Before we all get enmeshed in any irrational exuberance over “tax reform,” the Bible offers some insight on the subject. In two books of the New Testament, Mark and Luke, there are passages making the case that wealthy people should pay a higher percentage of income than poor people in order to support the community.
No argument there, but Warren Buffett points out that his secretary pays a higher percentage of her income in taxes than he does. This happens for many of those with lower incomes because, to start with, they are taxed at roughly 16 percent of their earned income for Social Security and Medicare.
Whenever I make this point about the 16 percent paid by those “freeloaders” who seemingly pay no income tax, I always have some readers who point out to me that employees only pay half and that their employers pay the other half. Sorry. Employees effectively pay both halves.
As an example, an employer convinces an employee to continue to do the same job but as an independent contractor. The boss says, “Don’t worry. I’ll pay you the same amount of money — the same $4,000 a month you make now.” The smart employee would realize that he needs the same $4,000 PLUS $320 — the other 8 percent — to “make the same amount of money” he made before.
The fact that the employer writes the check for the other half is just a semantics issue. The employee’s true earnings are what his labor costs — $4,320 in this example — and he is effectively paying every dime of his Social Security and Medicare taxes with no deductions or exemptions that would reduce the tax.
Tax legislation is full of “word craftsmanship” that creates similar illusions. Popular tax deductions, for instance, are nothing more than government “tax expenditures.” They are no different than the cost of food stamps or the premium subsidies of the former Affordable Care Act. Until the Kennedy administration, nobody thought to add them up to see what deductions for mortgage interest, state taxes, charitable contributions, etc. cost the government in lost revenue.
Now calculated every year, here’s how our major expenditures lined up as of 2014: Social Security, $845 billion; Medicare, $807 billion; defense $695 billion; civilian departments and agencies $582 billion; and tax expenditures — $1.169 trillion!
When Ronald Reagan cut taxes during his administration, he accomplished this by simultaneously doing away with many of the “tax expenditures” noted above. He was able to “cut taxes” by increasing what some people had to pay. Remember all those real estate and oil drilling tax shelters sold to doctors and other professionals? Gone.
Complicating the matter is the fact the president doubled the Social Security tax on the advice of Alan Greenspan, which saved Social Security. This was the largest single tax increase in history thanks to the fact that it applied to every dollar of earned income up to the annual cap. So Reagan didn’t really “cut taxes” — just the income tax rate.
Since that time, the tax expenditures (shelters) have been creeping back onto the list of “government spending” like the plague.
I’m not holding my breath waiting for tax reform, because the issue is too fraught with self-interests backed with unlimited campaign financing. Just be prepared for more political theater, along with the long-since debunked shibboleth: “Tax cuts pay for themselves by economic growth.”
A good read on this subject is a well-researched book by T.R. Reid titled “A Fine Mess — a Global Quest for a Simpler, Fairer and More Efficient Tax System.” Seeing how other countries do a better job means that we don’t have to re-invent the wheel. New Zealand has a tax rate we would die for — but (gasp) no deductions or exemptions for anything.