John Edward, a resident of Chelmsford who earned his master’s degree at UMass Lowell and who teaches economics at Bentley University and UMass Lowell, contributes the following column.
How long does it take you to figure out how much federal tax you owe on your income? If your answer is more than a minute or two, something is seriously wrong.
Some presidential candidates have advocated one form or another of a flat tax. They say we need a flat tax to simplify filing tax returns. If you buy that argument, something is seriously wrong.
In 1913, the Sixteenth Amendment to the United States Constitution established the federal personal income tax. It was a progressive tax from the start. A progressive tax applies higher marginal tax rates to incomes above certain levels. For example, in 2010, for married filing jointly, income above $373,650 was taxed at the top rate of 35 percent.
The federal income tax used to be much more progressive. In 1981, the top tax rate was 70 percent. In 1961, it was 91 percent. Until World War II, only the top income earners paid any taxes.
Public sector economists recognize the merits of a progressive tax. First, it adheres to the principle that those with more ability to pay should pay more. Second, the last dollar earned for someone making $40,000 is a lot more valuable to that taxpayer than the last dollar earned by someone making $400,000. Third, a progressive tax upholds a sense of noblesse oblige – a noble idea to which many of the wealthy no longer feel obliged.
Advocates of a flat tax promote its simplicity. The simplicity argument is a red herring.
It is not the progressive tax rates that make filing complicated. Once you have determined your taxable income, calculating taxes owed should take about a minute. A flat tax applies the same rate to all income. That might cut the calculation to about thirty seconds.
The deductions and credits that reduce the amount of income subject to taxation are what make filing a tax return complex. On IRS Form 1040 there are thirteen lines for deductions to gross income. Then there is a separate Schedule A for itemized deductions that is thirty lines long. There are ten lines for various credits. Line 53 alone covers eleven different credits, each with its own form.
Some, like the mortgage deduction, have been around for a long time. Congress added others, like the first-time homebuyer credit, recently.
Legislators promote deductions and credits in what are often ill-advised attempts to influence behavior. For example, the federal government uses the tax code to promote home ownership. That hurt low-income households and contributed to the housing crisis.
Once taxpayers get the benefit of a deduction or credit it is difficult to get rid of it. Clever accountants find ways to take advantage of these tax provisions in ways not imagined. The government tries to encourage fuel efficiency but sometimes credits leave gaps so big you can literally drive a Hummer though them.
These benefits have a very high price. Over the last five years the federal government has foregone $290 billion in revenue by allowing estate beneficiaries to avoid capital gain taxes. The deduction for mortgage interest costs over $400 billion.
In 1976, presidential candidate Jimmy Carter said the federal tax code was “a disgrace to the human race.” As measured by the tens of thousands of pages in the U.S. tax code, it has become much more complicated since then.
It would be a disgrace to use the complexity of the tax code as an excuse to eliminate or reduce tax progressivity.
Inequality is as severe now as it was just before the Great Depression. The top 1 percent now own more in net worth than the collective wealth of the bottom 90 percent.
One cause of increasing inequality is decreasing progressivity. During just his last year in office, the tax cuts of President George W. Bush gave middle-income households roughly two thousand dollars in extra after-tax income. In contrast, for the top 1 percent, taxes decreased by an average of sixty three thousand dollars. For some, it was a lot more.
Most flat tax plans include modest exemptions for very low incomes. However, any of the flat-tax-like plans proposed by the presidential candidates would dramatically shift the tax burden on to those least able to afford it.
According to the Tax Policy Center, under Governor Rick Perry’s flat tax plan, a household earning $400,000 would get a tax reduction measured in tens of thousands of dollars per year. A married couple with two children struggling to make ends meet on $30,000 would see their taxes increase by around a thousand dollars!
According to Citizens for Tax Justice, Herman Cain’s 9-9-9 plan gives the top 1 percent tax reductions over $200,000. For the bottom 20 percent, taxes increase by over $2,000.
An honest attempt at simplification would focus on the plethora of credits and deductions that permeate the tax code. The argument that we need to eliminate progressivity for simplicity sake simply falls flat. It is a diversionary tactic in the escalation of class warfare.
Flat Tax: 1. A tax alleged to be so simple it can be filed on a postcard, thus removing all the fun and benefit of developing tax expertise and therefore rendering the concept all but impossible to enact. 2. An effort by the well-to-do to shift the burden of taxes to the middle and lower classes, where it doubtlessly belongs because they don’t have enough sense to become rich so they can afford their own accountants.
Billy Hamilton: The Devil’s Dictionary of Taxation