Talk of Tax Reform
I follow Kelly Phillips Erb (@taxgirl) on Twitter. I also subscribe to the wonderful articles she writes about income taxes for Forbes Magazine. She put out a call to the tax professionals to submit their thoughts on tax reform and she will put some of them into the magazine/website of Forbes. I did not want to do that, but I was inspired to jot down some thoughts on tax reform for my much smaller audience.
Before talking about reforming the tax system in the U.S., a basic understanding of some information will help. Let's begin with the sources of federal tax revenue. This data is from the Center of Budget Policy and Priorities and represents FY2015.
Income tax - 47%
Payroll tax - 34%
Corporate tax - 9%
Excise, estate and other taxes - 9%
So right off the bat we've learned that more than half of the tax revenues available to the Congress to spend on the people's business come from sources other than the individual income tax.
Now let's look at who is actually paying the income tax (and yes Virginia, we will get to that Mitt Romney gaffe about the 47%). This data is from the Tax Foundation.
Income Range % of income paid in taxes % of all income taxes paid
Top 1% 20.58% 39.48%
5% to 1% 15.38% 20.48%
10% to 5% 11.25% 10.91%
25% to 10% 21.70% 15.90%
50% to 25% 19.82% 10.47%
Bottom 50% 11.27% 2.75%
As for what income ranges make up these groupings:
Top 1% More than $465,626
5% to 1% Between $188,996 and $465,626
10% to 5% Between $133,445 and $188,996
25% to 10% Between $77,714 and $133,445
50% to 25% Between $38,173 and $77,714
Bottom 50% Below $38,173
Asking someone who is earning less than $38,173 to pay over 11% of their income in income tax is a much bigger burden in their ability to exist than asking someone who is earning more than $465,626 to pay 20.58% of that income in income tax. As pointed out in the excellent documentary film from former Secretary of Labor Robert Reich, "Inequality for All" we have a vast inequality of income in our nation. Tax reform cannot solve that, but it can help to reduce it.
That is the "social justice" lens through which some view the issue of tax reform. There is another lens and it is the one that wants tax reform to reverse the slowing of the economy of the United States.
The Bureau of Economic Analysis of the U.S. Department of Commerce reports that growth of Gross Domestic Product (GDP) in the U.S. in the 2nd quarter of 2017 was 3.0%. NPR says it was only 2.6%. What is not in question is that according to most sources, we've experienced 96 consecutive months of GDP growth since the economic meltdown caused by the so-called housing bubble burst.
The Liar-in-Chief keeps touting the shrinking unemployment rate as evidence that the economy is rebounding and growing, even though nothing he's done had anything to do with what has happened since his inauguration. It sounds good. But it does not present the entire picture.
The Bureau of Labor Statistics tracks something called the Labor Participation Rate. That's the people who are 16 and over who are working full-time or part-time, or who are unemployed but still seeking work. It does not include those people over 16 who are no longer seeking employment.
In January of 2007, before the meltdown, the Labor Participation Rate was 66.4%. When Barrack Obama was inaugurated in January of 2009, the rate had fallen to 65.7%. Three years later, in January of 2012, it had fallen all the way to 63.7%. When the Liar-in-Chief was inaugurated, it had fallen down to 62.9%. As of the report for August 1, 2017, it remains at that level.
So we now know that the percentage of the population 16 and over that is working or trying to work is down 4.5% since that economic meltdown. That is not a recovery by any stretch of the imagination.
Any attempt at tax reform needs to address this as well as the inequity of the tax burden on the population in the two lowest income groupings identified above.
Why do corporate tax revenues represent only 9% of the total tax revenues when the top corporate tax rate is 35%? Because while that top rate exists, few corporations pay it. While the U.S. has the highest corporate tax rate in the world, the effective rate paid by corporations on average is right in line with what corporate tax rates are in other comparable countries.
* * *
These are the things that need to be put on the table when Congress begins to discuss tax reform. These and the real problem, which is that individuals and corporations lobby Congress very effectively to perpetuate.
