I confess: I'm a "Lucky Ducky."
Allow me to explain. Way back on Nov. 20, 2002, the Wall Street Journal ran an editorial complaining that the standard tax deduction, personal exemption and various automatic tax credits had created a class of citizens who pay no federal income tax.
Here's what they wrote:
Who are these lucky duckies? They are the beneficiaries of tax policies that have expanded the personal exemption and standard deduction and targeted certain voter groups by introducing a welter of tax credits for things like child care and education. When these escape hatches are figured against income, the result is either a zero liability or a liability that represents a tiny percentage of income.
Why The Journal saw this as a problem, and why I don't, below the fold.
The case against allowing low-income workers to escape paying taxes, as made by The Journal's editorial board, is this:
Say a person earns $12,000. After subtracting the personal exemption, the standard deduction and assuming no tax credits, then applying the 10% rate of the lowest bracket, the person ends up paying a little less than 4% of income in taxes. It ain't peanuts, but not enough to get his or her blood boiling with tax rage.
I highlighted that last sentence for a reason: The Wall Street Journal wants you to be enraged about the taxes you pay. And if you only make $12,000, you only get taxed at around 4%, and hey, that's just not enough to make you mad. Why, I bet if the government took 10% of your income, or worse, 35% like those at the top, why you'd be as pissed off as they are, and you'd understand why we have to cut programs for the poor.
Uh, not exactly. Yes, I'd be mad - but not because I have to pay taxes. I'd be mad if, as someone whose earnings are below the poverty line, I had to pay as high a percentage of my income in taxes as someone who earned $1 million.
I did my taxes more than a month ago. It only took me a few minutes - I don't itemize deductions. I got the personal exemption and the standard deduction, of course, and qualified for the Making Work Pay Tax Credit (although not the Earned Income Credit). My tax liability was slightly more than 3% of my income (a note is in order: my income last year was slightly higher than the $12,000 in The Journal's editorial, but the tax rate was lower than the 4% they cited because the Making Work Pay Tax Credit wasn't around when they wrote that editorial in 2002).
.
And sure enough, just as The Wall Street Journal editorial predicted, my blood is not boiling with tax rage. Guess they were right, huh?
Except here's a little secret: If I were in the 35% top marginal tax bracket, I would only take the personal exemption and the standard deduction. I would not itemize any deductions. And I wouldn't qualify for either the Making Work Pay Credit or the Earned Income Credit. And my blood still would not be boiling with tax rage.
First, let me explain why I would be mad if there was a flat tax, and I had to pay the same rate as a millionaire, regardless of whether that rate was the 3% I'm paying now or the 35% the millionaire's paying now. Then I'll explain why I wouldn't be mad if I were in the 35% bracket, even if I got to take no deductions other than those two standard items. (As a bonus, I'll even explain why I wouldn't itemize deductions.)
Flat Taxes are Regressive Because...
A "regressive" tax is, stated simply, a tax which causes a low-income person to pay a higher percentage of their income than a high-income person. By that pure definition, of course, a flat tax - where everyone pays the same percentage regardless of income (I've heard 10% bandied about quite a bit) - is not regressive.
Except that it is, because of something called "marginal utility."
Let's say you're making a poverty-level income, living paycheck to paycheck. You've paid all your bills and put gas in your car. But it's the day before payday, and you've only got a few cents left in your checking account, nothing in your wallet and no food left in the fridge. A friend, taking pity on your plight, gives you $1. You can use that dollar to buy a package of Ramen noodles, a box of generic spaghetti or a small bag of rice. Thanks to that $1, you will not go hungry the night before payday.
Now let's suppose you're a multi-millionaire. You have a nice house, at least one nice car, lots of food in your high-end Sub-Zero refrigerator, and thousands of dollars in your main checking account. Someone hands you $1. You would probably look at them with a puzzled expression. What are you supposed to do with that measely dollar?
Congratulations - you now understand the concept of "marginal utility." To a millionaire, an extra dollar here or there is meaningless. To a person in poverty, it might mean the difference between going hungry or having something to eat on any given day.
Now let's say you're like me, currently paying 3% of your income in federal income tax. That means you're living below the poverty line and struggling to get by already. If you're like the average person in the Bureau of Labor Statistics' annual Consumer Expenditure Survey, you're probably spiraling deeper and deeper into debt every day just to survive. And now, instead of paying 3% of your income in taxes, you're paying 10%. Yes, you'd be angry - but if you directed your anger at the tax man, it would be misplaced. Your anger would be better directed at the idiot policymaker (or Wall Street Journal editorialist) who thought it would be a great idea to plunge you even further into poverty just to prove a point about the supposed "evil" of taxes.
Who Wants to Pay Taxes Like a Millionaire?
I do! I do!
I'm 50 years old. At my age, the chances of finding a new career, coming up with a great new invention, or writing a novel that will become a huge international phenomenon and becoming a millionaire are growing increasingly remote. It could still happen, of course. But it's becoming less and less likely.
I do put a little money aside every week (when you give up fast food for health reasons, it tends to leave you a little extra) to play the Powerball. I win a few dollars here and there. And who knows, someday I might hit the big jackpot. Or maybe I'll match the five white numbers and win $1 million. Heck, maybe I'll match four and the Powerball with a Power Play multiplier of 5 and win $50,000.
Should that ever happen (or should I write that great novel, come up with that great invention, or embark on that lucrative new career), I would gladly fork over to Uncle Sam whatever percentage he asks (the current marginal rate on $50,000 is 25%, on the other prizes it would be 35%, but if the Bush-era tax cuts are allowed to expire - and I hope they will be - those rates would be 28% and 39.6%, respectively). I wouldn't itemize deductions, or try to find loopholes, or try to shelter any of it, either. Here's why:
I believe in paying taxes. I happen to think they're a good thing. And because I understand the concept of "marginal utility," I think it's only fair that if I have more money, I should pay more taxes.
