Tax system alarmingly progressive, yet politicians clamor for more

  • Follow Opinion columns

The recent frank exchange between professional golfer Phil Mickelson and the media about his opinion on taxes highlights several problems: According to the media, it is inappropriate for a leading sports figure to express his personal value judgments, while it is quite appropriate for liberal pundits to hit anyone over the head, including Tiger Woods, with their values.

Whenever taxes are increased, they tirelessly advise us that taxpayers would not react significantly to avoid them – i.e., they would not move to low-tax states. But since the responses of these golfers are embarrassing, the media must reprehend athletes for behaving contrary to liberal values – yes, those moral standards that emanate from the high priests who always occupy society’s highest moral plane.

WE CONSTANTLY are bombarded with allegations of inadequate taxation of the so-called “rich.” But why the need to soak the wealthy when the federal tax structure, in addition to the personal income tax, is riddled with so many painful progressive levies? Instead of compromising, President Obama demands more blood.

But rates and the personal income tax are only part of the entire tax story.

Our total federal tax system consists of the infamous individual income tax, plus all other taxes, levies, excises and assessments that man can think of, many of which are income-based. While no liberal has ever offered a precise definition of a fair progressive tax (providing a mere numerical example is not a definition), to judge the total fairness of our system it is first necessary to understand the extent to which people are subject to other income-based taxes, not just the income tax.

AS WILL BE shown, this overall tax structure is much more progressive than appears at first blush. Moreover, as treated later, our welfare-means-tested programs create perverse work-incentive problems among beneficiaries. In sum, we raise tax revenue through investment-incentive destroying progressive taxes to be distributed to welfare programs that are, in turn, work-incentive-destroying.

Let us first investigate the hidden progressiveness in Uncle Sam’s personal tax-rate schedule. The United States has a progressive tax structure in that, as personal income rises, the amount of income in each tax bracket becomes subject to higher and higher tax rates. The individual calculates taxes for each bracket, which are then summed to produce his total tax.

Even though the tax brackets provide for overt progressivism, the tax code increases progressiveness by altering the definition of taxable income as gross income increases. Reading an IRS Form 1040 reveals the amazing number of ways progressiveness is introduced aside from changing rates.

ONE IMPORTANT path is to subject deductions from gross income to a phase-out rule as gross income increases. Diminishing deductions obviously means higher, not lower, taxable income and hence higher taxes.

This type of stealth progression is not confined to deductions. Personal exemptions are subject to a similar rule, yielding more progressiveness. The alternative minimum tax – or, more correctly, the alternative maximum tax – adds to progressiveness. And everybody is aware that Social Security Payments are subject to income taxes when certain income tests are met. Because it reduces net income taxes paid at low-income levels, even the Earned Income Tax Credit contributes to overall progressiveness.

Add up these instances of stealth and the total degree of progressiveness becomes alarming. This is not all.

Another group of revenue-raising levies constitutes, in effect, de facto income taxes because they are income based. These taxes kick in if the taxpayer participates in a given program. For these participants, they further magnify the progressiveness in the tax structure. An example is the Medicare premium. Medicare Plan B is optional, but choosing it requires taxpayer acceptance of additional taxes.

Here is why. The Medicare premium is assessed as follows: For example, for the year 2012 the mandatory premium is $1,198.80. But those with an adjusted gross income (AGI) plus tax-exempt income in the year 2011 that exceeds $85,000 ($170,000 for joint filers), are socked with an income-based extra premium. For instance, suppose a person in the year 2012 is charged an annual premium of $3,836.40.

THIS SUM MUST consist of two parts: The basic premium ($1198.80) plus an added premium of $2,637.60 ($3,836.40 - $1,198.80), not because the insured is a medical disaster but because his AGI, plus tax-exempt interest for the year 2011 exceeded $85,000. Since this extra premium is purely income-based, it is a de facto income tax despite semantic obfuscations that may be offered by judicial authorities.

To add insult to injury, this premium (tax) also is subject to ordinary personal taxes in the year 2012, even though the premium is subject to deductibility if an elderly filer’s total medical expenses, including Medicare premiums, exceed 7.5 percent of AGI and the filer is at least 65 years old. Taxpayers not qualifying are not allowed to deduct the Medicare premium and, while unbelievable, such filers will be taxed in 2012 on their total premium. Because the extra premium is a tax, in itself, this additional tax becomes a tax on a tax, which can only occur in government.

