Wednesday, April 15, 2015

Happy Tax Day!

As hillary and other liberals rail against so-called income inequality, keep this in mind. The federal income tax system is very progressive; that is, the more you make, the higher your tax rate becomes. This results in higher income groups paying disproportionately higher shares of the total income taxes collected.

Top 20% of Earners Pay 84% of Income Tax - And the Bottom 20% Gets Paid by Uncle Sam.

(Original article in the WSJ - synopsis and charts provided by AEI.)

As the two charts below show:
1. The top 20% of Americans earn about half of all income (51.3%) and pay almost all income taxes (84%) (see Chart 1).  That top fifth is the only quintile whose tax share exceeds its income share – all bottom four quintiles have a lower tax burden as a share of the total taxes paid than their income as a share of the total. For example, the second highest quintile (with incomes of $79,500 to $134,300) earns 20% of US total income as a group, but shoulders only 13.4% of the total US income tax burden.

2. Both of the bottom two quintiles pay negative income taxes, and are therefore net tax recipients (see Chart 1). The 130 million Americans who represent the bottom 40% “get paid by Uncle Sam” as the WSJ says, or more accurately they “get paid by the top 60%” since Uncle Sam has no money of his own... Uncle Sam is not reaching into his own pockets to pay the bottom 40%, he’s reaching into your pockets if you make more than $47,000, the threshold income level to be in the top 60%. 

Chart 1
3. As the WSJ points out, the top 1% of Americans (about 3.2 million people) earn about 17% of total US income, but pay almost as much in taxes (about 46% of the total) as the 322 million people in the bottom 99% (they pay 54% of taxes while earning 83% of US total income) (see Chart 2). Similarly, the top 5% (about 16 million Americans) earn about 29% of total income but pay almost two-thirds (64%) of income taxes paid, while the 309 million Americans in the bottom 95% pay only 36% of total income taxes paid but earn roughly 83% of US total income (see Chart 2).
Chart 2

As if that's not bad enough, the tax code is so complicated that even the IRS can't figure it out.
...if you go to the US Government Printing Office ( ), you can order a complete set of Title 26 of the US Code of Federal Regulations (that's the part written by the IRS), all twenty volumes of it, at the bargain price of $974, shipping included.

According to the US Government Printing Office, it's 13,458 pages in total. The full text of Title 26 of the United States Code (the part written by Congress--available for an additional $179) is a mere 3,387 printed pages, bringing the adjusted gross page count to 16,845.

 There you have it. Almost 17,000 pages of rules and regulations, resulting in a convoluted mess that confuses and frustrates taxpayers. So what's the solution? It's simple.
The Simple Tax replaces the current Federal income tax system by first transitioning over four years to a flat rate personal income tax with no corporate tax and, after at least one more year, switches to a flat rate consumption tax on all retail products and services after repealing the 16th Amendment. The Simple Tax is based upon seven foundational principles.


1) An examination of the Federal personal income tax. Article I Section 9 of the U. S. Constitution says that all direct taxes, including income taxes, must be apportioned among the states based on population. Federal personal income tax laws passed in 1861 and 1894 were both ruled unconstitutional by the Supreme Court because they failed the apportionment requirement. The 16th Amendment, ratified in 1913, simply states that income taxes do not need to be apportioned among the states. There is no language in the 16th Amendment, or anywhere else in the Constitution, that gives the Federal government the power to tax us as individuals at different rates. In fact, the 14th Amendment clearly states that all citizens will receive equal protection under the law. This leads us to the first Simple Tax principle – The Constitution requires that everyone be charged the same Federal personal income tax rate.

2) An examination of the Federal corporate income tax. At 35%, it is the second highest rate in the world and, combined with the cost of complying with the tax code, is included in the price of everything we buy. In fact, on an average, 22% of the cost of every product and service in the United States is the embedded cost of the corporate tax. While it is true that 47% of Americans do not pay any Federal personal income tax, it is also true that everyone from billionaires to the poorest of the poor already pay a 22% tax on their consumption. This leads us to the second Simple Tax principle – Corporations do not pay taxes, but their customers do.

3) An examination of the cost of complying with the Federal tax code. Renowned economist Arthur Laffer estimates that for every dollar collected by the Federal government, the cost of compliance is 30 cents, and that individuals and businesses spend over 6 billion hours per year on tax compliance, bringing the total cost of compliance to a staggering $431.1 billion per year. These compliance costs stifle economic and job growth and, like the corporate tax, are paid by everyone in the form of higher prices. This leads us to the third Simple Tax principle – All Americans will benefit from reducing tax compliance costs.

4) Consideration of changing the tax system too quickly. Including lawyers, accountants, clerks, and IRS employees, millions of people and businesses make a living from the current tax system. Also, including mortgages, retirement planning, investments, and staffing, millions of individuals and companies have made decisions based on the current tax system. This leads us to the fourth Simple Tax principle – Individuals and companies need time to prepare for a new tax system.

5)  Considering the relative benefits of a flat rate retail consumption tax. It is estimated that a flat rate retail consumption tax would slash compliance costs by about 95%. Also, individuals would no longer need to fill out or submit tax forms, or be audited. Finally, the underground economy, which includes tax cheats, illegal aliens, and drug dealers, is estimated to be at least 10% of GDP, and a flat rate retail consumption tax will collect taxes from these people while an income tax does not. This leads us to the fifth Simple Tax principle – A flat rate retail consumption tax is the simplest, least expensive, least intrusive and broadest based method of taxation.

6) We acknowledge that each method of taxation requires a collection and audit process that incurs cost. Also, the history of taxation in the United States, including income, Social Security, Medicare, and Medicaid, shows that as long as a method of taxing has existed, Congress has eventually increased both the scope and the rate. Therefore, we should never have both a Federal income and consumption tax at the same time. This leads us to the sixth Simple Tax principle – We need to repeal the 16th Amendment before we institute a Federal consumption tax.

7) We accept that it does not matter what we do to the tax system if we continue to spend and borrow more than we receive in taxes. This leads us to the seventh Simple Tax principle – Any future flat tax rate, whether on income or consumption, will be based on spending, economic growth, and on whether we want a balanced budget or debt reduction.

With these seven principles in mind, The Simple Tax rate could be 10% of personal income or 9% of personal retail consumption. Once everyone is paying the same tax rate there is a built in incentive to reduce Federal spending to Constitutional limits, which will lead to further rate cuts or faster debt reduction, or both.

In summary, The Simple Tax will bring all Americans together with a common tax plan with a realistic implementation strategy that follows the Constitution and results in economic and job growth.
We should live so long...


Old NFO said...

We won't live that long, trust me... sigh

Well Seasoned Fool said...

Millions of accountants and lawyers, not to mention IRS riff raff, will fight it tooth and nail.

CenTexTim said...

NFO - maybe our kids will see it ... but I doubt it.

WSF - the tax industry is huge and well connected. Not to mention the special interests who have their own vested interest in preserving teh status quo.