This column explores questions about tax reform that congress has ignored.
The obvious purpose of taxes is to fund government operations that we have approved through our elected officials. The alternative is borrowing. Debt allows us to spend money now and delay taxation to a later date – like using a credit card to pay for something when you don’t have the cash. Later, while you pay off the credit card, you will have less money to spend.
It’s important to understand what we tax today (federal, state and local taxes combined). 36 percent of revenue comes from individual income taxes (mostly federal and state). Another 23 percent is payroll taxes, mostly designated for Social Security and Medicare. Investment income is exempt from payroll taxes. Next are corporate income taxes at 11 percent, property taxes at 10 percent, sales taxes at 8 percent and everything else at 12 percent. CLICK HERE FOR MORE INFORMATION
We generally do not tax accumulated wealth such as cash, stock, bonds, precious metals etc. Our inheritance or estate tax applies only to amounts over $5.9 million from an individual or $11.8 million from a married couple. We do not levy a sales tax on stocks, bonds, or other financial assets which are acquired as a source of future income. We generally tax income from those financial assets at a lower rate than income earned from work.
Are our taxes too high? Believe it or not, our total tax burden is relatively low. We collect 26 percent of our GDP through all forms of taxation. The median among developed democracies is 34 percent. Thirty nations had higher rates and four had lower rates.
Many Americans are alarmed about the decline of our middle class and the extreme difficulty of upward economic mobility. Jobs are available but employee compensation hasn’t kept up with living costs. This is occurring while corporate profits and the stock market set new records. The wealthiest 0.1 percent of the American population now own as much wealth as the bottom 90 percent (which includes the entire middle class along with the poor).
Should we use tax policy to change those trends? In his book, “Capital in the 21st Century”, Economist Thomas Piketty answers “yes”. He demonstrates that the rate of return on capital (accumulated wealth that is invested for profit) consistently exceeds the rate of total economic growth. That is the cause of concentration of wealth among the top 0.1 percent of the population. To hear him explain his ideas in a TED talk, CLICK HERE
There are a number of ways to apply Piketty’s research to tax reform. One idea is to begin charging a small excise (sales) tax on the purchase of stocks, bonds and other financial instruments. It might be around 1 percent. A carpenter who buys a new saw in order to earn income will pay a sales tax. Doesn’t it seem fair that someone who buys stock in order to make money would also pay a tax?
Another idea is a tax on accumulated wealth above some preset dollar value. Suppose that the combined value of real estate and financial assets exceeding $5 million for a family was subject to an annual tax of 1 or 2 percent. That would generate a lot of revenue, particularly from families with net worth in the billions of dollars. They could continue growing their fortunes by investing if they earned more than the tax rate of 1 or 2 percent.
A third idea is to tax non-work income (interest, dividends and appreciation of investments) at the same rate as wages. Why is it right to tax income earned by labor at a higher rate than investment income?
A fourth idea is to retain the estate tax. It allows a wealthy couple to pass on as much as $11.8 million to heirs tax-free. That’s a very nice head-start in life for anyone. Why is it right that those working their way up the economic ladder have payroll taxes on every dollar they earn while the children of the wealthy start with $11.8 million tax-free dollars?
If we apply the revenue generated from ideas like these to reducing payroll taxes, we can increase “take home” pay and we won’t need to reduce Social Security or Medicare benefits. That would certainly help families on the way up with their economic climb.
None of these concepts are on the congressional tax reform agenda. They should be explored and debated with ample public input before our tax laws are changed.
FURTHER READING:
NY Times coverage of wealth tax concept