STILL ANOTHER progressive tax is added if the insured chooses Medicare Plan D as well. Since the added Medicare tax applies only to well-off taxpayers, it contributes to overall progressiveness.

Capital gains, dividends, and interest income in
2014 become subject to a surtax of 3.8 percent for joint filers with incomes over $250,000. This not-so-well hidden bite adds to progressiveness.

In addition, veterans eligible for health-care benefits are subject to an income-based fee structure. As the patient’s income increases, fees for medical procedures are charged, and since they are income-based they are a de facto income tax. The reader can easily find more examples of either income-based fees or welfare benefits that decline with income. All means-tested benefit programs consist, by definition, of an income-based procedure.

THE EQUIVALENT of progressive taxes is found in our welfare system. This design is based on the principle that as recipients earn more income, the amount of their entitlements decreases (e.g., Medicaid services, food stamps, child care). Not only does this amount to a progressive tax on the poor, it also provides significant incentives for them not to work.

Our social system is
permeated, in a broad sense, with a heavily burdensome progressivism. By reducing rewards from productive effort, it severely dampens investment risk-taking, the nerve center
for creating more employment, and by discouraging welfare recipients from working, it increases unemployment.

Something is very much remiss here. Are we just guaranteeing a no-growth, socialist economy where the only opportunities for innovative entrepreneurs lie virtually in performing as “crony capitalists”?

(The writer is a professor emeritus of financial economics at the University of Georgia. He lives in Aiken, S.C.)

Comments (14)

Add comment
ADVISORY: Users are solely responsible for opinions they post here and for following agreed-upon rules of civility. Posts and comments do not reflect the views of this site. Posts and comments are automatically checked for inappropriate language, but readers might find some comments offensive or inaccurate. If you believe a comment violates our rules, click the "Flag as offensive" link below the comment.
burninater
6830
Points
burninater 03/03/13 - 04:19 am
4
5

This "analysis" deliberately

This "analysis" deliberately ignores key factors to create a fallacious model of real-world behavior. Specifically, it bases its case on the entirely false premise that real and taxable incomes are equal. Any 18 year-old filing their first Federal return can tell you this is not the case, and I am somewhat surprised and embarrassed for the good doctor for making such a transparently obvious blunder.

A claimed tax burden that ignores DEDUCTIONS, SHELTERS, and EFFECTIVE tax rates is inherently fallacious. Conclusions drawn from that fallacious claim are worse than incorrect, as they deliberately seek to mislead.

What did Romney, for example, ACTUALLY pay in Federal taxes over the past decade? Approximately 14%, we can conclude from information released by his preparer. This is "alarmingly progressive"? Rubbish.

Rhetor
862
Points
Rhetor 03/03/13 - 07:43 am
4
5

sort of...

On the one hand, the column's points are true, but this article is very misleading. In particular, the tax system does indeed include some perverse incentives that need prompt attention. However, the payroll tax, which is quite substantial, is highly regressive, as is the sales tax. Many rich people get much of their money from capital gains, which are taxed very favorably. Worse, much capital gains income is never taxed at all. I.e., if you get rich, invest wisely or luckily, and give the assets to your heirs, the income is never taxed at all! That's because capital gains are taxed only when you cash them in. There's no inheritance tax, and the heirs pay taxes on the basis as of the date of the inheritance, not the date of purchase. If the column's argument is that our tax system is a mess, I'd agree. But if the argument is that the rich are paying more than their fair percentage based on their wealth and income, my response is to snort and to say that this is nonsense. Indeed, one of the tax system's perverse consequences has to encourage a massive redistribution of wealth toward a tiny percentage of the people. These people pay the bulk of the taxes, not because the system is progressive, but because they own so much. If they paid their fair share, they'd pay even more. So, I agree with the comment above. Rubbish.

