As fall campaigns kick into high gear, many politicians are seeking favor with the voters by metaphorically offering them a candy bar and an ice cream cone. They say “elect me because I will cut your taxes and reduce the deficit.” Who could resist that? Paul Gleckman published an article in the Christian Science Monitor Saturday that demonstrates that such promises are, in fact, mutually exclusive. Cutting the tax rate will increase the deficit.
The Tax Policy Center, as Gleckman reported, updated their estimates and found that a one percentage point across-the-board reduction in tax rates would add $662 billion to the budget deficit over 10 years—about $40 billion in 2015. This increases to more than $85 billion by 2024. Absent draconian cuts to non-mandatory spending, or cuts to Social Security and Medicare, cutting taxes will increase our debt and our interest payments. We can’t have it both ways.
What is more disturbing, more than half the benefit of an across-the-board tax cut would go to the households in the top 20 percent of income, while the one percent with the highest incomes would pocket nearly 22 percent of the rate cut. In an era where income inequality is stifling our economy, an across the board tax cut would make that inequality worse, which would further hold economic growth down.
Talking about how much to tax actually misses the point. The real issue that needs to be debated is who pays those taxes, and is the system fundamentally fair? Economist Joseph E. Stieglitz says that changes to the tax code enacted over the last couple decades have resulted in a system that is fundamentally unfair.
Everyone complains about taxes, especially those with so many write-offs they do not pay them. In reality, the United States is one of the least-taxed industrialized nations on earth. Of the 34 industrialized nations, only Chile and Mexico paid less in taxes than the U.S. in 2010 as a percentage of GDP. As recently as 1979, we paid the 16th highest. So the pie is significantly smaller making shifts in the tax burden more profound.
As the relative taxation pie shrinks, the share of taxes paid by corporations has gotten much smaller. Since 1950, the share of taxes paid by corporations has dropped from nearly 30 percent to less than 8 percent. In that same period, payroll taxes (paid by employees) have grown from less than 10 percent to more than 40 percent of total taxes. This increases income inequality because payroll taxes are regressive — after the first $117,000, the more money a person makes, the smaller the share of income gets deducted from his or her paycheck.
Another disturbing statistic is that the highest income group receives the lion’s share of all tax breaks, 51 percent, while the lowest income group receives only 8 percent. The wealthy contribute massive amounts to campaigns and have lobbyists to make sure that the politicians they purchased reward them with tax breaks. The middle class and poor, not so much. When the rich don’t pay their fair share, the people at the bottom and small business owners are forced to make up the difference.
Lastly, the cuts to the federal budget have made thing worse in terms of income inequality. The federal tax code, not taking into account special tax breaks, was designed to be progressive meaning those who make more pay a higher percentage of their incomes in taxes. State and local tax rates are not designed to be nearly as progressive.
So, when the federal government cuts its budget, the programs previously funded by all taxpayers get shifted to state and local governments which have fewer tax payers. And, lower income people at the state and local level pay a greater percentage of the bill than the wealthy.
A half century ago, our tax system was much fairer than today. The result was a growing middle class and prosperity. Today, the system is rigged toward the very wealthy; the result is a shrinking and almost extinct middle class, and a weak economy. Perhaps, the way to fix this is to go back to the fair tax system that made us the most prosperous nation on earth in the 1950s.