Tuesday, May 27, 2008

Tax Inequality

This is going to be a shorter post. I was at my cousin's wedding all weekend long, and I didn't come close to finishing the essay am working on. However, I do have some not-so-polished thoughts I want to share.

In theory, I don't mind paying taxes. I like roads, judges, public schools, national parks, firemen, policewomen, and social service workers. I even appreciate the FBI and at least some of our 11 active aircraft carriers.

What I don't like is tax inequality. I don't mean this in the sense that I think a flat tax would be a good idea. At present, I don't want to get into a discussion of the graduated income tax, a policy toward which I have much more complicated feelings.

The tax inequality I want to discuss relate to two other federal taxes (state taxes are too varied to discuss here): Capital Gains tax and the Social Security tax.

The (long-term) capital gains tax is the tax on incomes gained from the investment of money. When someone sells stock that has been held for at least 18 months for a profit, that profit is currently taxed at a rate of 15%, though it is even lower for people who earn less than $32,550 a year.

The Social Security tax is 6.2% on all wages up not exceeding $102,000 per year (for 2008). Employers are also expected to chip in 6.2%, bringing the total tax rate to 12.4%. Even though the employer portion isn't normally included in what we think of as wages, it is part of the compensation because it counts toward what the employee will theoretically get back when they hit retirement age. In addition, the self-employed have to pay the full 12.4%. For all earnings over $102,000, no social security tax is applied.

All of the money collected as social security payments goes into a trust fund, out of which retirees are paid. When workers reach the age of 65 (67 if they were born after 1960, with a sliding scale before that), they may receive full benefits based on what they earned through their life.

My problem with these two taxes are that they are unfair to people with wages below $102,000, and especially to those who also earn more than $32,550 a year. Warren Buffet has calculated that because of these inequities, he pays an average of 18% in taxes on his earnings, while his secretary pays about 33%. Based on my own taxes, I doubt this includes the employee paid half of the SS tax.

Even if social security doesn't turn out to be a pyramid scheme and and Buffet's secretary gets SS checks when when he hits retirement age, he is still taking home a much smaller percentage than Buffet.

Even if one doesn't believe in a progressive income tax in which the rich are required to pay more, how can this regressive tax system be justified?

Proponents of a low capital gains tax argue that a high capital gains tax will scare investors away from investing their money, which will hurt the economy. However, I have yet to see an explanation of what investors will do with their money instead of investing it. Even with a higher tax rate, those with capital to invest will still reap many more benefits from investing their money than hording it.

Proponents also point to statistics that many "middle-class" Americans own stock and would therefore suffer from an increase in the capital gains tax. While it is true that many people own stock, the VAST majority of capital gains is paid by the rich. As of 1998 (and I have read it has become worse), the richest one percent of Americans owned 52 percent of the wealth. The richest 20% collectively owned 82% of the wealth. I would venture an educated guess that the richest people in the U.S. owned an even larger percent of investments subject to capital gains, since many people in the middle class (the poor include those in the bottom twentieth percentile, while the rich are the top twentieth percentile) have most of their "wealth" invested in things like homes and cars. Thus even though many middle-class Americans own stock, they own very little of it.

If I were to do something more than just raise the capital gains tax, I would revert to a tax structure like we had before the 1980's. Under this system, a small proportion of the capital gains were excluded from taxation, while the remaining were taxed at standard amounts.

While I appreciate what the Social Security system is trying to do, I do not like the way it has evolved (or more precisely, not evolved) over the years. When the Social Security trust fund began, the retirement age was 65. However, the average life expectancy in 1935 was about 65 (more for women, less for men). Its now about 77 or 78. The SS retirement age, on the other hand, has only been raised to 67.

At the time of its inception, the U.S.'s oldest citizens were also some of its poorest, and the Social Security benefits were designed to help them out when they became too old or unhealthy to work. Thus, I would gradually raise the age of retirement. I would also raise the cap on the social security tax. If I were to redesign the system, it would not be in the form of a trust fund, and there would be no cap (though the percent would be lowered).


Daniel said...

These are exactly the kind of facts that made me blame the failures of capitalism on government interference when I was still feeling particularly Libertarian. I used to strongly believe that given fair taxation, less union resistance, and a more fair playing field between corporations and consumers that libertarians really had something going. However, while I am still concerned with these facts, I am able to see larger sociological forces at work and have changed my political ideology accordingly.
Anyway, back to the things that you were actually writing about:
it is amazingly disturbing how the current tax system in the US is extremely detrimental to the middle class. I think that arguments for decreased taxation on the rich fall apart rapidly under even a little scrutiny; by providing them the tax breaks, the government is merely insuring that those who already own everything will be the ones to continue to own the means of production and continue to be the investors or tomorrow's industries, thus insuring that the income gap continues to grow and that wage slavery becomes inescapable for the poor.

Mark said...

Sometime you will have to tell me about this new political ideology of yours.

When I used to hear people talk about how the game had been fixed, I nodded and thought, "Yea, but that's history." I was thinking usually of historic repression of Africans and their decedents through slavery, women through social practices and property rights. I saw institutional racism dieing off. And I still think, overall, that these trends are ongoing and good.

But these issues distracted me from the less obvious game-fixing - tax structures, effects of regulation, zoning laws, etc. I didn't pay all that much attention to the details, and got caught in my mind where many people get stuck: Taxes, regulation, zoning, etc., are either good or bad. As you know, I never really believed these things should be abolished. I came to realize that things are not "free" or "determined by the government." There are always rules, codified or not. Perhaps "rule" is not the right word. "Freedom" as the stereotypical libertarian would have it is a type of relationship, a type of social compact, but a compact none-the-less.

But I was never really as aware as I have recently become of how bad some of these policies are implemented. Its not that I was completely unaware, but I wasn't as acutely aware as I am now.

With the coming energy shortages, I am currently looking at local government and communities for the answer. As much as I like him, I am still very, very skeptical that Obama can change the Federal government in a way that many people hope he can. If elected, I see him making great improvements in transparency and honesty (not that it will take all that much to improve on Bush), but at least for the next 5-10 years, I don't see any revolutionary changes coming from the federal level. We need a different method of drawing congressional districts and picking presidents to really help, but that's another subject.

Until then, I see many mayors and governors, along with local business interests and activists leading the way forward.