Tax Reforms to Raise Revenues for Programs That Will Enhance the Lives of All Americans
By: Jp Kobel
Tags: Economics, Politics, Income Inequality, Wealth Tax, Tax Reform

For those who can least afford to pay taxes, there should be tax cuts. For taxpayers able to afford increased taxes without undue burden, taxes should be increased.

Photo by Kelly Sikkema on Unsplash

The Truth About Which Americans Are Bearing the Largest Burden of the Taxes

Many on the extreme right wing like to assert that 44% of Americans pay no taxes. I will coin a phrase that Ronald Reagan used in a 1984 Presidential Debate with Walter Mondale. President Reagan said, “Well, I guess I’m reminded a little bit of what Will Rogers once said about Herbert Hoover. He said, ‘It’s not what he doesn’t know that bothers me, it’s what he knows for sure that just ain’t so.” Fast forward 35 years to 2019 and it is the Republicans that are saying things that ‘just ain’t so’ and they know it. Ironically, President Reagan was quoting Will Rogers’ statement about Republican lies in the early 1930s.

First, let’s change this assertion to ‘pay no income taxes.’ In this case, it is sort of true, but it still very deceptive. In reality, most Americans that work pay income taxes. Many of these people receive a refund of income taxes withheld or they owe no taxes when they file their tax returns. These refunds are for income taxes that were paid through withholdings. These withholdings are effectively loans to the federal government, by the taxpayer that are repaid through these refunds.

These refunds are not repaid with interest. The time value of this money that is loaned to the federal government is much higher than the normal interest rate for the 40% of American people who don’t have $400 in savings in cases of an emergency. See the Report on the Well-Being of U.S. Households from the Federal Reserve at page 10 under the heading Dealing with Unexpected Expenses.

Second, 60% of households that have no income taxes due, do pay Social Security and Medicare taxes. Since these are flat taxes are based on the income of the taxpayer, these are in essence, an income tax also. Seven percent of households pay income taxes but no Social Security or Medicare. These households have non-wage income such as interest or dividends.

Eighteen percent of U.S. households pay no income tax, Social Security or Medicare. See TaxVox: Individual Taxes by Roberton C Williams from the Tax Policy Center at this link.

So, who are the 18% that pay no income tax, Social Security or Medicare? Some of these people are retired. Approximately 16.6% of the U.S. population is over 65. These retirees with insufficient income from sources other than Social Security make up approximately ½ of that 18%.

Now, we are down to 9% that are paying no income tax, Social Security, or Medicare. Some of this 9% are people who have sufficient itemized deductions to reduce their taxes due to zero yet they do not have sufficient income to exceed the exemption level of the Alternative Minimum Tax (AMT). The AMT would cause taxpayers with excessive deductions to still owe taxes. In 2018, the AMT exemption for a single person was $70,300.00. Therefore, it is conceivable that an individual could have deductions bringing their income tax due down to zero, but actually earn up to $70,300.00 and still pay zero in income taxes.

Some of this 9% is part of the 3.6% unemployed. Some of these people aren’t able to work. A few just don’t want to work or don’t report their income.

Even those who are not able to work are paying taxes. These people are paying sales taxes (in all but 5 states). These people are paying property taxes either directly (through home ownership) or indirectly (through landlords reflecting the costs in tenants’ rent).

In short, to some extent, most of the poorer Americans are pitching in when it comes to taxes, in one way or another. This is even though, as noted above, 40% of Americans would not be able to afford a $400 emergency without having to sell personal items or borrow money. The implication of right-wing assertions that only 44% are paying income taxes are distorted to the extent that the assertion is a falsehood. I suppose this 44% are the ‘job creators’ that the Republicans often refer to.

Tax Reforms

The underlying morality for my tax policies can be summed up by these Bible verses: Mark 12:41–44. These verses read as follows:

Jesus sat down opposite the place where the offerings were put and watched the crowd putting their money into the temple treasury. Many rich people threw in large amounts. But a poor widow came and put in two very small copper coins, worth only a few cents.