Let's visit history for an example.
The top is definitely a photo of Howard Hughes. The bottom is reportedly one of the last photos of Hughes before he died.
In 1953, Howard Hughes was informed by the then Secretary of the Air Force, Harold Talbott, that his Hughes Tool Company was in danger of losing all of its government contracts. The reason was the increasing erratic behavior of Hughes himself.
The solution was a brilliant idea. Hughes created two new organizations. Hughes Aircraft, which became owner of the most profitable portions of the Hughes Tool Company, and the Howard Hughes Medical Institute. The HHMI was to be a nonprofit corporation doing research to benefit mankind.
The result, when all was said and done, was that Hughes received $2.5 million from the HMMI annually for every $1 million in spent on research.
But there was an initial problem. The IRS refused to designate the HHMI as a tax-exempt organization. Mr. Hughes found a solution. He lent $205,000 to Dick Nixon, the brother of then-Vice President Richard M. Nixon.
Yes, there were once Nixon Burgers. The loan was to bail out the failing Nixon Family Restaurant business owned by Dick, but it went bankrupt in spite of the injection of cash from Hughes. Not long after this, the IRS relented and gave the HHMI the desperately needed tax-exempt status.
* * *
Big pharma lobbies and as a result, Medicare cannot negotiate lower prices for prescription medications.
Another component of the complexity of the tax code is that the Congress uses it to engage in social engineering. They give child tax credits to promote procreation under the guise of "helping parents." Of course, if you're married filing jointly and your income is more than $130,000 you lose those credits. If you're a single parent, they disappear when income goes above $75,000.
Construction of new homes and home ownership are desired, so there is a mortgage interest deduction. Charitable giving is desired so there are deductions for charitable contributions. The average person who isn't covered by a retirement plan at work can put $5,500 ($6,500 is over 50) into an Individual Retirement Arrangement annually. But a self-employed person can put up to 25% of their net profits, up to a maximum amount of $53,000 into a Simplified Employee Pension IRA (SEP-IRA). The wealthy lobby for tax breaks while the bulk of the people are subject to the whims of those able to influence tax law.
That is what needs to be reformed more than anything else.
Before talking about reforming the tax system in the U.S., a basic understanding of some information will help. Let's begin with the sources of federal tax revenue. This data is from the Center of Budget Policy and Priorities and represents FY2015.
Income tax - 47%
Payroll tax - 34%
Corporate tax - 9%
Excise, estate and other taxes - 9%
So right off the bat we've learned that more than half of the tax revenues available to the Congress to spend on the people's business come from sources other than the individual income tax.
Now let's look at who is actually paying the income tax (and yes Virginia, we will get to that Mitt Romney gaffe about the 47%). This data is from the Tax Foundation.
Income Range % of income paid in taxes % of all income taxes paid
Top 1% 20.58% 39.48%
5% to 1% 15.38% 20.48%
10% to 5% 11.25% 10.91%
25% to 10% 21.70% 15.90%
50% to 25% 19.82% 10.47%
Bottom 50% 11.27% 2.75%
As for what income ranges make up these groupings:
Top 1% More than $465,626
5% to 1% Between $188,996 and $465,626
10% to 5% Between $133,445 and $188,996
25% to 10% Between $77,714 and $133,445
50% to 25% Between $38,173 and $77,714
Bottom 50% Below $38,173
Asking someone who is earning less than $38,173 to pay over 11% of their income in income tax is a much bigger burden in their ability to exist than asking someone who is earning more than $465,626 to pay 20.58% of that income in income tax. As pointed out in the excellent documentary film from former Secretary of Labor Robert Reich, "Inequality for All" we have a vast inequality of income in our nation. Tax reform cannot solve that, but it can help to reduce it.
That is the "social justice" lens through which some view the issue of tax reform. There is another lens and it is the one that wants tax reform to reverse the slowing of the economy of the United States.
