American's perception of taxes is both perplexing and disturbing.
Americans have difficulty grasping the effect taxes have on their lives. There are many reasons for their confusion.
Taxes have become a political football with each side vehemently arguing their position in hopes of being reelected.
The Bush Tax Cuts are set to expire at the end of this year and a decision must be made by Congress whether to extend them or let them sunset. If Congress does nothing taxes will return to the levels of 2002; the lowest being 15% and the highest moving back to 38.6, a 3.6% increase.
It's understandable, given the complexity of the current tax code and the political posturing that clouds the discourse of such a sensitive personal subject, that the average person doesn't quite know which is best for them and the economy.
What is the truth about taxes? Which are good and which are bad? This is the question we should be asking.
Taxes are a very personal thing and, to put it quite frankly, everyone hates them; especially those taxes that touch them personally. There's a widespread misconception about taxes -- who they effect, their purpose, which ones will help and which will hurt the country, and their relationship to the economy.
Mark Zandi, Chief Economist at Moody's Economy.com addressed the issue in his New York Times Op-Ed, "The Tax Cut We Can Afford," and presented a reasoned approach to the current tax dilemma.
There is a fear by some, including Mr. Zandi, that increasing the marginal tax rate on the top two income brackets will dramatically slow the economy and possibly send us into the dreaded douple dip.
But that fear may be unjustified if a double dip is imminent. Despite the possibility of a double dip, allowing those that caused this recession to slide another year is unacceptable.
Phasing, as suggested by Mr. Zandi, is a great concept, one I've advocated for nearly 40 years.
Phasing in taxes is a good idea, but it must begin immediately. Mr. Zandi would prefer to wait until 2012, but delaying the increase may also be destructive to an already sputtering economy and escalating deficit.
The marginal tax rate on upper-income Americans is too low and has been for far too long. We have been at some of the lowest rates in our lifetime, and the Bush tax cuts have done little to stimulate the economy. They have only served to redistribute the wealth upward. Warren Buffet acknowledged the insanity of low upper tax rates on the wealthy when he declared something to the affect: "My chauffeur pays a higher tax rate than I do!"
His reference to the 'effective tax rate,' the actual amount of tax that is paid after deductions, is much lower than the 'marginal tax rate.' The average upper income family pays an 'average rate' of 18 to 20% after figuring their adjusted gross income. Raising the tax rate by 2% in 2011 would increase the actual taxes these individuals pay by about half a percent.
Some feel raising the top two rates would slow consumer spending. Moody's Chief Economist estimates that the group accounts for nearly a fourth of consumer spending. The question he, and other tax-extension advocates should be asking is -- why?
The answer should be obvious.
Thirty years of redistribution of wealth has killed the middle-class -- usurped their buying power -- while elevating the elite to 1920's excesses. Though they represent one quarter of consumer spending much of what the elite buy does little to help the economy of the other 98%; the 'real' economy.
The arguments on taxes are fraught with myths and lies. They distort the real issue confronting us: declining tax receipts and a rapidly rising deficit. Even the Tea Party, through their naivete, have muddied the 'real' discussion we should be having over taxes.
Republicans, still enamored by Ronald Reagan, conjure up the myth that his tax cuts created a thriving, robust economy. That's a lie! And it's repeated by all Republicans. Top Marginal Tax Rates during Reagan's two terms were higher than the current rate for seven of his eight years in office. Even more devastating was his tripling of the national debt from $900 billion to nearly $2.67 trillion; an increase of 189%.
His two band-aid terms forced George H.W. Bush to raise taxes during his administration to make up for Reagan's economic insufficiencies. Bush raised the TMR to 31% from 28% and was vilified, losing reelection to Bill Clinton as a result.
Clinton immediately raised it to 39.6% where it remained for 8 years and allowed President Clinton to leave George W. Bush a surplus which he promptly spent, then pushed the economy into untenable deficits. His tax cuts dramatically reduced the tax receipts collected each year which drove the national debt to $10.7 trillion; nearly doubling the $5.6 trillion when he came into office.
It is easy to understand the confusion if talking points are all most voters get. This is evidenced by the deception of the estate tax. Frank Luntz's suggestion to the Republicans to call it a 'death tax' is unAmerican and should be an indictable offense. The Estate Tax has absolutely no affect on 97.5% of the people in this country, yet individuals making $100,000 a year are screaming about getting rid of the death tax. Sheep following a stupid idea.
The confusion over the Capital Gains Tax and how it will hurt small business, delay someone from starting a business, or from hiring a needed employee is a diversion.
So what is the right thing to do about taxes?
As Mr. Zandi says, phase in the increases on the top two tax brackets. Start immediately: 35% Bracket -- 2% in 2011, 1.5% in 2012, and 1% in 2013; 33% Bracket -- 1.5% in 2011, 1% in 2012, and .5% in 2013. That would bring the rates to 2000 levels by 2013 and cause less pain.
But we should consider something unique, something bold! Let's also lower the lowest three tax rates over the next three years.
Current Tax Rate should be reduced to new lower levels by 2013:
10% Bracket: 9% in 2011, 8.5% in 2012, and 8.5% in 2013
15% Bracket: 14% in 2011, 13% in 2012, and 12.5% in 2013
25% Bracket: 23.5% in 2011, 22% in 2012, and 21% in 2013
This would put money in the hands of people that will spend all of it on necessities and other products that will stimulate the economy from the bottom up. Eight years of tax cuts have done nothing to help this dying economy. We've tried it at the top and it doesn't work. It's time to try it at the bottom and see if it works better.
This has been a horrific recession and it is not yet over. We may have to feel more pain and level the playing field if we have any hope of recovering from this morass.
Not only do people need to research taxes, but they must insist that their Congressional representatives fully explain their position rather than merely repeat talking points.
The Internet has all the necessary tools to research taxes. If you want to be an American, get off your lazy asses and do some. With even a little research, the vote regarding the Estate Tax should be 95% to keep and raise it, and 5% to eliminate it.
We need more than talking points to understand taxes. We need honest discussion.
Our survival and the survival of this country depends on it!
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