Preventing Future IRS Scandals is as Easy as Changing the Tax Code

Posted by PITHOCRATES - May 30th, 2013

Politics 101

The Tea Party was the Driving Force in returning the House of Representatives to the Republicans

The IRS is very powerful.  It can seize your property.  It can throw you in jail.  It can ruin your life.  There is no other arm of the government honest people fear more.  Because it is so powerful.  America did away with debtor’s prison.  Because it was inhuman to jail a person over a debt.  Unless you owe it to the federal government.  Then all of that compassion goes out of the window.

The recent scandal of the IRS targeting conservative groups is especially chilling.  For the Tea Party was the driving force in returning the House of Representatives to the Republicans.  Infuriating the Democrats.  As well as the Obama administration.  When President Obama ran for reelection in 2012 he had little to run on.  The economy was horrible.  No one was talking about Obamacare because the majority of Americans don’t want it.  It was so bad that the Democrat president had to highlight his single national security achievement—killing Osama bin Laden—while ignoring his domestic policy achievement.  Obamacare.

Then Benghazi threatened to ruin everything.  An attack on an American mission that killed four Americans.  Including a serving ambassador.  Making matters worse was that it was an al Qaeda affiliated terrorist group that was responsible for it.  This did not play well with the campaign message.  ‘Osama bin Laden is dead.  And General Motors is alive.’  President Obama had already won the War on Terror.  So he couldn’t have a terrorist attack during his reelection campaign.  So they hit the Sunday morning talk shows and said there was an anti-Muslim video on YouTube that created a spontaneous uprising.  Where average Libyans on the street then pulled out rocket propelled grenades and mortar launchers from their back pockets.  And launched a military assault on the American mission.

The IRS silenced the Tea Party during the 2012 Election by Harassing them and their Donors

You don’t hear much about the YouTube video anymore.  During the 2012 reelection campaign, though, both the president and the secretary of state pushed it hot and heavy.  Even apologized for it in a video to play in Pakistan.  And arresting the obscure filmmaker on some other charge.  And it worked.  Benghazi faded into the background.  Despite the Obama administration denying the American ambassador additional security.  And issuing a stand-down order for forces that could have gone to help the Americans under attack.  This order coming about 7 hours BEFORE the last two Americans died.  To this day we don’t know who gave that stand-down order.  And we don’t know where the president was when all of this was unfolding in Libya.

But it worked.  The misinformation spun from the White House won the president a second term.  And people started talking about what the Republicans had to do to start appealing to women and Hispanics.  For the early postmortem said that was why the Republicans lost.  They turned off women and Hispanics.  But something was wrong with that conclusion.  Because the conservative base didn’t turn out on Election Day.  That’s why the Republicans lost.  To explain that some said the problem was that Mitt Romney wasn’t a true conservative.  And he turned off true conservatives.  But that doesn’t make sense, either.  Because Romney may not have been the most conservative Republican to run for president but next to President Obama the man was practically Ronald Reagan.  There had to be some other reason why conservatives didn’t turn out like they did in the 2010 midterm elections that returned the House to the Republicans.

That was the million dollar question.  What happened to the Tea Party?  Who were so instrumental in turning out conservatives to vote in the 2010 midterm elections.  It’s as if they sat out the 2012 election.  For we didn’t hear their voice like we heard it in 2010.  And now we have a plausible explanation for that.  The IRS.  They delayed and made it so difficult to get their 501(c)(4) tax-exempt status that some just gave up trying.  Finding themselves and their donors getting IRS audits both for their businesses and their personal returns.  As well as other arms of the federal government auditing them from the Department of Labor to the EPA.

Everyone wins with a more Simplified Tax Code except those in Power who use it to Attack their Political Enemies

Did the White House coordinate this?  We don’t know.  Yet.  The IRS commissioner visited the White House 151 times.  While his predecessor visited the Bush White House about 1 time.  So that looks suspicious.  And silencing the Tea Party did help the president win reelection.  For silencing the Tea Party sure didn’t help Mitt Romney.  So it looks probable that the Obama administration used the nonpartisan IRS to attack their political enemies.  As they were determined not to suffer another Tea Party uprising like that which lost them the House of Representatives in 2010.  Right now the circumstantial evidence is pretty damning.