Let's put this in perspective (I'm going to use generalities here, the actual tax rate would be lower because the marginal rate is only paid on a certain percentage of income): Under the current tax system, if I won $50,000, I'd have slightly more than $37,500 left after taxes. Under the Clinton-era rates, I'd have "only" a bit more than $36,000 left. Yeah, there's some extra stuff I could buy with that extra $1,500-plus. Maybe some more debt I could pay off. But seriously, even the $36,000 is more than I make in two and half years. For me, it would be a hell of windfall.
And the million? Under current rates, I'd have a little more than $750,000 left. Under the Clinton-era rates, I'd have a little more than $604,000. Yeah, that $146,000 would buy me a really nice car. But it would take me more than 43 years at my current wage to make $604,000. I could retire on that and still live better than I do now.
I don't know about you, but I'd feel guilty driving that fancy $146,000 car, or watching a movie on a $1,500 flat-screen TV, if it meant one of my current co-workers, a single mom, would lose the assistance she needs to put a roof over her kids' heads or give them a decent dinner.
To Deduct, or Not to Deduct?
Those who rage against the income tax often cite its complexity. The current tax code is thousands and thousands of pages. People pay hundreds of dollars to hire tax accountants or attorneys to navigate this complex code. Large corporations pay millions.
Why is the tax code so complex? Because over the years, our progressive income tax has become larded down with deductions and loopholes, all designed to help those who have the time, money or knowledge to figure them out avoid paying a higher percentage of their income in taxes than those who don't have that time, money or knowledge.
I happen to think that's dumb. And worse, it's unfair. It's why, as Warren Buffett famously says, he pays a lower percentage of his income in taxes than his secretary, and why mega-corporations like Bank of America and General Electric pay no taxes at all, or get multi-million- (or even billion-) dollar tax refunds
Eliminating all, or even most, of those deductions and loopholes would make the system simpler, much less frustrating, and a lot more fair. It would also generate more revenue, while allowing everyone to pay a reasonable rate.
Some deductions might be reasonable to keep - though someone smarter than me would have to figure out which ones, and how they could be structured to keep people from taking unfair advantage of them.
I would also support lower corporate rates for companies which employ a certain percentage (with a fairly high threshhold) of their workforce in the United States. The key, it seems to me, is to restructure rates rather than create loopholes.
Okay, that's not the tax system we've got. So, if I were to become a millionaire, why wouldn't I take advantage of all those loopholes so I could keep more of "my" money?
One, I could find better things to do with my time than sweat over tax forms; and two, I'd rather see that money go toward repairing a bridge, educating a child, providing medical care for a poor person, putting a roof over the head of a homeless veteran or helping feed the kids of a single mom than using it myself to buy an expensive toy or forking it over to a tax accountant.
In other words, I want to pay my fair share.
About Those Lucky Duckies
When evaluating The Wall Street Journal's "Lucky Duckies" argument, it's important to ask oneself who the real "Lucky Duckies" are - those who pay a tiny percentage of their income in taxes but have to struggle, cut corners, or go deep into debt to make ends meet; or those who pay a much higher percentage of their income in taxes yet still manage to live quite comfortably? Which situation would you rather be in?
To buy into The Wall Street Journal's premise - that paying taxes is something to get angry about - is to buy into the Conservative/Libertarian/Tea Party meme that taxes are inherently bad, and that to levy a tax rate approaching 40% on a person with an income in the hundreds of thousands of dollars is meant to "punish" that person's success.
Unfortunately, too many liberals buy into that meme. The issue needs to be re-framed if we are to gain broad support not just for raising tax rates on the wealthy, but allowing all the Bush tax cuts to expire, reforming corporate taxes to stop tax dodges by mega-companies, restoring the estate tax, taxing capital gains as income and instituting a financial transaction tax.
The Tea Party boasts of its patriotism and worships our founding fathers, while at the same time complaining that they are "Taxed Enough Already" and thus advocating tax policies which guarantee the country's continuing decline and fly in the face of the philosophies expressed by the founders they claim to revere.
It must be pointed out to the Tea Party and everyone else that paying one's taxes is itself an act of patriotism. It must be pointed out to the Tea Party and everyone else that the founding fathers believed that government has a legitimate role in the nation's life, a role so important they thought it worth enshrining as the preamble to the Constitution: "to... establish justice, insure domestic tranquility, provide for the common defence, promote the general welfare, and secure the blessings of liberty for ourselves and our posterity." That is the founders' "mission statement," and to accomplish that, they gave Congress the "power to lay and collect taxes, duties, imposts and excises... to pay the debts and provide for the common defence and general welfare of the United States."
One assumes most Americans want to live in a society where justice is established, domestic tranquility is ensured, the common defense is provided for, the general welfare is promoted, and the blessings of liberty are secured. And if you truly revere the founding fathers you must acknowledge that they believed it was the job of government - not the private sector and not the individual - to establish, ensure, provide for, promote and secure them.
That is why paying taxes should be seen as a blessing, not a burden. And why, as long as those taxes are not confiscatory - that is, one can still provide for oneself and one's family after paying them (and, in the case of the wealthy, enjoy some of the rewards of the wealth they earned) - Tax Day should not be an occasion that gets one's blood "boiling with tax rage."
Former Supreme Court Justice Oliver Wendell Holmes said it most eloquently in a quote which today hangs over the door of the Internal Revenue Service building:
"Taxes are the price we pay for a civilized society."