Deconstructing The Absurdity

Breaking Down The Policy of Taxing

In 2012 Presidential Election, Barack Obama, Democratic Party, Republican Party, U.S Congress on December 7, 2012 at 8:54 pm

During the 2012 political campaign we got to hear a lot about the tax policy and how unfair the United States taxing system is supposed to be. We also heard the slogan “Tax the rich more” several times. All this talk about the inequality of taxes levied on the citizens in this country made me dig a little deeper into the tax system to find out what was really going on. Who needs to be taxed, what tax breaks should be eliminated, who is not paying and why is our focus not on changing the tax policy?

How is it that tax rates have gone up and down over the years but it has never been enough to fix the budget or the economy. That leads us to draw the conclusion that somewhere the money is not coming in. Someone is not paying the fair share.

tax+cut

A study done by Thomas Piketty and Emmanuel Saez examines the progressiveness of the U.S Federal Tax System. The research which was published in the Journal of Economic Perspectives found that the most dramatic changes in the federal tax system almost always has taken place within the top 1 percent of income earners, with relatively small changes occurring below the top percentile. The research also suggests that any debates within the Congress on the topic of tax and tax policy also affects the top 1%. Topics like permanent reduction in tax rates for capital gains and dividends and repealing of the estate tax all concern the top income level of the society. In essence, the tax issues of the marginal voter never gets discussed making the policy of taxing in the United States extremely unfair. An opinion post on Bloomberg online carries the headline, Forget the Fiscal Cliff, Fix the U.S Tax System. The post talks about all the things wrong with the U.S Tax System and provides some ideas as to how we could fix those issues. Authors of the post, Betsey Stevenson and Justin Wolfers argue that, “The real danger, is not that we’ll fall off the cliff. It’s that Congress will solve the problem badly, missing a once-in-a-generation opportunity to design a better tax system.” The study done by Piketty and Saez only proves their [Steven and Wolfers] point.

  • The Problems

The problems in the tax code has resulted in huge loss of revenue to Uncle Sam. Some of tax credits given by the federal government have proven to be a complete disaster.

Tax exemption for mortgage interest seems to be a very bad idea. The Bloomberg post stresses on the fact that encouraging people to take on more debt than they can afford is a call for disaster. According to Bankrate.com it costs the treasury approximately $464.1 billion in lost taxes.

The top individual tax breaks is estimated to cost more than $3.5 trillion in uncollected taxes between 2011 and 2015.

Capital gains and dividends is the reason that allows Warren Buffet to pay less income tax than his secretary. Capital gains is the selling of investments such as stocks and bonds held for more than a year, are taxed at 15%. That is way below the 35% maximum tax rate of on regular income such as wages.

The other issues which have been brought up include pension plan credits and step-up in basis which exempts heirs of assets from paying taxes on passed on wealth. According to the Office Management and Budget, the step-up in basis rule cost the government about $61.5 billion of uncollected revenue in 2012.

The top 0.01 percent of earners paid over 70 percent of their income in federal taxes in 1960, while they paid only about 35 percent of their income in 2005. Average federal tax rates for the middle class have remained roughly constant over time. All these exemptions have allowed the rich to remain richer while the rest are expected to pay the standard tax rate on their income.

  • The Solution

While taxes are not fun to pay, it is imperative that every citizen should contribute towards the benefit of the nation.

However, as suggested by the Bloomberg article, getting rid of tax credits and using deductions instead would be a more feasible option.

Alternative Minimum Tax (AMT), originally designed to make the highest earners pay some tax needs to be abolished. AMT instead has become a burden on middle class families cancelling out any benefits derived from the Bush Tax Cuts.

Instead of raising the federal debt ceiling on a regular basis, policy makers need to focus more on reforms to the system which would ensure a more level playing field.

Surely, giving $24 billion in tax break to oil corporations who make record-setting profits will not result in any additional revenue to the system.

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