This is not what the Founding Fathers had in mind.  That was the point of limited government.  So it didn’t have this kind of power over people it perceived as political enemies.  And the source of this power is the complex and convoluted tax code.  That serves those in power better than the people they serve.  Allowing them to reward friends and punish their enemies.  One would almost have to believe the reason why the current administration ran the deficit up to record highs is to further empower the IRS.  By creating the need for ever more tax revenue.  And the need for more strenuous collection efforts.  Not to mention using the tax code to facilitate a permanent state of class warfare.  For the government needs this complex and convoluted tax code to make sure the rich pay their fair share.  As well as using it to reward their friends.  And punish their enemies.

So perhaps it’s time to revamp the tax code.  Some are talking about it.  As they always do.  But there is so much resistance because of the power the tax code gives those in power.  And those in power quickly shoot down any talk about a flat tax or a national sales tax as being unfair.  Regressive.  Hitting low-income earners harder than the rich.  But perhaps this is exactly what we need.  So everyone feels the pinch of the taxman.  So people won’t be so quick to give the taxman more powers.  Because a lot of low-income people don’t stay low-income.  And one of the quickest ways of raising low-income earners out of poverty is with a better and stronger economy.  And there is one thing that does that better than anything else in the world.  Low tax rates.  So let’s take a look at different tax plans for a married couple filing jointly.

Federal Taxes Current Brackets Flat Tax National Sales Tax

(For the national sales tax we assumed everything above a certain savings rate is spent somewhere in the economy.  Those who earn more can save more.  In our example the saving rates are 1%, 8%, 15%, 20%, 25% and 30 %.)

Those earning only $15,000 will pay more under a flat tax or a national sales tax.  But the IRS becomes far less intrusive and far less powerful.  Because it will be so much simpler.  Giving honest people less to fear about.  And giving those in power less power to attack their political enemies.  Making it harder for them to cheat during elections.

Also, lower tax rates will bring money sheltered outside of the country back home. Which those rich people will invest here.  To get even richer.  And probably end up paying more taxes than they were before.  Because they won’t have any need to shelter it.  While all the new jobs they create will increase tax revenue further.  Because there will be more people working and paying taxes.  So everyone will win with a more simplified tax code.  Except, of course, those in power who use the tax code to attack their political enemies.

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Sixteenth Amendment, Revenue Act of 1913, Progressive Tax, Marginal Tax Rate, Tax Shelter, Tax Cuts and Decade of Greed

Posted by PITHOCRATES - July 10th, 2012

History 101

Americans find Taxes Repugnant and have a Long History of Making this Repugnance Known

American independence began with a tax revolt.  The ratification of the U.S. Constitution happened only with safeguards against the new federal government from growing too powerful.  And great efforts went to limiting the amount of money it could spend.  For a long time all federal tax revenue came from import tariffs.  Then from sales of federal lands as the population moved west.  It took a civil war for us to impose an income tax.  Our first income tax was 3% on incomes over $800 (or about $20,000 today).  The first income tax was a flat tax.  They passed this income tax to pay for the war.  They repealed the income tax following the war.  Americans wouldn’t see another federal income tax until 1913 when we ratified the Sixteenth Amendment.  And President Woodrow Wilson signed into law the Revenue Act of 1913.

Woodrow Wilson was a progressive.  The precursor to today’s liberals.  Who thought beyond the limited government of our Founding Fathers.  They wanted to expand government.  To make it a part of our everyday life.  Where the brilliant progressive politicians would make better decisions for us than we ever could.  And their changing of society included the funding of the federal government.  For their income tax was a progressive tax.  Everyone paid a flat tax of 1% on income of $3,000 or more.  About $66,100 today.  Then the progressive taxes came into play.   Adding another percentage to the income tax rate for increasing amounts of income.  The thresholds for these increases were as follows: $20,000 (roughly $440,400 today), $50,000 ($1,101,000 today), $75,000 ($1,651,600), $100,000 ($2,202,100), $250,000 ($5,505,300) and $500,000 ($11,010,700).  The top marginal tax rate on the super rich (earning $11,010,700) was 7%.

