Today slightly more federal revenues are collected from payroll taxes than all the sources of federal income taxes combined including capital gains and corporate taxes. How we got to this point was because of a decades long Republican economic strategy to shift the cost of government off the wealthy and onto the middle classes. Their primary mechanism has always been to increase payroll taxes and simultaneously reduce the top income tax marginal rates and/or give specific tax breaks to wealthy individuals or corporations. The Bush/Cheney administration also reduced the capital gains and eliminated the inheritance tax for the investment class as part of the infamous Bush tax cuts. We not only need to shift the real federal tax burden off the average American and back upwards but we must also dismantle this mechanism so it cannot be utilized in the future.
Please follow below the fold for my ideas on putting progressive back into the federal tax system and keeping it there.
Most Americans are being double taxed on their gross earnings.
If you earn a paycheck like most Americans you pay payroll taxes both directly and indirectly. Because Payroll taxes increases the cost of payroll the costs of these taxes are included like any other business cost in the price the customer pays. Payroll taxes are by far the largest single component of the all the hidden indirect taxes that inflates the price of every product/service sold in America by an average of 15%. The costs of both your gross payroll including the payroll taxes you directly pay and the employer's contribution to payroll taxes are just another part of the cost of doing business, all these costs become embedded in the price the final consumer pays.
We don't need a VAT tax we already have one.
All taxes assessed against any business are passed along in the price of the product/service that business provides at every level of production and transportation until it reaches the final consumer. The cumulative costs of these embedded taxes are passed along to the final consumer. If the customer is another business that cost gets passed to their customer until the customer is one of the 80% of Americans that take home a paycheck. The average American wage earner cannot pass their costs along to anyone else. The wage earner is always the final payer of all these hidden embedded indirect taxes. The only difference between our 15% embedded taxes and the VAT is most Americans do not realize they are paying it. In the european VAT tax the costs of the cumulative taxes are calculated at the register and shown on their retail receipts. We have a hidden embedded tax because this is how the rich and powerful shifted much of the cost of government off of them and onto us. Those of us that cannot pass our costs along to another now pay this average 15% tax on everything we purchase including basic necessities before we get credit for paying one penny of our own direct taxes.
Time to make a change.
Robert Reich suggested that we should give a People's Tax Cut by untaxing payroll taxes on wages/salaries up to $20K and then access payroll taxes to those with incomes over $250K as well to maintain the same federal revenues. This is a very good idea but again tax cuts are not good enough we need to shift the entire real tax burden. I believe we should shift the entire costs of our current payroll taxes completely off the gross earnings of the employees and onto the gross business receipts of every business. The cost of this tax will be still passed along to the businesses customer and ultimately to the wage earner but the rate would be greatly reduced and the employee would only be required to pay the indirect taxes. Since the total gross business receipts are at least 3-4 times more that the total gross payroll earnings the rate could be easily be between 3-5% to replace the revenues from the more than 15% of the current taxes on our jobs.
By shifting the cost of the payroll taxes off the gross earnings of the employee and onto the gross receipts of all businesses we would deny this mechanism to shift the real tax burden off the rich and powerful in the future. They would have to increase the tax rate on gross business receipts instead. Even though the wage earner does pay the final cost of this tax the business owner actually remits the tax to the government. A small rate increase in the gross business receipts tax would cost big business far more tax dollars that a small business with much smaller gross receipts . Increasing the tax on gross business receipts to shift the cost of government of the wealthy would not be very popular with their base at all.
The federal income tax needs to be reformed too.
If the federal income tax were reformed by increasing the minimum taxable income from the current $400 to $75,000 no deductions, credits, shelters or any other way to game the system would be necessary. Everyone including corporations and Wall Street gamblers would be required to pay the same progressive marginal tax rates on all their income no matter the source over $75K. Since business income taxes are assessed upon their profits before the profits are actually distributed to shareholders and/or ownership, there will be no place to hide their actual taxable income. Billions of dollars would stay circulating in the economy instead of flowing off-shore like they do in the current system.
This would add tax pressure to larger businesses to breakup into smaller businesses which would ultimately compete with each other for both market share and quality employees. Along with the shifting the cost of payroll taxes off the employee this resulting increase in business competition would further drive back up wages to their pre-Reagan equivalence. The current federal tax structure exerts the exact opposite economic pressures. Now real effective tax rates are reduced as the business grows larger. It is currently more profitable to merge into 'too big to fail corporations' that extracts billions of dollars in profits from our economy and pay little or no taxes.
Shifting the real cost of government back upward in this way would not only be good for the average American citizen it would also be very good for business competition and our economy. The small business would be allowed to grow with lower tax rates than the big box stores instead of the big boys getting all the breaks like it is now. A truly progressive tax system would allow for a more competitive business environment top to bottom. This would also allow the 80% of Americans that bring home a paycheck to bring home 25% more income. This would inject billions of payroll dollars into local economies, putting much more available income into the hands of every businesses customer. The economy would be rebuilt from the ground up into one with a much larger and vibrant middle class once again.
A Financial Transaction Tax of 0.5% would stabilize Wall Street.
We could have avoided decades of the boom and bust cycles in our economy if this tax were instituted when it was first proposed in 1972. This tax would also generate around $1.3 trillion/yr in federal revenues which we could be using to rebuild our infrastructure and paying down our national debt.