Calling his disciples to him, Jesus said, “Truly I tell you, this poor widow has put more into the treasury than all the others. They all gave out of their wealth; but she, out of her poverty, put in everything — all she had to live on.”

I think most of the world’s major religions have similar provisions. Regardless of if one is religious or not, I believe most humans would agree to the morality of the lesson of these verses.

Tax Cuts for the Poor and the Middle Class

1. We should eliminate the income tax for any person making less than 1.5 times the poverty rate. This measure will stimulate the economy.

2. We should enact an exemption from Social Security and Medicare withholdings for those making less than 1.25 times the poverty rate. These peoples’ benefits should be subsidized by higher income taxes on those that can more easily afford these higher rates.

3. We need a more progressive tax rate table with effective cuts for all with household income less than $125,000.00. This measure will greatly stimulate the economy by putting much more money into the pockets of the middle class. $125,000.00 is the maximum level for tax cuts for average household size. Therefore, a single person would have cuts at a lower level.

4. There should be no tax increase for those with household income less than $250,000.00. The $250,000.00 is the maximum level for no tax increases for the average household size. Therefore, a single person might have tax increases at a lower level.

Tax Increases for the Higher Income Brackets

5. The highest marginal income tax rates should be increased to a rate of 70%. This 70% tax rate should sunset on the later of 20 years or a reduction in the national debt to a level of not more than 10% of the total privately held wealth of the nation. After the sunset, the top marginal rate should drop to 50%.

With less money coming in from the middle class, there must be an offset; this offset will come from those with a greater ability to pay. These higher rates are for the purpose of increasing revenues. Increased revenues are necessary to fund new government programs while maintaining a responsible budget. A responsible budget is one that has a reasonable deficit before wealth tax mentioned in item 7 below, or even a surplus.

A 70% highest marginal tax rate is too high. Maintaining a rate this high for a prolonged period would stifle innovation and slow the economy. Though Art Laffer doesn’t know how to interpret the Laffer Curve, this curve is a real phenomenon and attention does need to be paid to it. Art Laffer must have missed the day in economics class when the ‘Law of Diminishing Marginal Returns’ was discussed. Unlike the extreme right wing, we do not need to consider tax cuts on the wealthy as a solution to everything. The real world data shows that such tax cuts for the wealthy only work up to a certain point.

The Estate, Gift, and Generation-Skipping Tax

6. We should change the Estate, Gift, and Generation-Skipping Taxes back to a rate of 55%. The main purpose of these taxes is to keep money moving through the economy as opposed to being concentrated in the hands of the wealthiest Americans’ children. These children are not the ones who earned this wealth. There are already measures within the Internal Revenue Code (IRC) that reduce the impact on family farmers and family owned businesses. These may need to be enhanced. The right-wing propaganda on this tax is ‘over the top’ ridiculous and at times nothing more than outright lies. In paragraphs a thru d, I will correct some of these lies.

a. The Estate Tax is a voluntary tax that does not have to be paid. An estate can be left 100% to recognized charities and then no tax would be due. This is not like the charitable deduction for income taxes, this is a dollar for dollar credit.

b. There are credits in place to make sure only the truly wealthy are required to pay these taxes. These credits need to indexed for inflation. When I worked with Estate and Gift taxes in the 1990s, these credits were close to $600,000 per individual. These credits were too low in the 1990s. This unified credit is now at $11,400,000.00 per individual. This is far too high. The unified credit needs to be reduced to $5,000,000.00 per individual.

c. Anyone that tells you that a parent died and a few days later, they received a bill from the IRS for the ‘Death Taxes’ is lying to you. I heard a Republican Congressman makes this statement about her own family. It is impossible to know what the amount due on an estate would be for at least six months after the date of death due to the ‘Alternative Valuation Date.’ The IRS does not send a bill. The estate files a Form 706 and determines what the estate tax should be. The IRS reviews the form for accuracy. The return must be filed within nine months after the date of death.

d. It is extremely rare for a family business or family farm to be lost due to the Estate Tax.