Our second income tax was quite controversial.  A lot of people hated it.  For Americans find taxes repugnant.  And have a long history of making this repugnance well known.  But thanks to the American Civil War a generation of men was lost.  And a generation of boys grew up without fathers.  Tended on by doting mothers.  Smothering them with love and affection.  And these boys grew up without knowing the manly hardships of life.  And they entered politics.  Becoming those early progressives.  Who wanted to change the government into a great doting mother.  And now they could.  For they had their income tax.

Few paid the Confiscatory Tax Rates of the Seventies by Hiding their Income in Tax Shelters

The rich paid our first federal income taxes after the Revenue Act of 1913.  And these were very small percentages we had them pay.  Back then the top marginal tax rate was lower than our lowest income tax rate today.  Think about that.  The richest of the rich paid only 7% of their income ($11,010,700 or more today) in federal income taxes.  While today single people earning the lowest bracket of taxable income (from $0 to $8,700) pay 10% of their income in federal income taxes.  Clearly the growth of government exploded thanks to the Sixteenth Amendment.  Much as our Founding Fathers feared it would if they had too much money to spend.

Of course, this is ancient history.  Few know about this today.  For few could even tell you why we fought for our independence.  Or even who we fought for our independence from.  (We fought for our independence from Great Britain because of their policies to tax us despite our having no representation in Parliament.  That’s where the phrase taxation without representation came from).  Today high taxes are sadly just an accepted part of life.  In fact, we have referred to our paychecks as take-home pay.  Our net pay.  Because gross pay is a myth.  No one sees their gross pay.  About a third or more of that disappears in withholding taxes.  So gross pay is a meaningless expression for us today.  (It wasn’t before the Sixteenth Amendment or before the progressives came to power).  Something that we sadly accept.  And we now fund our lives on the take-home pay the government allows us to keep.  All the while accepting these high tax rates.

Government spending took off in the Sixties and the Seventies.  As did our taxes.  If we had once thought that a 7% tax on incomes of $11,010,700 or more was an outrage, we didn’t see anything yet.  In 1978 the top marginal tax rate was 70% on incomes of $351,712 or more.  And there were 25 marginal tax rates.  As shown here adjusted for inflation (sources: Tax Rates, Tax Receipts, and Celebrity Incomes).

 In this example we calculated the average of some top celebrities.  And the top celebrities on average earned about $30,000,000 in 2010.  Using the 1978 tax brackets they would have owed $20,936,506 in federal income taxes.  Or approximately 69.8% of their total income.  Which is pretty much equal to the top marginal tax rate.  Of course, few paid these confiscatory tax rates.  They hid their income as best as they could in the Seventies.  In tax shelters.  And you know they did because despite these confiscatory tax rates the federal government still ran budget deficits.  Having to print money to pay for their explosion in government spending. 

The Low Tax Rates of the Eighties created so much Economic Activity the Opposition called it the Decade of Greed

The heyday of Keynesian economics was in the Seventies.  After Richard Nixon decoupled the dollar from gold the Keynesians were free to print money to stimulate the economy.  Which was their answer to ending a recession.  Stimulus spending.  Have the government print money to create economic activity that wasn’t happening in the private sector.  Their policy tool to end a recession was inflation.  By pouring money into the economy people would borrow it and buy cars and houses and furniture.  And everything else under the sun.  Creating a surge of economic activity.  And creating jobs in the process as businesses must hire new workers to meet that government stimulated demand.  With the dollar decoupled from the ‘cross of gold’ the Keynesians were finally able to prove their mettle.  And solve all the country’s economic problems.  It was the dawn of a brave new world.

And that world sucked.  For the implementation of Keynesian economic policy proved those policies did not work.  Instead of replacing high unemployment with inflation they just added high inflation to the high unemployment.  Something that was impossible to happen in Keynesian textbooks.  But it happened.  Stagnant economic activity.  And inflation.  What we called stagflation.  We added the unemployment rate to the inflation rate to come up with a new economic indicator.  The misery index.  The economy was so miserable during Jimmy Carter’s 4 years in office that he lost in a landslide to Ronald Reagan.  Who was a proponent not of Keynesian economics but of the Austrian school.  Or supply side economics.   And the Austrians believed in low tax rates.  For low tax rates would stimulate economic activity.  And the greater amount of economic activity would generate a greater amount of tax revenue even at lower tax rates.  Let’s look at that same celebrity paying taxes a decade later under Ronald Reagan.

