At the core there are only three ways to reduce it: increase revenue (through higher taxes or growing the tax base), decrease expenses (reducing spending) or some combination of these two levers. The candidates have different perspectives on which option is better and with Romney’s wealth, including an effective income tax rate of 13.9% in 2010, sparring will most certainly ensue.
We’ve seen movements such as Occupy Wall Street and proclamations for the wealthy Americans to “pay their fair share.” With politicians notorious for twisting facts and figures, how can we be informed properly? Focusing on the revenue side of the equation (taxes) is necessary because automatic sequestration is in place to slash the expense side if Congress cannot come to common ground on ways to reduce spending. We need to completely understand the current tax climate to best inform our vote when November arrives.
In 2009, the bottom 50% of the earners in the US paid 2% of the federal income tax and they earned 13% of the total income. The top 10% of income earners paid 71% of the federal income tax and they earned 43% of the total income. This allows us to draw the conclusion that the federal income tax system is highly progressive (taxes rise as incomes rise). It starts to get sticky is when you look two areas: (1) the ultra-wealthy and (2) the income inequality. For example, the top 400 taxpayers had an effective federal tax rate of 19.9% on their Adjusted Gross Income (AGI). This is attributable to the preferential tax treatment of dividends and capital gains (currently 15%). The tax bill on the rich, on average, is bigger than other income brackets, except for those whose income mainly comes from capital gains and dividends. An upper middle class earner (with an income between $100,000 – $200,000) on average had an effective rate of 12%, still well below the super rich. The second point is a smaller portion of the population continues to earn more of the income and control more of the net worth, leading to a widening gap between the super rich and the middle class and poor. In the past, when economic dispersion becomes unbearable, major societal shifts occur (think Soviet Union in 1991, France in 1789 and Portugal in 1974).
As we take a historical perspective on tax rates, average tax rates have come down for everyone in recent times. The top marginal income-tax rate went from 7% in 1913 to 92% in the 1950s to 28% with the Tax Reform Act of 1986 to 39.6% in the Clinton years to today’s 35%. But, individual income taxes only accounted for 47.4% of the total federal revenue in 2011.
When we look beyond the income tax to other governmental revenue sources, our current system has become surprisingly regressive (tax rate decreases as income increases). This is due to the other tax that does not get discussed as much, the payroll tax (Social Security and Medicare). In 2012, payroll tax totals 13.3% of wages with half being paid by the employee and the other half by the employer (self-employed individuals pay the full 13.3%). This tax is paid regardless of how little income you earn, but most of this tax stops once an individual’s earned income exceeds $110,100. Above this threshold, only the Medicare portion (2.9%) continues. When this tax burden is tallied, surprisingly three-quarters of all households pay more in payroll taxes than in income taxes. In addition, it accounted for 35.6% of the total federal revenue in 2011. Rounding out the federal revenue stream, the corporate tax accounted for approximately 7.9%, excise taxes accounted for another 3.1% and the remaining 6% represents all other taxes including the estate and gift tax.
Another issue is the Alternative Minimum Tax (AMT) which was created in 1969 as a result of Treasury Secretary Joseph Barr prompting the enactment by announcing that 155 high-income households had not paid a dime of federal income taxes (high income, but no taxes). Today, according to the Tax Policy Center, there are more than 78,000 people who were in the top 5% of earners and paid no taxes. So, the AMT does not work, yet it still is on the law almost 40 years later. We must apply the correct solution to the problem and not just any solution!
Clearly attention needs to be given to the myriad of factors at play. The budget needs to be structured to create a surplus to start chipping away at the gargantuan deficit we’ve created. Taxation on Americans is going to be integral to this election and our fiscal future, so we need to expand our awareness to ensure we consider the entire burden, understand who is actually paying the taxes, and be prepared for the current tax environment to change, all while promoting economic vibrancy for everyone.
http://www.huffingtonpost.com/2011/06/28/46-percent-of-americans-e_n_886293.htm
http://en.wikipedia.org/wiki/Alternative_Minimum_Tax
http://www.heritage.org/federalbudget/federal-revenue-sources
http://online.wsj.com/article/SB10000872396390444246904577571042249868040.html