Wealth Taxes

7. We need to enact a Wealth Tax similar to the one that Elizabeth Warren has proposed. This wealth tax should be at a higher rate until the national debt has decreased to less than 10% of the privately held wealth of the nation. Those with wealth over $10,000,000,000.00 should pay a 5% wealth tax. Those subject to the wealth tax should be anyone with wealth, exclusive of their principal residence up to a maximum exemption of $1,000,000.00, with valued at $5,000,000.00 or greater. The lowest tax rate would be ¼ of 1%. From that rate, there would be a progressive rate structure up to a level of 5% for those with wealth in excess of $10,000,000,000.00.

Example of the Wealth Tax for the Lowest Wealth Levels

This article from UPI shows that the top one percent of American’s own 40% of our nation’s wealth. Total wealth for households and non-profit organizations within the United States was approximately $104 trillion at the end of 2018. If I apply the wealth tax on only household wealth and private foundations and consider the progressive rate structure, I will assume that the average effective rate of the aforementioned wealth tax would be about 2.5%. If this 2.5% is correct, the taxes collected would be 0.025 X 0.40 X 104,000,000,000,000 = $1,040,000,000,000.00 per year. This is less than the current rate of wealth growth for the wealthiest Americans. The taxes collected from this wealth tax would actually increase every year if all other taxes were held the same. However, I propose that other taxes be changed as well.

We should shoot for getting the national debt below 10% of the privately owned wealth. Most economists focus on a debt to GDP ratio which would translate to an individual as a debt to income ratio. I prefer this debt to total privately held net wealth which would translate to individuals as a debt to equity ratio. GDP calculations have some distortions that cause the data to have less credibility. The table below shows the growth of this debt to equity ratio for America since 1946. The data was taken from the Federal Reserve Economic Database (FRED).

The graph above shows that we haven’t had a debt to equity ratio above 20% since the early 1950s when the nation was paying down the debt that arose from World War II. This ratio has risen steadily since 1980. President Clinton was able to reduce the ratio from approximately 17% down to about 13%. President Obama had to increase the ratio due to the Great Recession. Trump has decided to keep the ratio high without an apparent reason. We can reduce the national debt to acceptable levels and introduce new government programs at the same time.

By my estimate, as shown above, it appears that this tax could bring the national debt down to near 10% of total privately held wealth within a time frame of 7 to 12 years. At that point, the wealth tax rates could be reduced. Also, after reducing the government debt to an acceptable level, the revenue from the wealth tax could be used to help fund new government programs instead of just reducing the debt.

Reduction of Property Taxes and Sales Taxes

8. We should eliminate the mortgage interest deduction. The mortgage interest deduction is a subsidy to the mortgage industry. Item 9 below is a better way to encourage home ownership while not encouraging excessive mortgages.

9. We should use the weight of the federal government, through incentive, to eliminate all property taxes by state and local governments for the principal residence of all taxpayers up to a maximum exemption. The maximum exemption should be equal to the value of the lowest valued home in the top 20% of home values in a particular county or $150,000.00; whichever is more.

EXAMPLE 2:

If the top 20% of homes in a certain area have a minimum value of $400,000.00 and you own a house valued at $399,000.00, your property tax on the house would be zero. If the home is valued at 401,000.00, your property tax would be based on a value of $1,000.00. However, if you have a home valued at $50,000.00, but it is a second home, your tax would be based on a value of $50,000.00 since the home is not your principal residence.

Other taxes can be used to meet the shortfall from this lack of property taxes. A taxpayer should not have to pay the government each year for the right to own a reasonably priced home. The principal residence meets the basic human need for shelter. Taxes should be paid only on income and property that exceeds basic human needs.

