 percent. By 1999, that figure
has grown to 34.4 percent. For the top 20 percent, the figure has grown from 24.5 to 29.1 percent. The bottom 20
percent has seen their rates drop from 10.2 to 4.6 percent while the earned income tax credit (a form of a negative
income tax) has risen from $7 billion in 1990 to $30 billion today. Saying that tax collections had gotten "too
gentle," the Clinton administration has asked for a 9% increase in the budget to hire 633 new IRS auditors.
That's to go with the 12,000 currently employed.
There are two points of view being readied for the upcoming election. One is from the people who pay the taxes
and one from the people who derive their living from tax receipts. The former will call for a reduction in the
payroll tax, a complete overhaul of the system to produce more personal long-term savings, a reduction of the brackets
and a lowering of the rates. Their mantra will be continued growth of the economy. The other side, who depends
on tax receipts for their income, will call for debt reduction, "saving" Social Security and Medicare
and "investments" in education. Their mantra will be continued growth of the public sector. That is to
say, any reduction in the role of government is "too risky" for them.
Since both parties prefer obscuring social legislation by rewriting the tax code, the issue of the fall campaign
may well be how do those with modest incomes retain their hard-won entry into the middle class? As earnings increase,
the special credits for the working poor decrease so that longer hours or a pay raise do not produce a net benefit
to them. Some 70% of Americans (who earn less than $50,000) only pay 10% of the bills of government. Because there
are so many millions of them, a tax cut which looks meager to a low or moderate income individual costs the government
enormous sums. For example, a $100 reduction per household in low and moderate tax rates creates $7 billion less
revenue. It is also likely to be spent rather than saved and therefore stimulates the economy. A $1,000 reduction
for the top bracket on creates just $60 million less revenue and it is likely to be invested in future, taxable
growth.
The state of the economy in the fall may determine which side prevails. If the economy falters, people may well
become more concerned about the government's inefficient and ineffective use of an ever-rising share of their income.
If the economy remains robust, reducing the accumulated national debt and strengthening Social Security and Medicare
may be perceived as less of a drain on rising wealth appreciation than the prospect of having to take personal
responsibility for the care of one's own family in their declining years.
Thanks to the 1942 Victory Tax law mandating withholding by employers, lawmakers of both parties now only debate
budget shape rather than size - the way money should be spent, not whether it should be taken in the first place.
As Ken Smith of The Washington Times points out - taxpayers can't effectively demand smaller government when the
government has already collected in advance the money to keep it large and get larger.
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| George Mason, 1725-92, was known as the Sage of Gunston Hall.
His Virginia declaration of rights, written in 1776, was the model for the first section of the Declaration of
Independence. A friend of Patrick Henry and Thomas Jefferson, Mason was an original drafter of the Constitution
and the first ten amendments to the Bill of Rights. He refused, however, to sign the final version of the Constitution
because he thought it did too little for individuals and, without the Bill of Rights, gave too much power to the
government.This column honors his memory. |
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