One of the key elements of the 2012 Presidential Election was the issue of taxes, or more specifically the so-called tax fairness of our tax rates on income. The issue was discussed in very simple terms. So simple, the debate failed to depict the contradictions of our current tax code.
What is tax fairness?
Conventional wisdom is that that persons receiving a certain income should pay the same taxes as others receiving the same income. Well, isn’t that what happens now? Not by a long shot. The problem is that the tax code makes different classifications of income and taxes them at different rates. Thus the retiree who receives all of his income from capital gains now pays a sharply lower tax than his wage earning neighbor. He also pays less than his neighbor who receives all of his income from loan interest.
How would we make the tax fairer — at least according to the purported public policy of treated those similarly situated alike by taking income the same? I suggest that we start with the W-2 employee. This person is taxed at a rate that progressively increases as his income rises. It makes no difference that he is or where he works, the tax is the same. But that is not true!
What about exemptions and deductions?
The amount of taxes that a W-2 employee can vary quite a bit when the deductions and exemptions are factored in. I argue that we should eliminate them. The most egregious is the home mortgage deduction. Is there any empirical evidence, as claimed by realtors, that home ownership promotes better neighborhoods? Is there any evidence to disprove that banks charge higher interest rates because they know that the mortgagor will be claiming the interest deduction? The fact is that deductions are governmental notions, often back by speculation, as how society should be structured and have nothing to do with the efficient collection of taxes.
What about Capital Gains?
The argument is that a lower rate is needed so as to encourage investment and takes into consideration that the gain was the result of several years of investment. If the lower rate did encourage investment then the stock market should be at an all time high because the rate is so low. That does not seem to be happening. Moreover, when we consider the W-2 employee, especially those at high levels of income, a good part of the income that they receive today is due to the investments in time, effort and education that they made several years ago. It is also fair to allow Capital Losses to be deducted in the year in which they occur. Thus, it is fair to tax capital gains at the same rate as the W-2 employee. However, a great counterargument is that capital gains are already taxed through the stealth tax of government-induced inflation.
What about Dividends?
In both cases the taxpayer risks some capital and receives a reward. With dividends, the reward is paid out during the tax year just as is the W-2 Income. Thus the W-2 rate should apply. But then a counter-argument this is that dividends are already taxed at the corporate rate, so how could it be fair to tax the same money twice?
By now you can see where we are going. If W-2’s, Capital Gains and dividends are taxed at the same rate, then so should pensions, Social Security, Interest, IRA’s and Gambling Earnings also be taxed at the same rate.
So is it fair to tax all income at the same rate?
Yes, it is fair. In relation to taxing income at progressively higher and higher rates. As with with a progressive income tax, the reason someone owes money is a function of how much money they added to their possession in one year. That it, you owe something simply because you have it.
However, the essence of our taxation system is a ‘how much you got,” not a how much something costs. That is, income tax is a form of kleptocracy. The reason someone has a bill is because they have money. This is nothing more than mob rule. How can this ever be consider fair?
When will people look at fair results, not so-called ‘fair’ intentions?
And if our high taxes actually created social goods, well then that would be an argument to keep them. But as fair as we can tell, the poverty rate has increased, and education has stagnated or stayed the same. We pay a lot. And for what? At what point will conventional wisdom measure the outputs of our so-called ‘fair” tax system. Shouldn’t you?