“No Man’s life liberty or property is safe while the legislature is in session”.

- attributed to NY State Judge Gideon Tucker

Friday, April 22, 2011

If Not From High Rates, Where Will Tax Revenues Come?

Following on the two editorials about which I wrote in a post earlier this week, the lead staff editorial in Monday's Wall Street Journal focused on the middle-level income brackets, which, according to its title, is Where the Tax Money Is.

Here are the key passages from that piece,

"Consider the Internal Revenue Service's income tax statistics for 2008, the latest year for which data are available. The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the "millionaires and billionaires" Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.

In 2005 the top 5% earned over $145,000. If you took all the income of people over $200,000, it would yield about $1.89 trillion, enough revenue to cover the 2012 bill for Medicare, Medicaid and Social Security—but not the same bill in 2016, as the costs of those entitlements are expected to grow rapidly. The rich, in short, aren't nearly rich enough to finance Mr. Obama's entitlement state ambitions—even before his health-care plan kicks in.

So who else is there to tax? Well, in 2008, there was about $5.65 trillion in total taxable income from all individual taxpayers, and most of that came from middle income earners. The nearby chart shows the distribution, and the big hump in the center is where Democrats are inevitably headed for the same reason that Willie Sutton robbed banks.

Keep in mind that the most expensive tax deductions, in terms of lost tax revenue, go mainly to the middle class. These include the deductions for state and local tax payments (especially property taxes), mortgage interest, employer-sponsored health insurance, 401(k) contributions and charitable donations. The irony is that even as Mr. Obama says he merely wants the rich to pay a little bit more, his proposals would make the tax code less progressive than it is today.

Mr. Obama's speech was disgraceful for its demagoguery but also because it contained nothing remotely commensurate to the scale of the problem. If the President had come out for a large tax on the middle class, like a VAT, then at least the country could have debated the choice of paying for the government we have or modernizing it a la Mr. Ryan so it is affordable.

Instead the President will continue targeting the middle class for tax increases to pay for an entitlement state on autopilot, while claiming he only wants to tax the rich."

That chart with the single column of middle-income taxable base is eye-popping, isn't it? Thus the real target, after all the demagoging of the so-called rich. When you begin to consider the taxes Wonderboy has endorsed or promised- energy taxes, capital gains in Obamacare- you get a picture of federal taxation moving from income to expenditures, thus hitting the lower income groups harder. But they won't notice it quite so explicitly as having to file a 1040 with a higher rate.

This entire topic also begs an important and overriding question: why do we tax ourselves?

Is it, per Wonderboy's recent comments in town hall meetings, to 'pay our fair share?' Or is it to raise sufficient revenues to operate our government at the lowest rates consistent with that objective?

If you read the Constitution, you get the sense that of the two reasons, it would be the second, not the first. In fact, in the original Constitution, there wasn't even a taxation relationship between individuals and the federal government. Tariffs were the original tax source for the federal government.

It's a false representation of our federal government's purpose to suggest that 'fair share' taxpaying is a high priority. Who determines what's 'fair?'

Doesn't it make more sense to have the simplest tax code with the lowest rates on the most income, without any preferences? To make the entire process more efficient, truly fair with respect to each dollar earned, and no special preferences whatsoever?

No comments: