Monday, September 5, 2011

Thinking about the income tax

Headlines this month announced that nearly half of U.S. households will not pay federal income tax this year. Reaching for impact, the articles sometimes de-emphasized the numerous other taxes that people pay (payroll taxes for Social Security and Medicare, sales tax, state income tax, federal taxes on gas and cigarettes, sales taxes, excise taxes, etc.). (Stephen Ohlemacher, “Nearly half of US households escape fed income tax,” Washington Post, April 7, 2010)

The non-payment by this half of the population is not a function of non-compliance. Instead, by combing the standard deduction, four exemptions, and tax credits a family of two adults and two children under seventeen with an income of $50,000 owes no federal income tax for 2009.

Some predictably declared this non-payment of federal income tax scandalous: the rich pay a disproportionate share of the tax; beneath the non-payment of federal income tax lies creeping socialism; etc. Others predictably supported the tax policies that allow the poor and relatively poor to keep more of their income.

Let me offer a more nuanced view. First, most employed people should pay at least a modicum of federal income tax, e.g., half a percent of their income. The U.S. should sufficiently streamline and simplify its tax laws and regulations that persons and households with average income do not need to hire a tax preparer to file an accurate return and to pay the minimum tax due. The government could then collect the money now spent on tax preparation as tax revenue, leaving the taxpayer no worse off financially.

The federal income tax code is now about 70,000 pages long and Americans spend 7.6 billion hours coping with it. Imagine the gain in productivity if that time could be redirected toward a more constructive use! Eighty-two percent of Americans now pay for help in preparing their taxes. Even the director of the Internal Revenue Service – the man responsible for administering tax collection – pays someone else to prepare his taxes. (“April 15th: The joy of tax,” The Economist, April 8, 2010) Although simplifying the tax code would adversely effect the tax preparation and tax law industries, the increased compliance from a simpler system should be well worth the economic dislocation.

Furthermore, paying some amount of income tax would give everyone a stake in government. Government of and by the people becomes more real when people financially contribute to government operations. For example, one-half of one percent of $50,000 is $250, not a huge sum, but something.

Second, people who earn more should pay relatively more than people who learn less, i.e., the nation should have a progressive tax structure. Flat tax proposals in which everybody would pay the same percentage of income in tax discriminate against low- and middle-income people. Excluding dividends and interest from taxation further discriminates against low- and middle-income people because they generally receive the lowest percentage of their incomes from such sources.

Mere existence (food, shelter, clothing, and healthcare) requires some level of income. Quality of life frequently improves as one spends more on those items and on other, discretionary items, e.g., vacations and toys. A nation that truly values all of its citizens will ensure that all have adequate means by which to pay for some minimum standard of living. Nations can achieve this through a variety of welfare programs. Tax policy contributes to this goal by taxing the wealthy more heavily than the poor.

The Christian Bible does not directly speak to tax policy. However, the Bible repeatedly underscores the importance of justice. No person chooses the family into which to be born or the family that raises him or her. Treating my neighbor equitably requires that I consider how I would feel if born with different genes or reared in a different neighborhood. Some wealth differences are a matter of individual effort and initiative. Most wealth differences are a function of matters over which individuals have no control, a truth that Malcolm Gladwell’s Outliers emphasizes in a highly accessible yet thoroughly researched manner.

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