Tuesday, October 16, 2007

Our Income Taxes Are Not Progressive

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The claim we have progressive income taxation has been accepted with no thought given to whether it is true.

It isn’t. Although the wealthy are paying a larger share of total income taxes than ever, they are also wealthier than ever, and Liberals are constantly whining about the growing wealth gap. Far from being progressive, income taxes discourage savings and the accumulation of wealth, and place obstacles in the path to closing the wealth gap. It’s easy to maintain wealth, hard to accumulate it.

To begin, what makes an income tax progressive? The probable answer is that the higher the income, the higher the tax rate. The intent of progressive taxation is to have the wealthy carry the tax load, because: “They should pay their fair share. They need to give back. They receive the greatest benefits. Yada, yada & Etc.”

Because of the “progressive” nature of our income tax system, the wealthy make a lot of tax lawyers and accountants wealthy too by paying them to devise ways to beat high taxes. Even government has leaped into the tax avoidance business, by promoting schemes like tax-free municipal bonds.

Since the top 5% in terms of adjusted gross income pay 57% of income taxes (the top 5% share of the total has increased steadily, up from 37% in 1980 when the top tax brackets were at 70%), and the bottom 50% pay only 3% of the total (less than half of the 7% they paid in 1980).

You can see by the trend, the wealthy need all the help they can buy to avoid fulfilling the Democrat’s dream of wealthy Republicans eventually paying all the income tax. As it is, almost half of our “taxpayers” no longer pay any taxes to the IRS.

Thanks to the Internet, you can also easily find entire nations that provide tax avoidance services, offering off-shore banking in British Virgin Islands, Belize, Dominica, Seychelles, Panama and Gibraltar, and in other less favored states.

As is usual, the unwealthy need not apply.

Can an income tax be regressive? Look no farther than FICA (Social Security) and Medicare payroll taxes for the answer, a resounding “Yes!” The FICA and Medicare rates are the same for all, and FICA is paid equally on the first dollar earned up to the 94,200th dollar, after which the marginal rate is zero. Therefore, the total FICA tax rate for someone earning $188,400 falls to 6.2 percent, exactly half the 12.4 percent rate for anyone earning $94,200 or less. (You do realize your "employer contribution" comes out of your wages too, don't you? It's a sneaky way politicians try to make you think you're only paying 6.2 percent into Social Security. If you were self-employed, you would know you pay 12.4 percent into Social Security, and 2.9 percent into Medicare.)

The total FICA tax rate continues to fall once taxable wages pass $94,200. For example, for someone earning $376,400, the tax rate is only 3.1 percent. At $752,800, it falls to 1.55 percent, or almost half of the 2.9 percent Medicare tax. Get the picture?

FICA is also regressive because it discourages savings and wealth accumulation. The 12.4 percent of income paid into Social Security earns at about a 2 percent rate, less than the rate of inflation. After a lifetime paying into FICA, mortality tables show the average black male will die just about the time he would collect his first check at about 66 years of age. He will probably be unmarried when he dies, so his Social Security benefits will cease with his last breath. The return on his working lifetime investment is worse than 0.00%, which would be the return if someone was paid what he put in. No, his return on investment is a negative 100 percent (-100%).

Opponents of privatized Social Security accounts don’t spend much time on this feature of the present system, or on the fact it goes bankrupt in 2018.

As added frosting on the wealthy’s tax avoidance cake, a person making a million dollars a year from investments only pays FICA at the 0.00% rate. If, following the example of Ross Perot, the million dollars was all income from tax-free municipal bonds, his federal income tax rate is also 0.00%. Therefore, the wealthy can legally pay FICA and income taxes at the same rate as the drug dealer, who pays none of either unless he is caught, arrested, and convicted, and then only if the government can then find where he stashed his loot (see British Virgin Islands, Belize, Dominica, Seychelles, Panama and Gibraltar), and then find someway to collect from it.

Lots of luck collecting, G-Men.

Not only FICA is regressive, but our “progressive” income tax system is too. It also discourages savings and wealth accumulation, by taking a portion of the income before it can be invested, and then taxing interest and profits which, during inflationary periods (i.e. most of the time), means the IRS is reducing your capital base.

Taxing both interest earned on investments and capital gains are particularly regressive and oppressive forms of taxation. In the first instance, interest usually doesn’t keep up with the rate of inflation, so taxing interest earned just adds to capital shrinkage.

On the other hand, capital investments usually increase with inflation, and often at a faster rate. However, that still means that most of the value of the asset is original cost plus inflation. If the value only goes up by the amount of inflation, and the asset is then sold, the investor has not made a profit, he has just gotten back the value of his original investment.

“Not so,” says the IRS. "You have made a profit, i.e. selling price – original cost = profit, and on that profit you will pay capital gains tax." In other words, your investment not only did not beat inflation, but after paying tax on the “capital gain,” you lost money. Such a deal! Courtesy of your IRS.

I am waiting for a Liberal to explain to me why a system of taxation that discourages savings and investment is considered “progressive.”

The most illogical and regressive part of income taxation is the double taxation of corporate profits. Corporations are taxed at a very high rate (basically 35%, with possible add-ons) when profits are earned, and then those profits are taxed to individuals when distributed as dividends.

Liberals have justified this double taxation by once again clothing it in the mantel of “fairness,” declaring that corporations must pay their fair share. Either through deceit or ignorance, the Liberals don’t admit that corporations don’t actually pay any income taxes, we who buy their products pay their taxes.

That’s right, when you’re calling for corporations to take on more of the tax load, what you are really demanding is government to tax us more. To a corporation, corporate income taxes are just another cost of business to be passed on to their customers along with the costs of labor, materials, and overhead.

When the government collects corporate taxes, it reduces the capital the corporation can use for investment. Therefore, instead of funding growth internally through increased retained earnings, the corporation has to replace the funds lost to corporate income taxes by borrowing.

I’ve heard many Liberals dispute this, but without demonstrating to me how corporations could pay their taxes unless they receive money from their customers when they sell them their products. Some have told me that corporations sell a lot to other corporations, and to government, as if that proved a human being was not the ultimate link in the tax paying chain.

For the accounting illiterate among you, I would like to explain that corporations who buy anything from anyone include those costs as material or overhead charges, and recover them through charges such as depreciation, amortization, professional services expenses (such as tax lawyers and accountants), & etc. The only time they “eat” the taxes instead of passing them on is when they are operating at a loss. However, at that point taxpayers subsidize their loss because tax law provides for corporations to carry losses back against prior period taxes paid, and then forward against subsequent year profits.

The bottom line is there is nothing progressive about “progressive” income taxation. It is an artifact created from class envy and taxpayer ignorance by legislators to fool taxpayers. While the taxpayers are gloating and celebrating how politicians have “socked it to” the wealthy and to the evil corporations, the politicians are gloating about how easy it is to fool ignorant and envious citizens and get their votes.

Meanwhile, instead of benefiting from the stronger and healthier economy that sensible taxation would promote, the taxpayer congratulates the politicians for distributing tax misery equitably.

Income taxation problems such as discouraging investment, wealth accumulation and savings, slowing economic growth, and placing American business at a competitive disadvantage in the world marketplace, would be solved by a national sales tax along the lines of the Fair Tax proposal.

Just as regressive income taxation has been called “progressive,” the progressive Fair Tax proposal has been labeled regressive.

Newspeak lives.

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