Many Americans would like to pay less in taxes. That desire is a major motivating force behind the Tea Party revolt at the right end of the political spectrum. But I’m sure many liberals would also like to have their tax burden reduced. In the interest of bringing these two sides of our partisan political debates closer together, I propose that everybody get behind the following three ways to reduce the tax burdens of most Americans.
1. Do a better job of collecting the taxes that Americans owe. Every year about $385 billion in tax revenues are not paid. During fiscal year 2013, the US government collected $2.77 trillion in tax revenues, meaning that about 12% of what should have been collected wasn’t. Those uncollected taxes would considerably reduce the budget deficit and the resulting federal debt.
Who doesn’t pay their taxes? Most Americans would be easily caught if we cheated: our income is reported by employers on W-2's. Joe Antenucci, professor of accounting and finance at Youngstown State University, offers this profile of the typical tax cheat: “male, under age 50 in a high tax bracket with a complex return.” The most common method of cheating is to overstate church donations. But the most profitable methods involve hiding big incomes illegally. This year, Swiss bank Credit Suisse pleaded guilty to helping wealthy Americans hide billions of dollars from US tax collectors in foreign bank accounts, and will pay $2.6 billion in fines. Such methods are only open to the wealthiest Americans.
How can we stop such cheating, increase legal tax collections, and reduce the burden on the rest of us? Not by decreasing the enforcement budget of the IRS. Cuts in the IRS budget demanded by Congressional Republicans have reduced its staff by about 8000 people over the past four years, and thus reduced its ability to catch cheaters. As the IRS budget has dropped, so have the number of audits. I have read many different estimates of how much new revenue each additional dollar invested in IRS enforcement brings, ranging from $4 to $10. But it’s clear that increasing the IRS enforcement budget decreases the deficit and thus could contribute to lowering our tax rates.
2. Reduce some tax loopholes. There is always discussion about “tax loopholes”, legal ways that people avoid paying taxes. Congressional Republicans have recently talked about ending the loophole that allows homeowners to deduct mortgage interest. That would significantly increase the taxes paid by most middle-class Americans. But they haven’t talked about ending some amazing loopholes that benefit only the very wealthy. For example, in 1993 Congress passed legislation designed to prevent corporations from deducting giant salaries for their executives as expenses. But a loophole in the law exempted so-called “performance pay”, including stock options. Over the past 6 years, Walmart has claimed a deduction for $298 million in “performance pay” for its eight top executives, reducing its tax burden by $104 million. Multiply that by all the giant corporations that employ this loophole, and the result is a lot of money that must be made up by the rest of us.
Here’s another loophole. The biggest American pharmacy chain, Walgreens, is considering becoming the biggest Swiss pharmacy. If Walgreens, currently located in Illinois, reincorporates in Switzerland, its tax rate would be considerably reduced. In 2012, Illinois gave Walgreens $46 million in corporate income tax credits in exchange for a pledge to stay here for 10 years. Walgreens may not make the jump, but many other big US corporations have “moved” to tax havens like Switzerland and Ireland. Profits from American consumers end up as taxes elsewhere.
3. Make all income equal. Unlike the great majority of ordinary taxpayers, people whose income consists mainly of capital gains pay a much lower tax rate. Capital gains are taxed at 15%, or 20% for those who make above $400,000, while their rate for other income is 39.6%. In 2011 it was reported that billionaire Warren Buffett paid the lowest tax rate of anyone in his office, including his receptionist. Nearly all of the capital gains tax benefit goes to people with annual incomes over $1 million. Here’s the result: in 2007, the richest 400 households by income, who each made over $340 million that year, paid the same tax rate as those earning $50,000 to $75,000. The annual cost in tax revenues is about $40 billion.
We could have the same governmental services that we have now and pay less taxes if just these three changes were implemented. Or we could have somewhat more services (like better roads), and still pay less. We might feel better, too, because all Americans would be treated more equally.
What’s in the way? Each of these changes would benefit only 90% or 95% or 99% of Americans. The extra revenue from catching tax cheaters, from closing those loopholes, and from treating all income equally would mostly come from the richest 1%. They are a tiny minority, but they have the greatest influence. Their fellow millionaires in the Senate and the House are easily persuaded by the trickle-down economic theories which defend these tax breaks. Their personal connections to Congress through big donations and their lobbying groups magnify their voices. That’s not going to change unless the rest of us speak louder.
Published in the Jacksonville Journal-Courier, July 15, 2014