Sabrina the Unicorn from the People’s Tax Page puzzles over the recent Trump Tax Reform plan with her friends
Here we go again. President Trump and Congressional Republicans are touting tax reform, again. It turns out this means mostly tax cuts for the rich, again.
We have been here before. Whenever we arrive at this place, we get the usual arguments from the rich and their friends that this is the way it should or has to be. Consider the following rhetorical moves that we at the People’s Tax Page have been attempting to set in context and rebut:
Tax Cuts for the Rich Help All
This is the old “supply side” or “trickle down” argument that cutting taxes for the rich will move them to invest more, spurring economic growth that will benefit the people and pay for the tax cuts over time. Like many rhetorical arguments against tax, there is some truth to this position, sometimes. The trouble is, it all depends on the facts. With tax and interest rates high when he took office -- the highest marginal rate under the income tax was 70% in 1980 -- Ronald Reagan’s tax cuts may have helped growth in decades past, though George H. W. Bush called the whole thing “voodoo economics.” But with far lower tax and interest rates today, the case for large supply side effects is much weaker. And if it is all about getting more “money into the economy,” how about some real middle class tax cuts to spur consumer demand -- and to address the middle class pain due to wage stagnation over the past several decades -- for a bit of “bottom up” stimulus, instead of going to the same old, same old tactics that just so happen to favor the rich?
Only the Rich Pay Taxes, so Tax Cuts Must Benefit the Rich
This is another standby: tax-cutters-for-the-rich point to statistics that show that the rich, say the top 1%, pay a high share of the income taxes. This is true.
But there are two problems with this argument, which focuses only on the income tax. The income tax has become largely a wage tax on middle and upper earners. It is therefore not surprising that upper earners pay most of it. But the income tax is not the whole story, on either end of the income scale.
Looking below, the middle and lower classes pay more in payroll taxes than they do in the income tax. These taxes are a regressive imposition on the first dollar of wages, coming in at 15.3% with the employer and employee share combined. There are no accommodations for family size or deductions for anything. After about $120,000 of wages, the rate drops off to 2.9%. The receipts from payroll taxes are used for general government purposes, just like the income tax; there is no setting aside of “your” “contributions” for your benefit. The payroll tax now accounts for over 70% of the revenues of the income tax, and, if we do indeed get a round of massive income tax cuts, may equal (as it nearly did in 2006) or even exceed that:
Unlike the income tax, which has often been cut over a century of its existence, the payroll tax has only been cut once -- by 2%, in 2010, under President Obama. That cut expired in 2012.
Looking upwards, the income tax is again the wrong thing to consider out of context. The truly rich -- those with assets, who can depend on wealth not wages -- don’t even have to show any “income” using basic tax planning that we at the People’s Tax Page explain here:
These wealthy persons -- very much including President Trump -- don’t have to pay any income tax. Still, the Trump tax plan would favor them by getting rid of the estate or so-called death tax, and the plan also does nothing about any of the planks in buy/borrow/die. Which brings us to:
The Rich Have Already Paid Lots of Taxes
This is the “double tax” argument against any attempt to tax the rich on their wealth. It has already been taxed, the rich cry, so that the death tax (among others) is a prohibited “double tax” on wealth.
One problem with this argument is that there is nothing wrong with a “double tax” per se. Lots of dollars are taxed multiple times in the flow of things. An average worker, for example, pays both income and payroll taxes on her wages, possibly at the federal and state and local levels. With whatever is left over, she still might need to pay sales or other hidden taxes as she spends her cents. Rationally, the worker should be concerned with her total tax burden, which stands at over 30% for average Americans, rather than the total number of taxes.
The second problem? The rich have not paid tax on all their wealth. The huge amounts of “unrealized appreciation” that billionaires like Warren Buffet have been able to build up tax-free using Tax Planning 101, Buy/Borrow/Die, has never been taxed. Whereas the tax system assures that wages put into tax-favored retirement plans must eventually bear tax, even after death, billionaires like Sheldon Adelson are able to get billions to their children, all completely tax-free.
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Tax is complicated. Almost no one understands it. Amidst this complexity and general ignorance -- the fog of tax -- the tax-cutting-crowd is able to make rhetorical arguments that sound good. But sounding good and being good -- for anyone but the rich -- are two different things. We at the People’s Tax Page are trying to speak truth to the power of the tax-cutting crowd, simply and honestly. We invite you to come learn and to participate in our movement to make tax more people-friendly, beginning with explaining it.