Tax Facts and Fair Shares
The United States House of Representatives recently rejected a constitutional amendment that would have required all future revenue increases to be passed by a two-thirds supermajority of both the House and the Senate. Since few, if any, revenue increases ever pass by a two-thirds majority due to their unpopularity, the amendment would effectively forbid Congress from closing tax loopholes or raising tax rates in the future. Although the amendment failed, a majority in Congress supported it; the final vote was 232-189, short of the two-thirds majority required to amend the Constitution. Given the high degree of support, it stands to reason a measure like this will come before the House again; that support, along with the news that Republicans in Congress plan to pass a massive tax cut that will likely be weighted more toward the wealthiest taxpayers, tells me that we need to have an informed discussion of the nature and function of the federal tax system.
To lay my cards out on the table, I believe in a progressive, redistributive tax system. By progressive I mean a system in which wealthier citizens pay a greater share of their wealth in taxes, and by redistributive I mean a system in which those tax revenues are then used to improve the resources of poor and middle-class citizens, either by directly returning to them in the form of tax credits and rebates or by providing services that they would otherwise be unable to afford. Our current system imperfectly reflects these priorities, as progressivity and redistribution seem unfair to many Americans who therefore exert political pressure to keep rates low and open loopholes; a significant minority wish to impose a flat tax or eliminate most income taxes altogether. At first glance, they have a compelling argument; America is a capitalist society, built upon the notion of individual competition and achievement. Perhaps more importantly, we have enshrined respect for private property and transformed it into a fundamental right, conferred by human nature. Given these principles, why should citizens not be entitled to keep what they earn?
The reason is that I feel that concept of individualism is hopelessly outdated in a 21st century information/industrial era. As John Dewey argues in Individualism, Old and New, success in the new age is not achieved by a single person moving forward and taming the land alone. Instead, individuals must gather together, pool their resources and act collectively. The actions of one unavoidably influence the fate of another. Certain individuals find themselves in a position to roughly control the actions of these collective groups. In our current system, which tries to treat each individual as if he or she exists in a vacuum, these elites are entitled to a disproportionate share of the wealth that the collective creates. The rest of the organization is so many cogs in a machine, and while the mythology of the American Dream insists that anyone can pull themselves up by the bootstraps, the reality is that the resources necessary to achieve success are shared by a relative few. Unable to strike out on their own, and unable to fully participate in the functioning of the collectives of which they are part, many Americans languish as undifferentiated individuals, what Dewey calls “lost individuals.” Once Americans understand and accept this shift, they can begin to confront the new reality as skillfully as they confronted the challenges of the frontier:
The adventure of the individual, if there is to be any venturing of individuality and not a relapse into the deadness of complacency or of despairing discontent, is an unsubdued social frontier. The issues can not be met with ideas improvised for the occasion. The problems to be solved are general, not local. (Dewey)
Dewey’s position makes a twofold challenge to the current structure:
1) It denies, or at least weakens, the individual entitlement to private property by denying that the individual is solely responsible for his or her success. This is not a denial of the role of the individual, but an attempt to understand the individual as being inextricably part of a larger whole. Many Americans justifiably take pride in home ownership, and justifiably so. But most if not all of these homeowners have more expensive homes than they would be able to afford in a pure capitalist housing market, if they could afford homes at all, because the federal government subsidizes homeowners through the tax deduction on mortgage interest. Does this mean that homeowners should be less proud of their achievement? I don’t think so. But I do think they should be aware that that achievement was assisted by a collective social action, and that therefore they have a certain obligation to the society that has assisted them.
2) It brings to the forefront the notion of equality of opportunity, the need for each individual to start from a relatively equal position in the competitive economic game. As my previous articles on the public education system attest, we fall far short on that score. Wealth buys access to education, technology, safety, better health, and who knows how many other advantages. The increasing concentration of wealth in a small number of hands denies these things to an ever-growing part of the population. Redistribution aims to address this fundamental imbalance, and give more people the capability to fulfill their potential and thus become true individuals.
This is not to say I necessarily favor higher taxes, or that I believe that every federal program is a good one. Clearly, there are many wasteful programs which, if eliminated, would reduce the need for tax revenue. Those programs are protected by the same local voters who make tax hikes so hard to pass, by demanding that federal funds be spent in their area while at the same time wanting the federal government to have less funding. An honest look at how we finance our government will have to include these programs as well.
A proposal by the Brookings Institution would make a good starting place for a discussion of a better, simpler, more equitable tax code. In an article in the Los Angeles Times, they propose that a new tax system:
- Relieve between 40 million and 50 million households of the need to file tax returns. With small changes in withholding rules, this could be done for households that do not take itemized deductions and have income only from wages, Social Security, IRAs, pensions, unemployment insurance, interest and dividends.
- Cut the top rate from 39.6% to 30% and tax capital gains as ordinary income. Lowering the top rate would raise economic activity and reduce tax avoidance. Eliminating the differential between capital gains and other income would close down a significant amount of sheltering activity.
- Raise the standard deduction significantly. This would reduce the number of households that have to itemize their deductions.
- Confine the alternative minimum tax to operators of real tax shelters by drastically raising the exemption and indexing it for inflation. Do not force people onto this tax by virtue of their personal exemptions, standard deductions or state and local taxes.
- Remove the restrictions on itemized deductions and personal exemptions that affect high-income taxpayers. These are needless complications that raise little revenue.
- Make the tax credits for children, child care, education and adoption completely refundable, so that low-income households get the full value of the credit even if their income tax liability is zero. Eliminate the phase-outs of these credits as income rises.
- Consolidate and simplify all IRAs and related plans into one account with simple and clear contribution and withdrawal rules.
This is a rough outline, but it is a start. It emphasizes fairness, fiscal responsibility, and simplicity. As such, it might be a system we can all support and understand, so that the next time legislators want to cripple the country’s economic foundation, we’ll be ready to oppose them.
About Dave Thomer
Born and raised in Philadelphia. Studied philosophy at Fordham University in the Bronx, where I made many great friends and met my wonderful wife. We moved back to Philadelphia, where I studied philosophy some more and became a teacher. Online and off, I'm looking for ways that we can be better citizens and build stronger communities.