As the April 15 filing deadline for the federal personal income tax nears, it seems appropriate to reflect on the system by by which our national government raises revenue. I should mention that in a fiat money system theoretically the federal government, a monetary sovereign, doesn’t actually need taxes to raise revenue at all. It could simply issue credit to itself. Of course, that has implications of its own.
At any rate we do have a tax system and nearly everyone views it as a way of raising revenue so we’ll go along with the crowd. This analysis from Pew Research is as good as any place else to start. That’s where I got the graphic above.
With just a few days to go until the April 15 tax filing deadline, we’re sure some Americans are still sweating over their 1040s, Schedule A’s and self-employment tax worksheets. Here’s something for taxpayers to consider: the more than $1.3 trillion worth of tax breaks that are allowed under the U.S. tax code.
That’s the total estimated impact for fiscal year 2015 of the more than 200 “tax expenditures” – government lingo for tax breaks – that come in the form of exemptions, deductions, credits and other special breaks, according to an annual staff report from the Joint Committee on Taxation. Even that $1.3 trillion figure is an understatement, as the report only gives specifics for a break if it’s estimated to cost the government $50 million or more per year. Dozens of provisions in the tax code fall below that threshold.
Looked at another way removing those tax breaks would make another $1.3 trillion subject to tax. That would account for most of the federal deficit.
Each of those tax deductions has a constituency that would fight to the death to defend it. That’s what makes piecemeal reform of the federal income tax system so difficult.
For the last week or so we’ve been deluged with articles explaining how the top 1% of income earners pay 68% of the tax, the top 20% of income earners pay 84% of the tax or the like. While true as far as it goes, it doesn’t paint a complete picture. When not just looking at the federal income tax but taking all federal taxes into account our system looks more like this:
Hat tip to The Atlantic for the graphic. Under present law our complete tax system is extremely minorly progressive. If the heavy hitter tax breaks were completely eliminated, our system would become more progressive but not enormously so.
Something that surprised me in Pew’s analysis: thinking that the federal income tax needs to be completely changed has become more of a partisan issue than it was four years ago. Today two-thirds of Republicans think that while just under half of Democrats do. I don’t see any obvious reason for that other than an increase in general partisanship. More Republicans think a complete change is necessary and fewer Democrats do than four years ago. Has something else changed? That doesn’t seem to be warranted on the merits.
Since the ratification of the 16th Amendment in 1913 when Congress was granted the power to levy a tax based on income, something previously denied it, we’ve done a major overhaul of our tax system roughly every 20 years. Our last overhaul was thirty years ago or, in other words, we’re overdue. Our income tax system is like a ship. Just as a ship accumulates barnacles over time and must be hauled into drydock to be cleaned, our tax system accumulates breaks, loopholes, and so on. That’s no accident. It’s called “constituent service”. It’s built into our system of government.
Put me down in the “complete change” column. I honestly don’t see how any progressive worthy of the name could defend our present tax system or any conservative worthy of the name would want to keep it. However, I would also put FICA, i.e. the “payroll tax”, and the corporate income tax under the ax. From an economic standpoint a tax on consumption would be much more efficient and a value-added tax would be the least painful way to impose one. I don’t believe we’ll ever adopt a VAT here as long as the income tax is kept in place. There are strategies for making a consumption tax more progressive, i.e. constructing it so that it falls less heavily on the poor than on the rich. The obvious way to do that is by exempting food and medicine from the tax but that’s a slippery slope that’s hard to avoid.
As you send in your federal 1040 keep in mind that the system you’re supporting isn’t particularly fair, subsidizes a lot of things we don’t particularly want to subsidize, and penalizes things we shouldn’t want to penalize. That’s sure to make you feel better.
Speaking of sweating over estimated tax worksheets, I don’t see any indication that Illinois has modified the penalty for underpayment of estimated taxes to account for the reduction of tax rates from 5% to 3.75%. It seems like the “safe harbor” should be 75% of last year’s taxes. Is the state intentionally encouraging overpayment?
Do you remember we had a grand bi-partisan committee that proposed tax reform built on lowering rates in exchange for removing credits and deductions? Those were the days.
My taxes have run 3/4 inch to an inch thick in paper for years now. Need I say more?
My taxes have run 3/4 inch to an inch thick in paper for years now.
This year’s tax preparation for us was especially complicated because of some new rules/regs that were added in, putting us into the “Inch Thick Club” as well.
Having been burned by the state for penalties in the past my “safe harbor” over accrual runs now over $15k. You try to tell them you are in a lumpy income business and they just look at you and say eff you, pay me.
By the way, try to get this broke state to send you some back. Always have to apply it to the next year.
Agree that we are way past the need for an overhaul, especially on tax expenditures. However, eliminating them is seen as a tax increase so it has little chance of happening, to say nothing of the special interest groups. At this point the corporate income tax provides relatively little revenue and is applied so unevenly and unfairly, again special interests, it should just be eliminated. It is a source for a lot of the corruption in our system I believe. Our current federal government is too dysfunctional to do much, alas.
I think you are spot on, steve. The specials will just mangle it. And the big guys will be “more special.” Am reading Brill’s Bitter Pill which if nothing else shows how the specials mangled Obamacare. There are legitimate flaws and worthy corrective objectives in health care insuring and delivery but the way that effect worked is cringeworthy.
By the way. I had my fourth encounter with surgery this AM, this one relatively minor. Am always impressed with the professionalism and caring of the health care professionals – at least those I’ve encountered – in each case.