 Much simpler.  And more in keeping with the Founding Fathers.  Instead of paying 70% of their earnings in federal income taxes they will only pay 28% (again, equal to the top marginal tax rate.  Which is pretty much the only tax rate the rich pay).  That’s still a lot of money to give to the federal government.  But it’s so much smaller that in many cases it was cheaper and easier to pay Uncle Sam than trying to hide that income.  So economic activity took off in the Eighties.  It was so great that the opposition called it the Decade of Greed.  Out of sour grapes because their policies could never produce anything like it.  But what about tax revenue?  Those on the Left say this economic activity came at a price.  Exploding deficits.  Well, the deficits did grow.  But it wasn’t because of the cuts in the tax rates.

Higher Tax Rates do not Necessarily Increase Tax Revenue 

In 1978 total tax revenue was $1,113.6 billion.  In 1988 total tax revenue was $1,421.1 billion.  So Reagan’s cuts in the tax rates produced $307.5 billion more in tax revenue.  An increase of about 27.6%.  Dropping the top marginal tax rate from 70% to 28% actually increased tax revenue.  So the cut in tax rates did not cause the deficits.  It wasn’t a revenue problem.  Revenue went up.  Spending just increased more.  And it was this excessive government spending that caused the deficits.  Not the tax cuts. 

The lesson here is that higher tax rates do not necessarily increase tax revenue.  Because changes in tax rates changes behavior.  Higher tax rates discourage people from investing in businesses.  They discourage businesses from expanding.  Or hiring new workers.  Higher tax rates may decrease the opportunity costs for hiding income.  The cost and inconvenience of hiding income in tax shelters and offshore accounts may become less that the cost of paying higher taxes.  Like it was during the Seventies.  Where despite confiscatory tax rates the government could not generate enough tax revenue to meet their spending obligations.

Income tax rates grew from a very small percentage on only the largest of incomes to high tax rates on very modest incomes.  And yet our deficits have never been larger.  Proving that our tax rates are either too high and dampen economic activity (as well as encouraging people to avoid paying their taxes).  Or that government spending has just grown too large.  More than likely it’s a combination of the two.  A fact that would shock and dismay the Founding Fathers were they alive to see what we did with the republic they gave us.

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FUNDAMENTAL TRUTH #75: “Lower income tax rates generate more tax revenue by making more rich people who pay more income taxes.” -Old Pithy

Posted by PITHOCRATES - July 19th, 2011

The top 1% of Earners pay close to 40% of all Federal Income Taxes

Poor people pay little income taxes.  Rich people pay a lot of income taxes.  Everyone else pays somewhere in between.  The tool to make this happen is the progressive tax system.  Government designed it so that people with more income pay more taxes.   Via progressive tax brackets.  And the current (2010-2011) brackets (for head of household) are:

  • 10% on first $12,150
  • 15% on income from $12,150 – $46,250
  • 25% on income from $46,250 – $119,400
  • 28% on income from $119,400 – $193,350
  • 33% on income from $193,350 – $379,150
  • 35% on income over $379,150

If you earn $8,000 you owe $800.  Simple.  If you earn $83,600 you owe $15,668.  If you earn $450,000 you owe $131,435.  If you earn $2,500,000 you owe $848,935.  See the pattern?  Earn more.  Pay more.  Almost as if you’re penalized for being successful.

Of course, low-income people often don’t pay any federal income taxes.  In fact, a lot of people don’t.  About half.  Thanks to tax credits, deductions and exemptions.  But when you’re a rich CEO earning a multimillion dollar salary there aren’t enough tax credits, deductions and exemptions to avoid your taxes.  That’s why the top 1% of earners pay close to 40% of all federal income taxes.  Something we should thank them for.  Instead of demonizing them.