deestafford
18397
Points
deestafford 03/03/13 - 09:53 am
5
2

We have one of the most, if not the most,

ineffecient, punitive, and disincentive tax systems in the world. It's so complicated that no one really understands it. It punishes achievement and hampers growth and entreupreneurship. The tax burden is on the achievers and rewards the moochers. It is loved by the politicians because it is the source of much of their power. As Dr Carson asked in the prayer breakfast, "Why should paying taxes be designed to hurt someone because he is successful?" Liberals are never satisfied with the amount of taxes paid by the achievers. Study the history of the income tax and how it was sold to the public and then how with in four years the politicians had the rates skyrocketing. Read why FDR wanted to tax the "rich" at 100% and couldn't understand why he couldn't/shouldn't when his advisors tried to explain to himm why it wouldn't work. Every time taxes have been lowered--under Coolidge, JFK, Reagan, and GW Bush--income to the government INCREASED. As Reagan so often said, "If you want more of something decrease taxes on it. If you want less of something increase taxes on it." We should not tax income. We should tax consumption. The best tax system would be the Fair Tax. It's developement has had more money devoted to its developement ($22M) than any proposed program in US history. It would make us the envy and the fastest growing country economically in the world. Herman Cain's 9-9-9 program was a transition step to the Fair Tax and its lack of understanding showed the ignorance of the progressives/liberals in the way they tried to tear it down...along with some static, establishment Republicans.

soapy_725
43306
Points
soapy_725 03/03/13 - 09:58 am
0
0

The Effective Tax Rate % is the only one that matters.

Unpublished

What total amount of money was transferred from the taxpayer to the IRS. Divided by the gross amount of all income from all sources received by the taxpayer. You could be in the 35% Tax Bracket but only have a tax obligation of 2%. Maximize the percentage of your money you get to KEEP. The IRS is certainly doing their best to remove your money from your pocket.

The Effective Tax Rate % is where the fair rubber meets the road.

Been there, done that as a retiree with a lot of years to go. When you have done all that you can do to maximize your return on investment, you do all you can to reduce your overall tax liability.

The middle class working men and women have amassed billions in tax deferred retirement plans over the last five decades. The federal government wants this money. They want it now. They want it because it represent freedom and self reliance. The federal government wants all citizens to be on the government pay system.

chascushman
6653
Points
chascushman 03/03/13 - 10:14 am
3
2

Dr. Beranek, you are correct

Unpublished

Dr. Beranek, you are correct but it seems that the class warfare that is being lead by Obama is working very well indeed.
“These people pay the bulk of the taxes, not because the system is progressive, but because they own so much.”

dichotomy
26705
Points
dichotomy 03/03/13 - 11:13 am
8
2

Hey Prof.......you lost the

Hey Prof.......you lost the liberals since you used facts, numbers, and mathematics.

Here's their rule.....if the government needs more money to pay for socialists nanny state programs, the rich people have to pay more.

Me, I want to start taxing the poor. As long as we have half of the population not paying any federal taxes, those folks don't give a damn how the government is spending taxPAYER'S money. If we made them drop a little something in the bucket they would start paying attention to who they vote for and how they spend OUR money.

carcraft
20738
Points
carcraft 03/03/13 - 11:23 am
2
2

I guess 50% of the population

I guess 50% of the population paying nothing (and in many cases receiving earned income tax credit ie. Wealth distribution) is really a fair system! People change behavior to avoid negative consequences Like taxes look at John Kerry docking his yatch in New Jersey to avoid Massachusetts taxes! Look at Charlie Rangle cheating on his taxes. Yet thier are people that still think Obama wanting even more taxes is a good idea.

ymnbde
7526
Points
ymnbde 03/03/13 - 11:36 am
6
2

taxes and deception

my goodness... everyone should know that capital gains is money that has been put at risk by allowing others to use the money for their own good. The owner of the money can potentially benefit from the risk, or lose everything.
Capital gains shouldn't be taxed at all.
Romney put his money at risk. The average taxpayer never puts his labor at risk.
Burninator knows that, and his post is either deliberately deceptive, or he has been a useful victim of the deceptions of others.
And the writer of the article didn't even include the unborn taxpayers, who owe money at birth due to the government's malicious borrowing.
How can a citizen be born free yet already owing so much money?
This was a very clear, true, and well-written article. I wish Mr. Baranek would write more often.

carcraft
20738
Points
carcraft 03/03/13 - 11:43 am
5
2

Of course capital gains are

Of course capital gains are taxed at a lower rate! There are two reasons. The first reason is that it is return on investment money that has been put at risk! We need to go no further than Obama's tax payer funded investment into green energy to realizes that these investments don't always work out. The second reason is that this money has already been taxed once. Say I own 10% of Gold Rush mines inc. The corperation earn $10,000 dollars. The corperation then pays taxs on the profits of about 12%. I then receive $880.00 of which I pay 12% . The effective tax rate is 24%. Investment in businesses if done wisely (instead of like Obama's green energy BS) can stimulate the economy, Home Depot created over 1000 millionaires. Romney's income was mainly from capital gains which is why he was taxed at 14%. I wonder what the green energy companies like Fisker Motors paid in US taxes? BWAHAHAHAHA

carcraft
20738
Points
carcraft 03/03/13 - 11:47 am
4
1

The co founder of Face book

The co founder of Face book moved to Singapore and became a citizen of Singapore to avoid US capital gains taxes. Singapore does not tax capital gains. The US has the highest corperate tax rate in the world!

