Among many other things, Benjamin Franklin is remembered for saying “in this world nothing can be said to be certain, except death and taxes.”
I do not pretend to be an expert on economics or financial matters. The mysteries of national and international financial manipulations are beyond my ken, and I tend to avoid thinking or talking about them. Any deep discussion of dollars and debt makes my eyes glaze over. All of us, however, are very concerned about those matters that affect us directly, and that includes taxes.
On the American political stage, it is interesting to note how often a Republican Party platform will include the promise of tax reductions, while at the same time labeling their opponents as “tax and spend” Democrats. It often appears that the Republicans wish to eliminate taxes altogether, whereas the Democrats seem to delight in soaking the rich. What is the truth behind all this partisan hyperbole? Are the economic philosophies of our major political parties that different? The answer is apparently yes.
Most Republicans support the concept of self-interested, capitalistic enterprise as the most certain guarantor of economic progress. No man will work harder than the man who works for himself and is promised the reward of the fruits of his labor. The problem is that capitalism leads to an uneven distribution of prosperity. Some men are more successful in the pursuit of wealth than others. Those less successful may have different professional goals or may be less capable. They could be handicapped by environmental factors such as family problems, accidents, or poor health. They may also suffer the consequences of low energy, less ambition. and poor decision making.. Over time, the unevenness in income distribution increases, and there is a greater and greater gap between the rich and the poor.
Democrats appear primarily concerned with a more equitable distribution of wealth among the general population. At the very least, they favor the imposition of very high taxes on those with the most money in order to support social programs to benefit the poor and less advantaged. On the extreme side, an increasing number of Democrats support true socialistic programs in which the government controls the means of production and strictly enforces an equitable distribution of wealth.
Winston Churchill expressed the thoughts of many conservatives when he described the differences between capitalism and socialism in this way: “The main vice of capitalism is the uneven distribution of prosperity. The main vice of socialism is the even distribution of misery.”
The present American system is an amalgam. We have a very progressive income tax. Those with higher incomes (considering both federal and state taxes) pay rates up to almost 50%. Those with the lowest incomes pay nothing and may, through the earned income tax credit, even receive a refund. The wealthier members of our society thus contribute a huge percentage of the federal government’s income tax receipts. Of course, many wealthy citizens receive much of their income through investments, and taxes on income from these investments (capital gains) are at a much lower rate than regular income. Also, high earners are able to hire lawyers to guide them through our labyrinthian revenue laws and take advantage of every tax break.
The poor contribute nothing to our income tax receipts, but these less affluent citizens are taxed in other ways. There are social security taxes, state and local property and sales taxes, and the indirect taxes that everyone pays when businesses are taxed and that tax is passed on to the customer via price increases on products or services. No one can completely evade taxation.
Proper taxation rates are always subject to controversy.
Republicans seem to always be pushing for lower tax rates. Some taxation is necessary, but I cannot understand what tax rate, other than 0%, would be acceptable to some Republicans. For myself, as a conservative, I would favor a progressive income tax rate topping out at about 33% along with 15% corporate and capital gains taxes. These rates are very much in line with what we have today, and I believe they foster continued enterprise and economic growth. If necessary, because of severe economic circumstances, I would support the temporary imposition of much higher rates. If we could balance the budget with lower rates, I would support them.
As an alternative to income taxes, some economists have suggested that taxes could be applied at the point of production or consumption. Others have suggested a “flat tax” with no deductions except perhaps for home mortgages. The tax level for all individuals would be between 10% and 15% and would exclude individuals whose income was below some predetermined level. I’m not certain of the relative advantages or disadvantages of these several methods of taxation when compared to our present system.
Democrats favor much higher taxes on the rich and on corporations. They seem to feel that they can achieve a fairer, happier and more prosperous nation by leveling out income among citizens regardless of their respective contributions to society. In theory, they would favor relatively equal economic rewards for a janitor and a brain surgeon. Of course, in practice they would allow some adjustments for the years of training, etc. Some Democrats have proposed income taxes on high earners in the 75-90% range along with very high corporate and capital gains taxes.
I agree with Churchill’s assessment of this approach. He said that “for a nation to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” It would not work. Excessive taxation would destroy the American economic machine, and within a very short period of time we would become like the Venezuela of 2018, torn by internal dissension and despair. We cannot allow that to happen.
