When people talk about the injustice of our tax system they’re generally thinking about corporations that pay no tax, or wealthy individuals whose tax rate is lower than that of a middle class taxpayer. They call for higher rates; but higher rates are not going to fix the problems they have in mind.
Tax deductions, and the complexity that they’ve introduced into our tax system, are a significant cause of injustice. Complexity is an invitation to tax lawyers to devise creative ways to cut a client’s tax bill, and of course it’s the wealthy who can afford to pay the large legal bills that result.
Total federal tax deductions, as calculated by the OMB and the Joint Committee on Taxation, are worth more than a trillion dollars a year to a government that only received $3.5 trillion in taxes in 2019. IRS Commissioner Chuck Rettig says that another trillion could be harvested if we got all taxpayers to simply pay what they owe, under the current crazy rules.
Wealthy people who do pay what they owe and don’t maneuver for tax deductions are leaving New York and California, where their total tax brackets can exceed 50%, and moving to Florida, Texas, and other low-tax states. The wealthiest can move all the way to New Zealand (a 33% top tax rate) or the Cayman Islands (a zero, that is 0%, income tax).
The same is true for corporations. Before the 2017 tax reform we were losing corporations to Ireland (where the corporate tax rate is 12.5%) and Switzerland (as low as 11.9%, depending on canton). 134 countries, including Ireland (and maybe/probably Switzerland) just agreed to a 15% rate. 15% is still quite a bit lower than the U.S. rate, but most of our corporations will stay here if they think they’re being treated fairly.
As you study proposals for tax reform ask yourself whether they will actually cause the tax rates of billionaires such as Jeff Bezos and Mike Bloomberg to rise significantly. Congressmen protect the beloved tax breaks of their campaign donors. And they play to the voters; why, you might ask, are American gasoline taxes still a tiny fraction of those charged by other developed countries?
Returning to our main point: Charging higher tax rates to compliant taxpayers, while letting the schemers get off tax free, isn’t just stupid; it’s mean. Taxes can’t be fair unless they are simple. John McCain liked to say that the tax code is the foundation for the corruption of American politics.
Pork Is Back!
The Congressional Research Service, April 8, 2021:
“The House Committee on Appropriations and Committee on Transportation and Infrastructure have separately announced that individual Members may request funding for specific transportation projects. This ends an effective ban on earmarks that has been in force in the House since 2011.”
Forbes, May 6: “This week, the U.S. House posted online 3,309 earmarks.”