TAXATION – TIME FOR A RETHINK

Monday, July 4, 2011

One side says we should selectively raise taxes (or reduce tax subsidies); the other says we should cut taxes. The media coverage is about the fight – as it usually is – and not about the underlying arguments. Maybe it is time to step back from sports metaphors and ask ourselves ‘what are we trying to accomplish’.

Taxing people and corporations is an age-old method of allocating the cost of society’s common benefits among those individuals and entities able to pay. America adopted a progressive income tax, meaning the marginal rate of taxation increases as income increases. For the last sixty years, income tax has been the largest single source of federal revenue. Individuals pay over eighty percent of income tax revenue. Corporate income tax as a percent of federal revenue is one-half what it was sixty years ago.

We hear that America’s corporate income tax rate (maximum 35 percent) is the highest of any industrialized country, yet the effective tax rate is one-half of the maximum. And that is on those companies showing a profit. Imagine if individuals paid income tax on their disposable income rather than on their gross income less deductions.

But back to the point: What are we trying to accomplish by taxing the income of people and corporations? Clearly the objective is to raise enough money to fund priorities established by our elected representatives. Determining the proper amount is a political decision rightly decided by our Congress. An inseparable, though not the paramount objective is to raise revenue in an equitable way that supports a sustainable economy and encourages entrepreneurship, sound risk-taking and hard work. A tax structure has got to be fair enough that society and individuals accept its legitimacy as well as its burden.

Fairness is a subjective term, but I believe America has a shared sense of fairness – at least we collectively know what’s not fair. Recent discussion about tax subsidies for corporate jets is heated, but it is not about fairness. Even those who oppose elimination of the subsidy don’t argue fairness; it’s just too blatantly unfair to defend. Instead, they claim elimination of the subsidy amounts to a tax increase, and they oppose tax increases. Really? You expect us to believe that you’re defending us all against a stealth tax increase?

Taxes should be lowered they argue, but their implication is that the distribution of the income tax burden is just about right as codified in the 17,000 pages of Title 26 of the U.S. Code. Or is there a resistance to opening the Pandora’s Box of income tax equity: re-looking at our objectives and how we can achieve those objectives with income tax restructuring?

It’s time we talk. Stop the diversions into sexual transgressions, name calling, idol worshipping (that includes American Idol and Ayn Rand). Let’s find out what we have in common, our sense of fairness, with respect to income taxes. For a moment, let’s suspend the discussion of what’s the ‘right’ amount of income tax we need to raise.


Here are some proposed fairness adjustments to the income tax code and several necessary changes to make the adjustments work for individuals, corporations and the federal budget.

1. Mortgage interest deduction - Keep it to encourage home ownership, but limit the amount of interest deductable to $40,000 per year and only for one mortgage per household.

2. Charitable deduction – Keep it to encourage giving, but limit the income reduction of contributions to no more than ten percent of income.

3. Income is income – Treat all income has ordinary income. The stock market is not some nascent or intrinsically valuable social service that needs our subsidization.

4. Progressive income tax rates – Modify the rates to make them lower, simpler to implement (that is, less deductions and less tax code instruction pages) and apply the same rates to individuals and corporations.

5. Income tax waiver – Exempt from paying income taxes those individuals grossing $60,000 per year and corporations grossing $500,000 or less.

6. Retirement and Medical Plans – Require all individuals and private corporations to pay social security and Medicare taxes on all income.

7. Medicare tax rate – Double the rate (currently 1.45 percent) for individuals and employers and eliminate the need for out-of-pocket medical expenses of those receiving Medicare benefits.

8. Medicare for all – Make everyone eligible for Medicare, raise the reimbursement rates to be competitive with insurance rates, and vigorously enforce anti-fraud practices.

9. All federal subsidies (other than mortgage and charitable contributions) should be made outside the tax code. For example, rather than tax deductions for drilling oil or implementing solar power, direct government grants could be issued as part of the budget process. Tax code deductions and credits are for the wealthy and are not discussed as openly as comprehensive budget deliberations about our collective priorities.

Can we agree on the concepts? If not, let’s work it out, find common ground. Then let’s see what the impact would be on federal tax revenues. We can tweak the tax rates to bring in the right amount . . . whatever that is.

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