The Bureau of Economic Analysis of the U.S. Department of Commerce reports that growth of Gross Domestic Product (GDP) in the U.S. in the 2nd quarter of 2017 was 3.0%. NPR says it was only 2.6%. What is not in question is that according to most sources, we've experienced 96 consecutive months of GDP growth since the economic meltdown caused by the so-called housing bubble burst.
The Liar-in-Chief keeps touting the shrinking unemployment rate as evidence that the economy is rebounding and growing, even though nothing he's done had anything to do with what has happened since his inauguration. It sounds good. But it does not present the entire picture.
The Bureau of Labor Statistics tracks something called the Labor Participation Rate. That's the people who are 16 and over who are working full-time or part-time, or who are unemployed but still seeking work. It does not include those people over 16 who are no longer seeking employment.
In January of 2007, before the meltdown, the Labor Participation Rate was 66.4%. When Barrack Obama was inaugurated in January of 2009, the rate had fallen to 65.7%. Three years later, in January of 2012, it had fallen all the way to 63.7%. When the Liar-in-Chief was inaugurated, it had fallen down to 62.9%. As of the report for August 1, 2017, it remains at that level.
So we now know that the percentage of the population 16 and over that is working or trying to work is down 4.5% since that economic meltdown. That is not a recovery by any stretch of the imagination.
Any attempt at tax reform needs to address this as well as the inequity of the tax burden on the population in the two lowest income groupings identified above.
Why do corporate tax revenues represent only 9% of the total tax revenues when the top corporate tax rate is 35%? Because while that top rate exists, few corporations pay it. While the U.S. has the highest corporate tax rate in the world, the effective rate paid by corporations on average is right in line with what corporate tax rates are in other comparable countries.
* * *
These are the things that need to be put on the table when Congress begins to discuss tax reform. These and the real problem, which is that individuals and corporations lobby Congress very effectively to perpetuate.
Let's visit history for an example.
The top is definitely a photo of Howard Hughes. The bottom is reportedly one of the last photos of Hughes before he died.
In 1953, Howard Hughes was informed by the then Secretary of the Air Force, Harold Talbott, that his Hughes Tool Company was in danger of losing all of its government contracts. The reason was the increasing erratic behavior of Hughes himself.
The solution was a brilliant idea. Hughes created two new organizations. Hughes Aircraft, which became owner of the most profitable portions of the Hughes Tool Company, and the Howard Hughes Medical Institute. The HHMI was to be a nonprofit corporation doing research to benefit mankind.
The result, when all was said and done, was that Hughes received $2.5 million from the HMMI annually for every $1 million in spent on research.
But there was an initial problem. The IRS refused to designate the HHMI as a tax-exempt organization. Mr. Hughes found a solution. He lent $205,000 to Dick Nixon, the brother of then-Vice President Richard M. Nixon.
Yes, there were once Nixon Burgers. The loan was to bail out the failing Nixon Family Restaurant business owned by Dick, but it went bankrupt in spite of the injection of cash from Hughes. Not long after this, the IRS relented and gave the HHMI the desperately needed tax-exempt status.
* * *
Big pharma lobbies and as a result, Medicare cannot negotiate lower prices for prescription medications.
Another component of the complexity of the tax code is that the Congress uses it to engage in social engineering. They give child tax credits to promote procreation under the guise of "helping parents." Of course, if you're married filing jointly and your income is more than $130,000 you lose those credits. If you're a single parent, they disappear when income goes above $75,000.
Construction of new homes and home ownership are desired, so there is a mortgage interest deduction. Charitable giving is desired so there are deductions for charitable contributions. The average person who isn't covered by a retirement plan at work can put $5,500 ($6,500 is over 50) into an Individual Retirement Arrangement annually. But a self-employed person can put up to 25% of their net profits, up to a maximum amount of $53,000 into a Simplified Employee Pension IRA (SEP-IRA). The wealthy lobby for tax breaks while the bulk of the people are subject to the whims of those able to influence tax law.
That is what needs to be reformed more than anything else.
posted by me at 7:09 AM
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