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A Call For A More Fair Tax Code

Bill Knight

The tax code has eroded over the years so it’s no longer progressive – in the sense that more affluent citizens and profitable businesses pay more (what they have left is still a fortune). Now, tax law is filled with loopholes, exemptions and allowances that let some successful corporations pay less to the treasury than they pay their own CEOs.

 Republican presidential contender Mitt Romney conceded that his average tax rate is 15 percent on annual income of $21.6 million (in 2010) – about the same as a household making $40,000 or $50,000 in annual income. But billionaire businessman Warren Buffett – who notes that his tax rate is 17.4 percent (a lot lower than the 36 percent tax rate non-wealthy Americans typically pay) – has called for a 5.6 percent surtax or 30 percent tax rate on millionaires.

 A report by the nonpartisan Congressional Research Service, “An Analysis of the ‘Buffett Rule’,” analyzes how taxable income is determined, different tax rates, and how a surcharge on millionaires would affect job creation and savings rates. The analysis shows that U.S. taxpayers with annual incomes less than $100,000 pay an average of 35 percent of their income in taxes, while 65 percent of millionaires pay on average less than 30 percent of their income.

However, when examined using Adjusted Gross Income figures (using various loopholes), “…roughly one-quarter of all millionaires (about 94,000 taxpayers) face a tax rate that is lower than the tax rate faced by 10 million moderate-income taxpayers (10 percent of all moderate- income taxpayers).

 Researchers said, “A large proportion of millionaires pay a smaller percentage of their income in taxes than a significant proportion of moderate-income taxpayers.”

 Some business lobbyists such as the U.S. Chamber of Commerce say the Buffett Rule would hurt small businesses. But of the small businesses reporting income, 74 percent earn below $100,000 annually and 72 percent (many sole proprietors and business owners) also report income in addition to their own business, the report shows. This means that “the small share of taxpayers with small-business income in the millionaire category suggests that tax reform policies designed to ensure adherence to the Buffett Rule will affect few small businesses.”

 Regarding the effect of letting the Bush era tax cuts expire, the report concludes that such “reforms are unlikely to affect many small businesses or to deter saving and investment.”

 The elite’s mouthpieces on Capitol Hill argue that labor advocates, scholars or tax reformers, “never had to risk capital,” or “never worked in the REAL world,” or “never met a payroll” like the 1 percent. But the public still likes the idea of shared sacrifice, according to a United Technologies-National Journal Congressional Connection poll conducted this winter. It found that 76 percent of Americans support the Buffett Rule, versus only 19 percent who are against it. So opponents and defenders of the 1 percent resort to misleading attacks.

 One is to criticize Buffett himself. “Send in your money,” GOP cronies of the rich sneer. Of course, Buffett never said he would like to pay higher tax rates, just that the richest of the rich should do their part.

 Another study – 2011’s “Progressive Taxation and the Subjective Well-Being of Nations,” published in Psychological Science – evaluates the impact of progressive taxation (again, a higher tax rate for the rich and a lower one for the poor) on levels of satisfaction and well-being. Progressive taxation is positively associated with people’s overall well-being and satisfaction with daily life, and the link between higher levels of well-being and more progressive taxation “was mediated by citizens’ satisfaction with public goods, such as education and public transportation.” Such public services, of course, are funded in large part by progressive taxes.

 However, that appeal may be doomed, according to even more research, this showing that wealth breeds selfishness. The University of Minnesota experimented on more than 1,000 people with yearly incomes between $16,000 and $150,000, and he found that those with the most money were the most likely to cheat.

 One of the Minnesota researchers told, “They feel entitled and want to get ahead.”

 So, Diane Lim Rogers of the nonpartisan Concord Coalition on fiscal responsibility suggests an alternative: “tax capital gains and dividends at the same rate as labor income, or limit itemized deductions so that the rich do not receive higher subsidies than middle-income households. We could start by letting all of the Bush tax cuts expire, as already scheduled under current law.”

 U.S. Rep. Sander Levin, a Michigan Democrat, agrees. He introduced the Carried Interest Fairness Act this winter, a bill to close the loophole that lets people who manage other people’s money pay just 15 percent tax on their income, compared with the up-to-35- percent many Americans pay on their income.

Levin said, “There is … no reason why income earned for managing other people’s money shouldn’t be taxed in the same way as income earned teaching or working in a factory. This loophole for years has unfairly enabled some of the highest-paid individuals in the country to sharply reduce their tax bills and it is time to close it once and for all.”

Bill Knight is a freelance writer who teaches at Western Illinois University. The opinions expressed are not necessarily those of WIU or Tri States Public Radio.