The federal government has many ways to use its weight to influence policies within states. I believe we could use a ‘sponge tax’ to divert parts of the wealth taxes to the states in order to make this property tax elimination possible. This sponge tax would allow the states to share in the proceeds of the wealth tax. There would be a credit to the federal wealth tax for states to collect their own wealth tax. This state wealth tax would replace the state and local property taxes. This sponge tax should be small compared to the federal portion. If the sponge tax does not offset the property taxes lost, the states should impose higher marginal tax rate on the highest income earners within the state. Item 12 below reinstates the federal deduction for state and local income taxes, so this shouldn’t be a big issue.

10. Use the weight of the federal government through incentive, to eliminate all sales taxes on essential groceries. The federal government could impose a 1% value-added tax and/or a luxury tax for non-exempt luxury items costing greater than $100,000.00. This federal VAT and/or luxury tax could offset any state and local losses from sales tax grocery exemption.

Capital Gains Taxes

11. We should create a progressive tax rate schedule for capital gains based on the aggregation of ordinary income and all capital gains for each taxpayer. We should maintain some relief through reduced rates based on the length of the holding period for capital gains. We should have 4 levels of holding periods with the greatest reduction being for the longest holding period. This tax change would increase revenues. This change would also encourage people to take a longer-term investment outlook.

State and Local Income Tax Deductions

12. We should reinstate deductions for state and local taxes on federal tax returns.

Corporate Alternative Minimum Tax

13. We need a revised corporate Alternative Minimum Tax (AMT) so that no corporation can get away with paying zero taxes. Comparing different international tax systems is like comparing apples to oranges. The mere comparison of rates is wholly insufficient. We need to do a close comparison of the corporate tax systems of our fellow developed democracies. We should pay especially close attention to the corporate taxes of the other G-7 countries. Our corporate AMT should ensure that corporations in our country pay at least as much as they do in these other countries.

Any final tax reform would have to be closely calibrated with the current state of the economy as well as necessary government programs. In the future, tax adjustments in the form of cuts for the wealthy and increases for the middle class may be needed. At the moment, this broad outline of a tax reform act is what we need.

Conclusion

The tax proposals I have made are broad. The proposals do not have tax rate schedules and other necessary considerations. Yet, these proposals should give the readers a glimpse of what could be done. These proposals reduce the tax burden on those taxpayers in the lower income tiers. These proposals increase the tax burden on those that can most afford them. These higher taxes for the wealthy would be reduced when we reach a more responsible level of public debt.

I intentionally did not include an elimination of the stepped-up basis for capital gains. While the estate taxes rarely destroy family farms and family-owned businesses, the elimination of the stepped-up basis would cause many farm and business failures. Elimination of the stepped-up basis would adversely affect middle-class families that own farms and businesses. There would be no estate tax unified credit to keep the elimination of the stepped-up basis from affecting the middle class. At the date of death, there would be a carryover basis on the transfer to the spouse and/or children. Therefore, the spouse and/or children could have to recognize a gain on this transfer resulting in capital gains taxes due to this inheritance. If this date-of-death transfer is exempt, it could still cause great harm to a family business since some assets may have to be sold to support the business after the death of a key man.

The proposals I have made impose the greatest taxes on those that can most easily afford higher taxes. Just as the aforementioned Bible verses show by analogy. Tax cuts for lower tier income earners come in the form of reduction or elimination of real estate taxes, exempting some items from sales taxes, lower income tax rates, lower Social Security and Medicare rates for the poor, and reduced capital gains rates for lower incomes. Lower taxes for lower tier incomes will stimulate the economy due to these people having more money to spend. A sufficiently stimulated economy will increase tax revenues.

The higher tax rates for the wealthy will also increase revenues. These higher taxes need to be reduced to a more appropriate rate as quickly as possible. Excessively high tax rates on the wealthiest Americans will reduce entrepreneurial spirit and stifle innovation if left in effect too long. These taxes should be reduced to more reasonable rates (still higher than today) once the national debt has been sufficiently reduced.

The real stimulus to the economy from these increased revenues will come from government programs such as Medicare for All, infrastructure projects, and many other programs that will enable higher labor productivity. The next story will deal with government investment in these programs and the potential returns on these investments.