This Old Mansion
There's that House Of Representatives again, standing up for the downtrodden exceedingly wealthy by passing a bill (for the fourth time in four years) calling for the permanent repeal of the estate tax. A New York Times editorial (in the IHT) shows no pity for the very, very, very rich:
The House proposal would cost the federal government a whopping $290 billion through 2015, according to estimates by Congress' own budget agency. And that's just a start; the costs after that would be explosive. And for what? Repeal would shield the estates of the very wealthiest Americans from the tax. That's the same group that already benefits the most from Bush's tax breaks for dividends and capital gains.Repeal of the estate tax was deemed too expensive in 2001, when the government was still enjoying the Clinton-era budget surplus. So it stands to reason that it's out of the question today, as America's enormous deficits weaken the domestic economy and the country's international economic leadership. But to its proponents, estate-tax repeal is the holy grail of the Republican anti-tax crusade.
The most commonly heard argument against the estate tax - that it represents unfair double taxation - is specious. First, the estate tax does not even kick in until the assets left at death exceed $1.5 million, or $3 million per married couple - and those exemption amounts will more than double by 2009. So most Americans never even have to think about the estate tax, let alone worry about it coming on top of some other tax.
Second, much of the wealth transferred at death has never been taxed. That's because capital gains on assets like houses, stocks and bonds are not taxed until the asset is sold. Obviously, if you inherit, say, a house, its owner didn't sell it, so never paid any capital gains tax on it.
Another popular argument against the estate tax - that the rate is so high the government is basically confiscating your property - is also a sham. Estate tax rates currently top out at 47 percent. But those rates don't even start to apply until an estate tops the multimillion-dollar exemption.
Poor dears, will you be eating your cat food portions out of diamond and platinum encrusted dishes? Sniff, sniff. Now, don't get me wrong -- I think we're overtaxed, and pay for lots of really dumb stuff, but the way to solve our immediate tax burden isn't to rush in to help the exceedingly wealthy.
Unfortunately, this kind of rhetoric only produces bitter class envy - an endless carping of who should be paying more taxes, or whose getting tax breaks they shouldn't.
In a graduated tax system, any tax breaks will of course appear to disproportionately benefit the "rich" - depending on how you define rich.
The way I see it, the only way to solve all this class warfare vitriol is to have a flat tax system and a mandatory balanced budget. While no tax system is going to be perfectly equitable in all ways, a flat tax has several huge advantages.
With a flat tax, everyone has a vested interest in how our government spends money. If the government wants to spend more money, they have to raise everyone's taxes the same percentage. We all feel the pain. This automatically keeps spending in check because everyone remains keenly vigilant of government spending. No more of the "I think we need more social spending, but I think someone else should pay for it."
So tell me, what's not fair about a flat tax? Even with a flat tax, the wealthy pay more. If the tax is 20%, those making $20,000 pay $2,000 per year in taxes, while someone making $100,000 pays $20,000 per year, and someone making a million pays $200,000. Looks like the rich pay more to me.
To show that this works, look at states that have balanced budgets. Michigan has a 3.9% "flat" state income tax, and a balanced budget requirement. Right now, things are tight, and the state is having to make some tough choices about which programs to keep or cut. This is how it should be. If the state wanted more money to keep all its programs, it could just raise the state income tax rate. But that means essentially everyone pays an increased percentage of their income. Raising everyone's taxes is not popular either, so our state government is forced to keep spending in check and make prudent choices about what they spend tax money on.
If only the Federal government were under such constraints. Until this mean-spirited "tax the rich" (is that anyone who makes more than you? how in the world do you start defining who is "rich"? who gets to decide?) and "stop giving the rich tax breaks” rhetoric is put to rest, we will always have needless class envy and antagonism, and never have a general consensus on how our government spends money, with true spending accountably.
Jeff R at April 16, 2005 10:27 AM
I LOVE the idea of a flat tax, and if we had such a thing, imagine the wasted time we'd get back...that we spend doing our taxes and all that involves.
Amy Alkon at April 16, 2005 10:59 AM
Flat tax is fine, if you then tax non-wage earnings (ex. dividends, capital gains, etc.) at the same rate and eliminate all deductions for everything. If you're don't you are essentially charging the proverbial guy at walmart more than the coked-out heirs to the, say, Huggies fortune, who've never worked and never will, but make more in a year than the pleb will in twenty. Likewise, Walmart guy doesn't have Ernst & Young to make it look like he made half of what he did through deductions, but the Huggies heir would, so charities be damned, but for a flat tax rate to be fair, there cannot be a single deduction.
