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.)