Tax Time
Once again tax day is upon us. But what this day means is vastly different to many Americans and therein lies a problem. For many Americans, while preparing their income tax is a difficult and confusing task and one they often pay to have done, the reward is great. According to IRS stats the average refund on an individual return is $2,345, so it is little wonder that some look forward to tax time with anticipation.
For some, their refund is a true refund. It is the amount of money they overpaid in taxes during the year. But for many others their refund is not really a refund at all, but simply more money for them. This is because at lower income levels there are a large number of credits that are subtracted from your taxes whether or not you paid money in. As I point out in my new book, Preserving Democracy, released today, during the 2004 tax year the lowest 40% of those filing returns actually had a negative share of income taxes paid, i.e., they received more money back from the government in their refund than they paid in.
In fact the lowest 90% of those filing income tax returns either received more money back from the government than they paid, or their share of taxes paid was less than the share of income earned. For those in the 90%-95% range their share of taxes was about equal to their share of income. For those above 95% their share of taxes was higher than their share of income
The net result is vastly different views of the tax code. When the majority of people pay less than 5% of the income taxes, their reaction to policy questions such as “should income taxes be raised” is likely to be vastly different than that of the increasingly small minority who are forced to paid the majority of the bill. In 1986 the top 10% of those filing returns paid 55% of the taxes. By 2005 the burden had been shifted such that just the top five percent paid and even larger 60%. The top 1 percent paid nearly 40% of the total tax bill.
This situation was one of the specific dangers the founding fathers worried about when they set up the system of checks and balances that is the U. S. Constitution. The system of checks and balances worked well for over 100 years. Then starting about the time of World War I we began to make changes to government, and in the process undermined many of the checks and balances the founding fathers had set up.
The result has been the explosive growth in government that we saw over the last 100 years where the share of the economy consumed by government grew a staggering 459% . As a result of the removal of these checks and balances, we now have two long term trends that simply cannot continue forever, and yet seem to have no end in sight. The first is government’s consuming a growing share of the national economy. It is simply a fact that the explosive growth in government that we saw in the last century cannot be maintained, If for no other reason than if we continue at this rate, in about 200 years the government would consume 100% of the economy, leaving nothing for anyone to live on. This would be impossible, the system would collapse long before this. Unfortunately rather than slowing the growth of government, we are currently increasing even faster.
The second longer term trend is that the tax burden is being shifted onto an ever smaller percentage of the population. Not only does this make it ever harder to fix the first trend, as any attempt is immediately labeled as “tax cuts for the rich” it has many other problems. It takes a lot of work to earn money and at some point government takes so much that it is no longer worth the effort. For example, why put in long hours and weekends to earn a bonus, if the government is going to take it all? What will happen if “the rich” who pay the vast majority of taxes cut back, or are forced by government to cut back, even a bit? Who will pay the taxes if the rich are no longer rich?
Many people are happy that corporate bigwigs are not going to fancy resorts, except of course all the “average guys” who work at those resorts or whose jobs are in some way related to them. The same can be said about corporate jets, but what about all the people who build them, the pilots who fly them, the ground crews that maintain them, etc.. Not being able to fly a corporate jet may be an inconvenience for a CEO, but it can be a major problem for all those who are laid off when the CEO is no longer allowed to fly that jet.
The simple fact is that government cannot continue to grow at the rate it has grown over the last 100 years; at some point the entire system will collapse. Unfortunately, no one knows where the point of collapse is. And this is just one of the dangers I outline in my book. If you are in the ever decreasing percentage that pays the bills, you probably are already aware of much of this. However, if you see tax time as little more than a big refund check, you might do well to consider the reasons for the checks and balances the founding fathers put in place to preserve democracy and create the greatest country in the world.