Now we come to the estate tax. This is the only existing tax that I would NEVER want to see reduced. This has nothing to do with that it only hits very rich people. The reason I never want to see it go is because it is central to preserving the United States as a meritocratic system. If you allow fortunes to be passed through the generations and just accumulate unchecked, on a long enough timeline, the American Dream (that of starting with nothing and working your way to the top) is now impossible because the gap between poor and even the least rich of the rich is insurmountable. The power gap would become even worse, and more and more laws would be changed to make the caste systems more rigid, due to the large amount that the powerful would spend on influencing Congress. That's not a meritocracy folks, that's feudalism.
Little ted at April 16, 2005 11:14 AM
"The number of people who file returns but pay no federal income tax has grown from one in every five people in 1980 to one in every three in 2004. And, as we point out, just half the people pay more than 96 percent of the taxes. We, the people, no longer are the same as those, the taxpayers."
http://www.missoulian.com/articles/2005/04/16/opinion/opinion5.txt
Everyone should pay taxes. No one should be exempt.
Kevin at April 16, 2005 1:32 PM
I think I missed something in Jeff R.'s post:
"...if the tax is 20%, those making $20,000 pay $2,000 per year..."
My calculator says 20% of $20,000 is $4,000.....and that $4,000 is going to hit Little ted's "Walmart guy" (does that mean he _shops_ at Walmart, or _works_ at Walmart, or both?) a lot harder than it will hit someone who makes $100,000/year. A 20% tax on a low income has more impact on the buying power and daily decisions of those who earn it than a 30% tax has on people who make significantly higher incomes. That's the idea behind the graduated tax system, isn't it? I now pay more in Federal taxes (not counting state -- and I live in Maryland, a moderately "high tax" state) than I earned as total gross income in my first few years in the work force -- and I think that's fine, even though the percentage of my income that I pay has increased. I agree that a flat tax would simplify things, but I am concerned that it would also grind those on the edge into poverty, and end up costing society far more in the long run. "Fair", in the end, doesn't mean "same". It means "fair" -- which of course means something different to each person.....
mbm at April 16, 2005 8:43 PM
The tax system is unfair because so much income is not taxed. If one in three people pay no income tax in 2004, things can be a lot fairer if taxes are spread over this vast untaxed populace.
http://www.missoulian.com/articles/2005/04/16/opinion/opinion5.txt
And yes, I am cranky for paying 46% of my income to combined federal and state taxes. There has to be a better way.
Kevin at April 16, 2005 9:56 PM
Right you are mbm - I should have at least 2 cups of coffee before I do math in my head early in the morning.
But the concept of a graduated tax system is based on presumptions beyond preventing "hitting the little guy" harder because he/she has less discretionary income.
Who's the "little guy"? Who gets to draw the line in the sand? We all should, and that's why a flat tax with a consensus standard deduction would protect whoever the little guy is you're talking about just fine.
Any other way, and we're creeping back into the class warfare arena. A graduated tax system is just socialism in disguise.
Jeff R at April 16, 2005 10:19 PM
Actually, sorry, I love the idea of a SALES tax. That's what I meant, not "flat tax."
Amy Alkon at April 17, 2005 1:42 AM
Sales tax is upside-down taxation. $3.50 worth of taxes on a loaf of bread hits a poor citizen at a much higher tax percentage than a rich one.
Little ted at April 17, 2005 11:32 AM
Oh, and Kevin,
As far as making janitors and such pay an equal tax rate to industrial engineers for fairness sake, that's all fine philosophically, but understand that with property values ever going up, up, up and national minimum wage not increasing at a commensurate rate, your fairness is probably going to prevent the janitors from making their rent and car payments.
Just thought I'd mention that, since people who tend to make the loudest noise about the unfairness of a progressive tax system also moan about potential living wage laws loudest, then base their arguments on the fallacy that minimum wage increases prevent companies from hiring entry-level employees.
Little ted at April 17, 2005 12:17 PM
Full time minimum wage translates into about $10,000 per year. Where I live, you can't rent a one-bedroom for under $6,000 per year. A shitty Kia leases at about $2,400. Taxing this person at 20% puts them in the hole for $400 and that's assuming that he or she doesn't eat, pay utilities or wear clothes.
