For most Americans paying taxes is worse than taking cod liver oil, made worse because there’s no Mary Poppins to offer a spoonfull of sugar to make the medicine go down. Made even harder to swallow by President Biden who is eager to hire 87,000 additional agents to scrutinize tax returns.
Years ago while he was still a U.S. senator representing the State of Louisiana, Russell Long gave us these words to express how he saw his responsibility in writing the tax code.“Don’t tax me; don’t tax thee; tax the fellow behind the tree.” Understandably taxpayers today see their responsibility in complying with the tax code in these words. “Pay what you must, avoid what you can.”
The present federal income tax code is problematic for two main reasons. First, it is so complex that many taxpayers are forced to hire a specialist to prepare their returns. Second, large numbers of households do not pay any taxes. In 2020-2021 the numbers of tax-filing households who paid no income tax were roughly 57-61 percent due mainly to the availability of refundable tax credits.
Complexity is inevitable because the code is under continual revision in Congress pushed by taxpaying individuals and organizations pleading for new ways to reduce their taxable income. When they are successful, tax revenues tend to decline. With more than one-half of tax filers with no skin in the game, many will be supportive of added spending that benefits them directly – “it’s free” -- or will not stand in the way of additional expenditures which do not accrue to their personal advantage.
In fiscal year 2019 federal revenue according to the St. Louis Federal Reserve Bank amounted to $3.5 trillion of which $1.7 trillion came from individual income taxes and $230 billion from corporate taxes. At the same time federal expenditures totaled $4.4 trillion resulting in a deficit of $984 billion which required the U.S. Treasury to sell more government securities. In 2019 the public debt averaged more than $69,000 per person in America. Even though more recent data are available, Mayo Research Institute (MRI) uses data for 2019 because they do not reflect the economic lockdown of the last 18 months.
Democrats insist on dealing with the deficit by raising taxes. Republicans counter that the imbalance should be addressed by reducing expenditures. Taxpaying individuals and corporations resist the Democrats’ efforts to raise taxes. Those with no skin in the game resist Republicans’ efforts to reduce expenditures because those expenditures contribute directly to their personal well-being. Today, President Biden argues that “the rich are not paying their fair share of taxes”. The more radical members of the Democrat Party persist in the same argument with the harsher language of “tax the rich”. Both Biden and radicals use language that divides America along class lines. People without money and property are pitted against those who do. In essence, this is the old Marxist rhetoric that seeks to divide and conquer, replacing self-governance with authoritarian rule and a class-less society.
MRI has three tax-related remedies to help preserve our constitutional republic by defeating the forces that promote class warfare. The first is a flat-tax on income; the second is a national sales tax; the third is the elimination of the refundable tax credit. Both the flat tax and the sale tax have been advocated many times in the past by different individuals and organizations. The refundable tax credit is a relatively new provision of the tax code and to our knowledge has garnered little support for its removal from the code.
The present tax code is much too long and complicated for the ordinary taxpayer to understand fully. The Standard Federal Tax Reporter, for instance, publishes 18 volumes on the federal income tax law, regulations, and annotations in the code. No doubt, simplification would help the ordinary taxpayer. On the other hand, it likely would be harmful to those who currently operate or work for income tax preparation establishments.
A flat tax on income to replace the present progressive tax would greatly simplify tax preparation for the ordinary tax filer especially if the flat tax were to eliminate the vast assortment of provisions of the present code that exclude income from taxation. Just one rate for everyone, with the rich still paying far more in taxes than persons with lower incomes. Even persons in poverty pay the same rate on their cash income, which seems reasonable because it would not touch their benefits in kind — Medicaid, SNAP, housing, in addition to refundable credits. Under the flat tax everyone pays their fair share, thereby reducing class warfare.
Such a no-exceptions flat tax would reduce the pay-for-play incentive which is a regular phenomenon between persons with money and influence willing to financially support members of Congress for a favor that will reduce their taxes owed. Furthermore, the higher marginal tax rates of the progressive income tax rests on the “stick-it-to-them” argument that the government is justified in treating taxpayers with higher incomes differently than others with lower incomes just because they have more money.
Implementing a national sales tax is not as radical as it sounds. The federal government for years has imposed a tax on motor vehicle fuel. Presently the price of fuel at the pump includes a federal tax of 18.4 cents per gallon. The proceeds are earmarked for the highway trust fund. MRI’s second tax-related remedy imposes a national sales tax with exemptions for prescription drugs and other expensive goods and services critically needed by persons and families. As with the flat income tax, a national sales tax treats everyone the same. On any specific item for sale, the same tax is paid by rich or poor. Additionally, it helps assure that everyone, rich or poor alike, is contributing to the support of government which provides across-the-board benefits such as national defense, law enforcement, economic and weather information, and air-traffic control to rich or poor alike.
The third income-related remedy calls for the elimination of the refundable tax credit. This type of tax credit is one of the more important reasons why so many tax filers pay no federal income tax. Assume, for a moment, a household owes taxes of $650 and holds a tax credit of $1000 on a new electric vehicle it has purchased. A refundable tax credit would reduce its tax obligation to zero and issue them a check for $350 -- the difference between $1000 and $650. A nonrefundable tax credit would reduce its tax obligation to zero but not send them a check for $350. Eliminating the refundable tax credit would have the beneficial effects of helping to manage the government deficit by reducing spending and reminding all Americans that they have a duty to contribute to the support of their government. “It’s free” is not really free because someone is required to pay for it.
MRI has no recommendation for a specific rate for the flat income tax or for the national sales tax. Reaching agreement on those tax rates rightly belongs with Congress. However, minimally the two taxes taken together, along with the elimination of the refundable tax credit, ought to help reduce the federal deficit and nudge Congress away from the corrupting influence of the pay-for-play scheme. Insisting that everyone, whether rich or poor, has skin in the game should help undermine the appeal to further divide America along class lines and thereby further protect our constitutional republic.
Edward J. O’Boyle can be reached at 381-4002 or email@example.com.