ECONOMIC ANALYSIS:

“Taxes Are What We Pay for Civilized Society”

by Sheldon H. Laskin

Progressive income taxation is based on the very reasonable principle that those who have benefited the most from living in an ordered society should contribute the most to meeting the social needs of the nation.
Many factors have contributed to the erosion of democracy in the United States-increased concentration of corporate media ownership, privatization, deregulation, globalization, etc. But one factor that progressives fail to give adequate attention to is the erosion of the progressive income tax. Increasingly, the burden of taxation in this country is being borne by the middle class for the benefit of the wealthiest Americans.This is a major reason that disparities in wealth between the richest fraction of 1% of Americans and everyone else are at all-time highs.

First, while the richest 1% of Americans-those with reported adjusted gross income (AGI) of more than $313,000 in 2000 (before the Bush tax cuts)-paid more than 37% of individual income tax that year, this is only part of the picture. When other federal taxes are included, their overall federal tax burden was about 25% of total taxes, about 21% of their reported income. And yet, the richest 1% received one-third of the benefit of the Bush tax cuts. And, while $313,000 is certainly a very nice income, people at this level hardly constitute the super-rich in America. The tax burden falls exponentially the higher up the income ladder one looks.

The shift in tax burden is so profound that it will shortly become unfixable without a general income tax increase, because fixing it will simply cost the Treasury too much.

Also, measuring the tax burden by reported income is misleading. The reported income of the very wealthy is a fraction of their total income. Unlike the typical wage earner, the very wealthy are able to take much of their income in forms that never show up on a tax return at all.

One of the major reasons the tax burden is so heavily skewed against the middle class and in favor of the very wealthy is the Social Security tax. This tax is especially burdensome to middle-income taxpayers, while amounting to petty cash for the very wealthy. Unlike the income tax, the Social Security tax applies to the first dollar of income, and the tax is capped (as of 2000) at $76,200 of income. The Social Security tax burden for someone earning $76,200 in 2000 was 12.4% (the sum of the employer and employee share). For someone earning $313,000, this tax burden was only 3%. At $1,000,000, the burden was only nine-tenths of 1%.

Further, Congress didn't cut spending to fund the Bush tax cuts; instead, it borrowed the money. To pay the bill, the middle class subsidized the income tax cuts for the very wealthy, through the Social Security trust fund. Congress routinely uses Social Security taxes in order to meet current general budget needs. In doing so, Congress leaves the Social Security trust fund with an IOU that can be paid only by increasing some combination of the income and/or the Social Security tax, or by cutting Social Security benefits. This, and not the necessity to pay retirement and disability benefits, is the source of the Social Security funding crisis. It is outrageous that the super wealthy, who contribute so little to Social Security, should be able to finance tax cuts that overwhelmingly benefit them by handing an unsecured IOU to the rest of us.

Finally, the middle class is increasingly becoming subject to the alternative minimum tax (ATM). Originally enacted to reduce the ability of the very rich to shelter income, for a variety of reasons the burden of the tax is increasingly falling disproportionately on the middle class. By 2010, people with less than $200,000 in income will pay 58.6% of the ATM, while those with $1,000,000 will pay only 6%. Comparable figures for 2003 were 19.2% and 22.5%. This shift in tax burden is so profound that it will shortly become unfixable without a general income tax increase, because fixing it will simply cost the Treasury too much.

Oliver Wendell Holmes wrote, "Taxes are what we pay for civilized society." Progressive income taxation is based on the very reasonable principle that those who have benefited the most from living in an ordered society should contribute the most to meeting the social needs of the nation. No society has long remained democratic that did not have a progressive income tax system. The unwillingness of the very rich to pay their fair share of tax is one measure of the breakdown of the social contract in this country.


The writer holds an LL.M in Taxation from the University of Baltimore, where he teaches state and local tax in the graduate tax program.


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This story was published on September 2, 2004.