Is Our Tax Structure Fair?

With tax season fast approaching, American taxpayers will once again gripe about paying more than their fair share.  They will be right in this opinion; at least everyone reading this will be right.  I’m pretty sure that I don’t have any billionaire friends.  Even with the recent supposed "tax cuts" I don't expect to see any windfall.  So, is our tax structure fair?

I got to thinking about this after an old business associate and Trump supporter, quoted chapter and verse about the rich paying 90% of America’s taxes.  There are plenty of articles backing him up in this statement.  With 2020 election candidates starting to throw their hats, berets, hijabs, yarmulkes, wigs, and hairpieces into the three rings of our American political circus, it seems like a fitting time to research this. 

A few potential presidential candidates are using tax reform as essential planks in their platforms.  Elizabeth Warren has even proposed a “wealth tax” which has raised the ire of a few billionaires.  There’s nothing more dangerous than a pissed-off billionaire, as many of us have come to discover.

My Accountant
From the firm Hear, Speak, and See No Evil

As most know, our income tax system is designed to be progressive where the more affluent among us pay a larger percentage of their incomes in taxes.  If the tax schedule’s sliding scale were the only factor here, the premise of my friend would be easy to believe.  As the adage goes, there are lies, damned lies, and statistics.  The counter to this is that numbers don’t lie but as most us know, sometimes they do.

One factor is deductions.  A good example here can be found in former president Jimmy Carter's 1976 tax returns.  His returns, filed in 1977, showed that he owed no income taxes even though he had $68,251 of income (that would be around $296,500 in 2018 dollars).  Carter’s return showed an adjusted gross income of $54,934.  After deductions, he was left with a tax obligation of $11,675.  However, that obligation was wiped out by a $20,864 investment tax credit stemming from equipment and building purchases for his peanut processing business in Georgia.  Carter, as a newly minted president, felt guilty of his position and donated some money to the treasury.

If you work for a living and draw a salary and I have family money that I inherited which I have invested and we both have the same annual income, who pays more in taxes?  You do.  Your income is taxed as wages and mine will be taxed as a long-term capital gain or a qualified dividend.  If both our taxable incomes are identical, say $300,000, you will pay $104, 767 and I will pay $41,742.  Your effective rate is 34% and mine is 14%.  Does this sound fair?

Two Identical Incomes, Two Very Different Tax Rates

You see the majority of Americans financially in the top 1%, make the majority of their money on income from capital, and not labor.  Business owners can lower their tax bills further by paying themselves in dividends rather than salary.  Wealthy congressional leaders make the tax laws and guess how they structure those laws.  Would they tax themselves more and provide tax relief to the middle and lower classes?  If you said yes, then perhaps you can ask the Easter bunny to help you with your taxes.  While you have the Easter bunny’s ear, ask him for me how he lays colored eggs.

I'm not sure that Elizabeth Warren's wealth tax is the answer but the current structure is not fair.  A flatter tax structure that includes all forms of income from all sources would seem to be the only reasonable plan.  Exempt those below a certain threshold from all taxes, tax all income up to a second level at a flat rate with no deductions, and tax individuals and corporations with incomes higher than the second level at a higher rate.  For example, make the first $25,000 of gross income tax exempt, then tax all income between $25,001 and $5,000,000 at 15%, then tax all income above $5 million at 20%.  These rates would be for all labor income, dividends, capital investments, etc.  Corporations would have the same rates and would be taxed on all profits calculated as annual income minus annual expenses incurred in that year.

Corporations would pay taxes as they were earned with no deferrals for long term investments or other workarounds.  Actual annual expenses would be the only deductions allowed from annual income.  Companies that incur expenses from outsourcing overseas or moving production offshore would only get to use 90% those expense costs when determining taxable profits for the year.  The numbers used here are for argument's sake and are debatable but could be a starting point.  Seems fair to me.  Now let's elect some folks with a conscience and sense of fair play.

Diogenes would give Congress a wide berth