The higher the Top Marginal Tax Rate is the more the Rich avoid paying Income Taxes

There are no Mom and Pop hardware stores anymore.  The big box home improvement stores like The Home Depot, Lowe’s and, for those of you old enough to remember, Builder’s Square put them out of business.  Because of greedy consumers like you.  And me.  Who want to get the best value while shopping.  And if we can buy something of equal quality at a lower price we do.  We work hard for our money.  We spend it carefully.  Wisely.  And we don’t pay more for something when we can get the same for less elsewhere.

It’s the same for rich people.  When they shop.  And when they invest their wealth.  Or their ability.  They look at their options.  Create a new business?  Work at an established business?  If you’re highly skilled you can earn a lot of income.  Which rich people take into consideration.  But there are costs.  Payroll taxes.  Employee compensation and benefits.  Compliance and regulation costs.  And, of course, the progressive tax system.

The higher the top marginal tax rate the less incentive they have to start or run a business.  The less incentive they have to create jobs.  And the more likely they won’t start or run a business.  Instead they’ll invest their money and pay the simpler and (so far) lower capital gains tax.  And this is what happens.  The higher the top marginal tax rate is the more the rich avoid paying income taxes, leaving the middle class to pick them up.  Just like you avoided that Mom and Pop hardware store on your way to The Home Dept.  And with an abundance of government debt available, the rich can invest and live on interest.  Sitting on the sidelines.  Watching the rest of us struggle to find a job.

You don’t need Employees to live on Interest Income

So, the progressive tax system is a way to make rich people pay more.  To transfer the tax burden to them.  And it does.  To a point.  But if you try to tax them too much they’ll just drop out of the economy.  And take their jobs with them.  Which is a double whammy.  We lose some of that generous 40% of income taxes they pay.  And we lose who knows how many thousands of jobs.  And taxpayers.  Thus transferring the burden the other way.  Away from the rich.  To those less able to afford it.

The progressive tax system is supposed to make paying taxes easier on the poor.  The less you earn the less you pay, leaving you with more money for the necessities of life.  Whereas the rich can afford to pay more so they do.  But a flat tax is a progressive tax, too.  The more you earn the more you pay.  For example, going to a 15% flat tax, our sample earners above would change their taxes owed as follows:

  • $8000:  $800  →  $1,200
  • $83,600:  $15,668  →  $12,540
  • $450,000:  $131,435  →  $67,500
  • $2,500,000:  $848,935  →  $375,000

It’s still progressive.  And, yes, the rich will pay less individually.  But there will be more of them.  For this lower income tax rate changes the dynamic.  It will be more profitable to get off of the sidelines and get back into the economy.  Because a flat 15% income tax rate will beat or equal the capital gains tax.  And the profit from creating or running a business will blow away the earnings on a portfolio of treasury bonds.

Better still are the jobs.  You don’t need employees to live on interest income.  But you need them to run a business.  More jobs mean more taxpayers.  So more rich people are back in the economy earning income and paying income taxes.  And more employees are working.  That’s more payroll taxes.  And more personal income taxes.  In the end, the numbers win.  More jobs.  More GDP.  And more federal tax receipts.

Keeping People Poorer and more Dependent on Government

If the goal of government tax policy is to raise tax revenue, the logical thing to do would be to design a tax code that creates more rich people.  A lower top marginal tax rate does this.  So does a flat tax.  Such a tax policy will create incentives to earn income instead of living on capital gains from investments.  Each rich person will pay less income tax individually but there will be far more of them paying income taxes overall.  And they will create jobs.  The more jobs there are the more payroll taxes and personal income taxes there are.

History has shown that cutting tax rates has done just that.  The Mellon tax cuts of the 1920s.  The JFK tax cuts of the 1960s.  The Reagan tax cuts of the 1980s.  The Bush tax cuts of the 2000s.  So if the record shows that lower tax rates produce more tax revenue, why are we always trying to raise the top marginal tax rates?  Simple.  Politics.

Being in politics is the closest you can get to being part of an aristocracy in the United States.  Unless you’re born a Kennedy.  Whether its ego or the graft, people aspire to be in the privileged few.  Life is better there.  If you have no talent or ability.  Other than being able to tell a pretty good lie.  So you use class warfare to get the masses to support you.  And the progressive tax system.  Which keeps people poorer and more dependent on government.  Like it used to be in the old days when there was an aristocracy.

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