There is no consensus to this question. People based upon their economic standing have widely different views. Ones that earn less money believe the rich should pay a higher tax rate. Ones earning more money believe everyone should pay the same rate. While this debate may continue, what is not debatable is that our current federal tax system is not fair nor equitable.
It isn’t the tax rate that matters the most, it is the tax breaks and credits that are littered throughout the tax code that makes the biggest impact.
Approximately 40% of American households don’t pay any federal income taxes. On the flip side, billionaires and enormous prosperous companies pay little or no federal taxes. The middle class gets screwed again in our political system.
From 2014-2018, the top 25 richest Americans paid an average of 3.4% federal income tax while the rest of Americans averaged 14%. Jeff Bezos paid a true tax rate of 0.98%, Elon Musk 3.27% and Warren Buffet 10%. In 2007, Bezos paid no federal income tax, the same for Musk in 2018.
According to a 2021 study, the wealthiest 400 billionaire families paid an average federal individual tax rate of just 8.2%, while the average American taxpayer paid 13%.
Nineteen of the biggest American corporations paid little or no federal income taxes in 2021, according to the Center for American Progress, even though US companies enjoyed one of their most profitable years since 1950.
General Motors paid two-tenths of 1% in taxes, Exxon Mobile paid 2.1%, Bank of America paid 3.5%, and Amazon paid 6.1%. AT&T, Charter Communications, American International Group (AIG), and Dow are all getting tax refunds, after making millions in profits.
Why has Congress allowed this to happen? Why haven’t they changed the tax code to eliminate loopholes, tax credits and tax deductions that result in this travesty. The answer is simple. A majority of politicians care more about being re-elected and staying in power than doing what is fair and right for the American people. These individuals and companies spend hundreds of millions of dollars each election getting people elected who will maintain this absurdity.
Why haven’t Americans raised up and demanded an end to this? It could be that not enough understand how badly they are getting screwed and falsely believe the alternatives are worse. Every tax system has certain inequities. Every time a different system is broached as a replacement, tens of millions of dollars are spent attacking these inequities.
What is more inequitable than a person making billions of dollars a year and paying less than 1% in taxes while a schoolteacher earning $60,000 per year is paying 15% in taxes.
This past January, Republicans introduced the Fair Tax Act of 2023 in Congress. This bill imposes a national sales tax on the use or consumption of property or services in lieu of the current income taxes, payroll taxes, and estate and gift taxes. The rate of the sales tax would be 23% in 2025. Family members who are lawful U.S. residents would receive a monthly sales tax rebate, called a “Family Consumption Allowance”, based upon a criterion related to family size and poverty guidelines.
The Fair Tax is progressive. The rich would pay more taxes because they spend more money. It assures the Bezos of the world actually pay federal income tax. In fact, it assures everyone would pay taxes, even those working under the table and those earning income illegally. The Family Consumption Allowance protects the poor. It would eliminate the IRS and save taxpayers the $12.319 billion currently budgeted to the IRS. Many taxpayers would no longer need to pay an accountant or other tax preparer and no taxpayer would be required to file a tax return.
There are problems with this system. The bill provides for several exemptions, one of which is for property or services purchased for business, export, or investment purposes. Will this exemption result in businesses paying no federal taxes? American businesses receive a huge benefit from the infrastructure our federal taxes provide. Why exempt investment purposes? It results in income to the investor. Anytime Congress starts making exemptions to taxes the exemptions expand to protect the rich and powerful?
Would this system encourage people who have the financial wherewithal to purchase more goods outside the US to avoid this tax?
Another alternative widely discussed is the Flat Tax. The Flat Tax provides for a single tax rate applied to every taxpayer regardless of income. Typically, a flat tax involves no deductions or exemptions. Under this scenario everyone would pay a proportionate tax based upon their earnings, except those working under the table and those earning income illegally. It would also eliminate the IRS and the need for Americans to file a tax return.
There are problems with this system as well. I believe Americans living in poverty need a helping hand up and they should not pay federal taxes until they are.
Most Flat Tax proposals do not tax income from dividends, distributions, capital gains, or other investments. Income from passive investments is income to the person who earns it. Why should a person digging a ditch pay taxes on his/her salary but a person who invests in stock or real estate not pay taxes on theirs? A fair and equitable system taxes all income.
As with the Fair Tax, some politicians have proposed certain deductions in this system as well. It is this intrusive desire by politicians to control money that corrupts the tax system.
Critics of the Flat Tax argue that the system effectively penalizes lower-income earners since they pay the same tax rate as a higher-income earners. However, no system penalizes lower and middle-income workers more than our current system.
Next week I am going to discuss several of the tax breaks, exemptions and subsidies that permeate our tax code allowing billionaires and their companies to pay little to no federal income tax.