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).