What is the answer to questions and disagreements about taxation? We cannot avoid the issue. Taxes inevitably come with an organized society. How else are we to pay for national defense, the schools, the roads we share, etc.
What is an acceptable income tax rate? With the passage of the 16th Amendment in 1913, the federal income tax became a regular fixture of the American economy. The initial tax rate was 3%. With few dips, it has been rising ever since. At what point does an income tax become counter-productive? Should the rate be 15%, 30%, 50%? Some Republicans wish to set the rate ridiculously low. Some Democrats want it to be so high that it would virtually destroy capitalistic enterprise. I believe that the present income tax rate is very close to the desirable limit.
Capital gains tax rates have also become a bone of contention. Long-term capital gains tax rates are presently 0%, 15% or 20% depending on your taxable income and filing status. Many Republicans view capital investments as the very life blood of American industry and wish to eliminate capital gains taxes entirely. Many Democrats favor a much higher capital gains tax rate. Who is right? I believe that the capital gains tax could be raised modestly without discouraging investments. Additional tax revenues are certainly needed, and this is one area in which we might seek them.
Inheritance taxes are another issue. Republicans refer to it as double taxation and the “death tax.” A hard-working and successful entrepreneur paid his taxes on his earnings throughout his lifetime. Why should he be taxed again when he dies? Republicans often call for the total elimination of the death tax. From another point of view, however, what has the inheritor done to earn this money? Is it fair for tremendous fortunes to be passed from deceased parents to children, thus giving the inheritors a tremendous advantage in the game of life and contributing even further to the gap between rich and poor? I favor some middle ground. Inheritance taxes must not be so high as to destroy the family farm or family business, but I believe it proper to tax huge fortunes quite heavily rather than pass them in their entirety to the heirs.
Corporation taxes are frequently the subject of controversy. Republicans generally hate corporate taxes. Many Democrats, on the other hand, seem to hate the corporations and wish to soak them. Truth is, when you tax a corporation, the costs of this tax is included in production costs, and these costs are passed on to the consumer. Everyone pays. Certain corporate expenditures should be subject to taxation, but it is counterproductive to tax those corporate profits that are being plowed back into the production line.
We must balance our discussion of taxes with a consideration of the expenses that must be paid for by taxes. Most people agree that taxes (federal or state) must be levied to pay for roads, police, certain public projects, national defense, etc. But beyond these basic things, there is much disagreement about what other costs should be paid from the public till. For example, the vast majority of people support the concept of public education, but some people would favor vouchers rather than using money to support a cumbersome academic establishment. And what about college? Some people believe that free (tax funded) higher education should be available to all. Others believe paying for higher education or vocational training is not a governmental responsibility.
Health and welfare are perhaps the areas of greatest concern and disagreement. Liberal/progressives favor a universal health care system financed by the federal government, along with a generous social security system. They do not seem particularly concerned about how to pay for it. They seem to believe that “soaking the rich” would provide the necessary revenue, but even if we were to tax our richest citizens (the infamous 1%) at a 90% rate, and eliminated loopholes, it would not finance health care for all our citizens.
The majority of conservatives appear to want a continuation of our mostly privately managed health care system, supplemented with Medicare and Medicaid. They concede that improvements are needed, especially a provision of health insurance for the disadvantaged, but, insofar as a federal health care system is concerned, conservatives deeply distrust bureaucracy and fear its further intrusion into the medical arena. As for Social Security, conservatives support it, but they are anxious to modify it in response to our changing demographics to ensure its fiscal viability.
As we reflect on taxes and federal expenditures, a pressing concern is the gap between income and expenses. We have not balanced the national budget in twenty years, and the size of the deficit keeps growing. Our debt now exceeds 20 trillion dollars, and the interest on this debt is absorbing a larger and larger percentage of our yearly tax receipts. Spending on Social Security and Medicare alone will soon exceed 2 trillion dollars per annum, almost half the total federal budget. We are losing our ability to fund important new projects and programs. Something must give. Somehow, someway, we must make our politicians face up to this dilemma and work toward a sharp reduction in the deficit. If we do this, a steady growth in our gross domestic productivity will gradually bring us back from the brink.
President Obama put together an task force of experts to address the deficit problem. They made recommendations, and he ignored them. A few years later Paul Ryan came up with his own approach, and he was mercilessly depicted by Democrats as a man pushing poor grandmother over the cliff.
The clock is ticking. We must take action soon if we are to avoid a true fiscal crisis within the next decade or so.