gargoyle
10262
Points
gargoyle 03/03/13 - 02:01 pm
4
0

Taxation was originally the

Taxation was originally the rein which government used to control the economy. Now taxation is the whip used by by government to punish the economy.

Taxation acts as a brake on the economy. When the ecomony is speeding ahead, increase the taxes. HOWEVER when the economy is barely limping along, the taxes need to decrease.

Young Fred
13778
Points
Young Fred 03/03/13 - 03:30 pm
4
0

burninator and Rhetor both

burninator and Rhetor both make a few false assumptions.

As the good Dr's editorial probably lost most with his fact and figures I'll try to make mine short, but can expand if challenged.

First, real and taxable incomes are not equal, but they are close for the vast majority of taxpayers. The problem is that tax laws targeting multimillionaires, overcompensate and hurt the small businessman.

And as the good Dr pointed out - “DEDUCTIONS, SHELTERS, and EFFECTIVE tax rates” are limited, effectively phased out as your income climbs.

Capital gains are taxed at a lower rate, not just for the reasons stated but also for the time value of money, ie inflation.

To state there is no inheritance tax is a flat out inaccuracy. Not only is there an inheritance tax, but that tax is one of the most EVIL tax subjected on a free society. A tax based on nothing more than envy, totally devoid of reality.

chascushman
6653
Points
chascushman 03/03/13 - 04:33 pm
4
1

Well said Young Fred, Obama

Unpublished

Well said Young Fred, Obama is all about redistribution of wealth. Obama believes that the evil white man got there money off the backs of black people and this country stole its wealth from poor countries. He believes it is his job to correct that even if it destroys this country.

KSL
106062
Points
KSL 03/04/13 - 01:33 am
1
1

Would the income tax

Would the income tax amendment been passed without the original exemptions and deductions?

Darby
19255
Points
Darby 03/06/13 - 01:05 pm
1
0

Any way you slice it.....

a progressive tax is nothing more than a way to punish success and reward failure.
.

Those with their hands out, support a progressive system. They have never made it on their own and expect the government to prop them up. You know who you are!

Those who make good use of their hands (and minds) don't. With the possible exception of folks like Warren Buffett who have so many layers of protection (some call them loopholes) over their fortunes that they would prefer the benefits of political insulation in exchange for higher taxes which they won't pay anyway.

Darby
19255
Points
Darby 03/06/13 - 01:13 pm
1
0

"Obama believes that the evil white man got....

their money off the backs of black people and this country stole its wealth from poor countries."
.
That's just what he wants his base to think he believes. If he actually believed it, that would make him, more or less, an honest man.

In truth, he is a devious, malevolent, insidious power hungry liar and manipulator with little regard for the truth or for justice.

The pursuit of power and personal wealth is his true objective.

Gary Ross
3346
Points
Gary Ross 03/06/13 - 08:03 pm
0
0

What is fair?

Life is all about choices. We used to be able to succeed or fail based on those choices, but not any more. My brother spent a lifetime soaking his brain cells in alcohol and drugs. He has never paid any taxes (except for sales tax), and has nothing to show for his life. At 55, his health is now suffering. He recently qualified for disability and is getting free health care. He never paid into a system that is now supporting him. He bought a new computer and an electric bike, and has a new apartment. I on the other hand have spent my life trying to succeed, and have even given back to my community in many ways. I'm 59 and would very much like to retire at 65, but they raised the retirement age to 67 and are raising SS taxes. Why do I have to work two extra years? Am I my brother's keeper? Is it the government's duty to punish me for success while forcing me to pay the price for my brother's lifetime of bad choices?

Back to Top

Top headlines

Meth use on rise in Richmond County

Production of meth, a highly addictive drug made from household cold medicine, batteries, drain cleaner, brake fluid and other harmful chemicals, increased in recent years when the shake-and-bake ...
Loading...