Little ted at April 17, 2005 12:32 PM
The proposals from the Fair Tax people make a lot of sense, and it rebates to people making less--and it is progressive, yet fairer:
http://www.fairtaxvolunteer.org/smart/faq-main.html#1
The FairTax is a single-rate, federal retail sales tax collected only once, at the final point of purchase of new goods and services for personal consumption. Used items are not taxed. Business-to-business purchases for the production of goods and services are not taxed.
Exactly what taxes are abolished? The FairTax is replacement, not reform. It replaces federal income taxes including, personal, estate, gift, capital gains, alternative minimum, Social Security, Medicare, self-employment, and corporate taxes.
How does the rebate work? All valid Social Security cardholders who are U.S. residents receive a monthly rebate equivalent to the FairTax paid on essential goods and services, also known as the poverty level expenditures. The rebate is paid in advance, in equal installments each month. The size of the rebate is determined by the Department of Health & Human Services’ poverty level multiplied by the tax rate. This is a well-accepted, long-used poverty-level calculation that includes food, clothing, shelter, transportation, medical care, etc. See chart in Figure 1 below.
Kevin at April 17, 2005 12:39 PM
I find it amusing that many defenders of the status quo are not real stakeholders in the argument. One out of three people do not pay any taxes, yet they want to stick it even more to those who make more.
Kevin at April 17, 2005 12:46 PM
I guess that means that one in three people is poor enough to be eating dirt, which is why something needs to be done to encourage wage increases instead of cutting taxes on the primary sources of income (dividends, inheritance) of those who are too rich to work.
If unions were still about increasing pay instead of 'job security' (the only job security should come from being irreplaceable) and having too many workers for the amount of work, I wouldn't hate them.
Little ted at April 17, 2005 1:18 PM
http://clem.mscd.edu/~mayest/Personal/Taxes/Tax_Fable.htm
A Tax Fable
Suppose that everyday 10 men go to PJ's for lunch. The bill for all ten comes to $100. If it were paid the way we pay our taxes, the first four men would pay nothing; the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The tenth man (the richest) would pay $59. The 10 men ate lunch in the restaurant every day and seemed quite happy with the arrangement until the owner threw them a curve.
"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20." Now lunch for the 10 would costs only $80. The first four are unaffected. They still eat for free. Can you figure out how to divvy up the $20 savings between the remaining six so that everyone gets his fair share?
The men realize that $20 divided by 6 is $3.33, but if they subtract that from everybody's share, then the fifth and the sixth man would end up being paid to eat their meal. The restaurant owner suggested that it would be only fair to reduce each man's bill by roughly the same amount that each paid and he started to work out the amounts each should pay.
And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of $59. Outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20," declared the sixth man pointing to the tenth, "and he got $7!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got seven times more than me!"
"That's true," shouted the seventh man. "Why should he get $7 back when I got only $2? The wealthy get all the breaks."
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor."
The nine men surrounded the tenth man and beat him up. The next day he didn't show up for lunch, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They were $52 short!
And that, boys and girls and college instructors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. There are lots of good restaurants in Switzerland and the Caribbean.
NOTES and DISCLAIMERS:
I added the title "A Tax Fable" to this story because I think the word fable aptly describes the story. I am using "fable" in the sense of Aesop's fables. That is, a story with a moral that teaches an important lesson.
I did not write this little fable, and neither did Aesop. I don't know who did, but it is out there on the Internet and I haven't seen it attributed to anybody. I liked it, a lot, so I put it up here. I'll just assume that this was written by that most famous of all authors "Anonymous."
I should also point out a crucial distinction: When you hear people talk about "tax cuts," they don't usually mean cutting the dollars paid by all taxpayers (i.e. government income tax revenue). Instead, they are talking about cutting marginal tax rates. Much like cutting retail prices can often result in additional revenue, cutting tax rates may result in more total revenue for the government (or at least not as much lost tax revenue as proponents of the so-called "static" models would have you believe).
Kevin at April 17, 2005 2:30 PM
>The tenth man (the richest) would pay $59
And he has also received a few hundred sandwiches vs. the other guys' one or two.
I'm not against eliminating progressive wage taxation, in fact, I don't have a problem with it as long as simplification in the form of no deductions comes with it and non-wage earnings (like dividends and hefty inheritance) are taxed out the ass. But I really do think it's silly that those who have much money act as if they aren't in a position to handle US taxes.
Little ted at April 18, 2005 2:27 AM
Leave a comment