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Wednesday, June 01, 2005

Income Tax - Inflicting Numbers to Expose a Lack of Fairness

I'm sorry if the numbers hurt - there's no way around it for this discussion.

While President Bush is playing Chicken Little with Social Security, and Democrats finally found some spine to oppose him, the fact is that he has wreaked havoc on our tax system. In fact, the problem with Social Security is our income tax system.

The Census Bureau tracks income limits and income distribution in American families. From 1967 to 1980, the poorest 20% of American families increased their share of all income from 4.0% to 4.3%, it then dropped steadily since then and was only 3.4% in 2003 - 0.6% less than they had when we declared war on poverty. Meanwhile, the highest earning 5% of American families saw their share of income drop from 17.5% in 1967 to 15.8% in 1980. Since then, it has risen to 21.4%. This means that 5,600 families account for over a fifth of all income earned in the United States.

What happened in 1980 that changed things so badly? Ronald Reagan happened. Don't think that the wealthy were hurting when Reagan got into office. To break into the top 5% of family income in 1980, you needed $51,500. If you adjust for the value of the dollar in 2003, you needed $108,894. This is up from $19,000 in 1967, or $88,678 in 2003 dollars. Anyway you measure it, the rich got richer even before Reagan came along - even during the "turbulent '70s". A 73% gain from 1967 to 2003.

Meanwhile, the maximum income for the poorest 20% of Americans rose from $3,000 to $7,556 and then on to $17,984. If you adjust for inflation, the poorest 20% of American families scraped by on no more than $14,002 in 1967, but saw this rise to $15,977 in 1980. Since then, it has grown to a whopping $17,984 in 2003. Okay, the did better - marginally. Only 23% better than thirty-six years earlier.

According to the IRS tax charts, someone who makes $154,120 will be in the 33% tax bracket. If they slightly more than double their income, they will only pay an additional 2% tax.

The median income - the point at which exactly half of all families make more and half make less - for 2003 was approximately $65,000. That means a single person will face a tax increase of 15% - on top of the initial tax rate of 10% - to simply make it half way up the ladder. To understand what it takes to move upwards, consider this:

If that person doubles their median income to $130,000, they pay an additional 3% tax increase. If they manage to double their income again to $260,000, they will pay another 5% tax. Doubling it again to $520,000 will result in only an additional 2% tax.

That means that making it to the halfway point on the income ladder results in a fifteen percent tax increase, but multiplying that income by a factor of eight only results in an additional tax of ten percent.

Of course, the first $5,000 of income is exempt from taxation. Why? What can you do with $416,67 a month?

The truth is that we get an exemption because it is considered to be more important that you be able to take care of yourself than to pay taxes. You should be able to pay for some level of existence before you begin paying taxes. I don't know of anyone who can get by on $5,000 a month - well, maybe the homeless guy that lives in the park, but I hardly think that's a model we want to emulate.

Let's begin addressing the tax system by making the tax exemption a workable level. $20,000 seems a bit low for most parts of the country, but $30,000 seems a bit high. Let's use $25,000 as a starting point. Everyone gets to earn $25,000 before they have to pay taxes. Wow - that's somewhere around 30% of the population! You want to see this economy boom? Let 30% of the population spend every dime they make. As someone who actually raised a family on less than $25,000 a year, I can attest that you pretty well have to spend everything you make at that level to get by. Allow dependents to gain a deduction of another $5,000 each and you have a family friendly tax policy.

By the time we get to $25,000 we have passed the truly "working poor" but we are still caught in the "working near-poor" or "the struggling workers". A light tax rate of about 5% for the next $15,000 of income will begin paying for government without unduly burdening these people. That puts the 5% tax bracket at $25,000 to $40,000.

The idea of having tax brackets is that people at similar income levels have similar problems. The next income bracket should be much wider as we are actually dealing with the lower middle class here. The 15% tax bracket should reach all the way to $100,000. Raise it to 20% from $100,000 to $300,000, then 25% from $300,000 to $500,000. After that, we are no longer talking about people who are struggling in any real meaning of the word. We are past the middle class and reaching into the upper classes.

We are also getting to the areas where people can be taxed steeply and not be hurt. From $500,000 to $1 million the tax rate should rise to 35%. From $1 million to $10 million, it should be 45%. Over $10 million, it should be 55%.

We also have to redefine "income" as being any money that enters your control during the year. It isn't just what you get paid - it's the value of the stock options and loans against them that CEOs use to avoid paying taxes. It's the value of a second home rented to your company rather than them renting you a hotel room. If you didn't have it at the beginning of the year, and it came into your possession during the year, it was income for you. There is no reason why some people should be advantaged to have a portion of their income exempt while those who make less have to pay tax on all of theirs. Wealth should not go hand in hand with avoiding taxation.

I spent a good bit of time over the last several years searching for numbers, tracking exemption values, adding up different levels of income, finding percentages actually paid, and a lot more. What I found is that a plan like this - the actual numbers have to be fudged a bit to make them work perfectly - actually brings in the same or more money for the government and allows the vast majority of people to pay less tax. At the very least, it creates a system where a person can raise a family honestly without having to hide assets.

So it soaks the rich - guilty as charged. Honestly, that's the whole plan. When a CEO takes $250 million in compensation - plus more in unvalued compensations - they screw every single one of the company's employees and customers.

The biggest reason why the growth of incomes for the wealthy was held down from 1967 to 1980 was an income tax structure that punished people for being greedy. It discouraged usury in the boardroom. It encouraged even the wealthiest to live a thrifty life - to save for things they wanted rather than simply take the money and run. Ronald Reagan changed that.

Ronald Reagan has, upon occassion, been called a man of God and character and an Evangelical Christian. What God calls for greater injustice in society? What God says, "Turn your back on the poor and ensure the wealthy never even have to look at them." What tenet of Evangelical doctrine says, "Tax cuts are holy - covet thy money and zealously sneer at those with less."

Ronald Reagan was many things - but he did not save the economy - falling oil prices and the actions of Paul Volker did that. He did not bring down the Soviet Union - internal corruption, privateering, and greed did that. He did not make it safe to be American - the world was less safe when he left office because of his policies (particularly in South America). He did make it safe to hate poor people. He did make wed Calvinist doctrine into economic policy. He showed us that our eyes can indeed never be satisfied and our destruction can never be filled.

He showed us how to build ourselves a Hell - using only a tax policy.

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