SensibleTaxReform Blog

5. Sensible Tax Reform–A Just Tax

The simplicity of Sensible Tax Reform–Simple, Just and Effective was explored in the previous post. In this one, the justice element will be shown.

An Unjust Tax System

Will Rogers was not only a famous humorist but also an astute commentator on America and its problems. I think that he spoke for most Americans when he quipped that “people want just taxes more than they want lower taxes.”

Unfortunately, one of the greatest of the very numerous flaws of our existing Internal Revenue Code is its injustice. However when our federal tax code was first written a century ago, justice was one of its primary goals. The so-called “Gilded Age” of the late 1800s and early 1900s had brought great public scrutiny and disapproval of the excesses of the very rich. Even the Gilded Age’s most prominent financier, J. Pierpont Morgan, warned strongly about the dangers of an economic and social system that was perceived by many of the very rich (as well as by most of the rest of the country) to be a dangerous condition. Morgan warned against “the tyranny of mere wealth, the tyranny of plutocracy.”

There was a very different political environment 100 years ago from what we have now. The government passed aggressive legislation, including the creation of the Federal Reserve and the introduction of the federal income tax. That progressive government had a Republican president (Theodore Roosevelt, a member of the moneyed classes himself), a Republican Senate and a Republican House. There was broad bipartisan support from Democrats as well as Republicans. Political differences were put aside by the majority to do what was good for the country—not just politics as usual, which is clearly the norm in Washington today.

The new tax code, which first required a constitutional amendment (the 16^th Amendment) was progressive and very simple. Very few people, only those with high incomes, paid any personal income taxes at all. The tax rates ranged from 0-7%–less than what some states charge today. It had very few loopholes and did not impose a heavy burden on anyone. It was widely perceived to be just.

Unfortunately, in the intervening 100 years, that simple and just tax system deteriorated drastically into the 77,000-page disaster that we have today. Not only was simplicity sacrificed but so was justice–our current federal tax system is loaded with provisions that benefit some groups while harming others:

• Warren Buffett, America’s 2d-richest man, has publicly condemned a tax system that taxes his secretary at a much higher tax rate than someone like himself with tens of millions of dollars of income.
• Capital gains and dividends are taxed at a much lower rate for those wealthy enough to invest outside of an IRA or 401k retirement account.
• Salary earners may pay taxes at almost a 40% rate while speculators who qualify under special tax provisions called “carried interest” pay the same tax rate as for capital gains. That rate is 16% points less for their unearned and largely risk-free income (which in some cases amounts to billions of dollars) than that paid by most wage and salary earners.
• Companies like Apple and General Electric use financial tricks to pretend that their American earnings have been made abroad and avoid most or even all US taxation–indefinitely. Small and medium-sized businesses can seldom afford the same tricks.
• Many of the tax advantages that the lobbyists of big companies, the very wealthy and other very influential groups have been able to wrangle behind closed doors in Washington are not available to small companies and less-wealthy households.
• Wealthy people with expensive houses can obtain up to $500,000 of tax-free capital gains on the sales of their homes–and they can do it every two years if they have multiple homes.
• Although no estates smaller than $10.5 million are taxed by the federal government, huge estates often pay much less than mid-sized estates.

Almost everyone, wealthy as well as poor, can legitimately complain about the inequity of some parts or other of our existing Internal Revenue Code. That is not just. That is not even smart for the country as a whole.

Creation of a New Tax System that Focuses on Justice

When Sensible Tax Reform–Simple, Just and Effective is adopted, everyone will be treated exactly alike. That is how a just tax system must be designed.

• All businesses, whether large or small and whether corporation, partnership or proprietorship, will be treated exactly alike.
• All households, whether rich or poor and whatever the source of their income, will be subject to the same rules.
• All estates will be subject to the same rules.
• All purchases will be subject to the same rates.
• All retailers, whether in-store or online, will be treated exactly the same.
• Any special provision, such as the rebate to protect the poor, will be available to everyone.

This new tax system will be easy to understand. It will treat everyone alike. There will be no secret manipulations for the benefit of only a few. Sensible Tax Reform–Simple, Just and Effective will bring true tax justice.

 

The next post will detail the third key element of this new tax system: Its very dynamic impact upon the growth of the American economy.

Tags: #tax reform

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