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Main | Lifelong Learning Lecture: The Necessity of Regulations in Capitalism »

Lifelong Learning Lecture: "Taxes Are the Price We Pay..."

A Lifelong Learning Lecture by John M. Miller
Hilton Head Island, SC – November 9, 2012


An elderly minister lay dying in a hospital bed.  He had asked his lawyer and an IRS agent he knew to come visit him.  When they came into the room, he greeted them, but then, because of his severe weakness, he said nothing.  For a short time the lawyer and the tax man were silent.  Why have we been asked here, each man wondered.  Finally the attorney, who knew the minister better, said to the dying man, “Tom, why did you invite us to come here?”  Summoning up his rapidly failing strength, the old man gasped, “Jesus died between two thieves, …..and that’s how I want to go.”


Nobody likes to pay taxes.  (Some people don’t like lawyers, either.)  But taxes have been a part of human civilization as long as humans have lived in organized societies.  The Bible tells of high taxes being exacted by the pharaohs of Egypt and by the Roman emperors, as well as by the kings of Israel and Judah.  Ancient documents indicate that the emperors of China, India, Babylonia, Persia, and Rome all took what was deemed too much from the people in taxes.  Even the Greeks, who established the first democracy in history, complained that the government charged them too much in taxes.


Over a century ago, the US Supreme Court Justice Oliver Wendell Holmes, Jr. declared, “Taxes are the price we pay for civilized society.”  At a time in American political history when tax rates and the tax code are very much in the news, that is an observation well worth keeping in mind at all times. Taxes are the price we pray for civilized society.  Whether their governments are autocratic, oligarchic, or democratic, no civilization can remain civilized if there are no revenues going to the governing authorities.  Without taxes, chaos is inevitable.


However, there are some obvious questions which need not only to be asked but also answered.  How many kinds of taxes?  Which levels of government should collect the taxes?  Who should pay the taxes?  The wealthy few?  Some?  Many?  Everyone?  Of perhaps greater import, at what rate, and at what rate for what levels of income, and what sort of tax code shall be written to make the taxes as equitable as possible?


Let me say at the outset that in this lecture I shall be talking almost exclusively about federal as opposed to state or local taxes.  The crisis of the Civil War prompted the first federal income tax, which exempted only the poorest Americans.  After the war, it was quickly repealed.  Before and after the Civil War, the federal government relied mainly on tariffs and excises to generate the funds they needed to operate.  That is, when goods were imported from other nations, taxes had to be paid on those goods by whoever was doing the importing.  But tariffs are a regressive form of taxation.  The cost of the tax is simply added onto the sales price of whatever is being sold.  Because the poor use all their income to buy whatever they need to keep them alive, they pay a higher proportion of their income than anyone else on sales-related taxes.  Those who are able to save anything pay a lower percentage of their income on sales taxes or on value-added taxes, which we do not have in this country - - - yet.


In 1894 Democratic President Grover Cleveland, with a majority of Democrats in both houses of Congress, initiated the second income tax in our country’s history. (They were Democrats; what can I say?).  But the tax was levied only on the richest 2% of Americans.  (They were Democrats; what can I say?.)  In 1894, the 2% were those whose total income was $4000 or more per year.  However, the Supreme Court ruled an income tax to be unconstitutional.  In 1913 William Howard Taft, a Republican, pushed through the 16th Amendment to the constitution, which legally and permanently authorized a federal income tax on individuals and corporations.  His successor as President, Democrat Woodrow Wilson, engineered a new tax code which exacted a flat 1% tax on everyone with an income over $3000, rising to 7% for everyone whose income was over $500,000.  It was thus a sort-of graduated tax, but only for the realtively wealthy.


The corporate tax rate has always been levied at a lower percentage than the highest individual rates.  In order to take advantage of that, many individuals incorporated their assets to avoid paying higher taxes.  Without further going into the intricacies of obscenely complicated American taxation regulations, suffice it to say that by 2012 the IRS tax code is more than 20,000 pages in length.  It keeps a growing number of accountants and CPAs permanently occupied from April 16 of one year to April 15 of the next.


Since the election of Ronald Reagan in 1980, there has been an ongoing and increasingly vitriolic debate in the American public, and particularly in our Congress, about taxes.  Many if not most people think the government is not sufficiently efficiently run, which is probably true.  But government likely is no less efficient than American business, education, or religion.  (About the latter I personally have considerable experience.)   In any case, as I have suggested in pervious lectures in this series, political conservatives have for years been demanding lower taxes, which means basically lower tax rates, and political liberals have been insisting we need to tax the wealthy at higher rates than are currently required by the tax code.  Liberals also say we need to lower middle class rates, and perhaps to levy no taxes at all on the poorest among us.  This debate is not really new; it is just louder and less civil than it has been in previous decades.


In the Great Recession which has severely gnawed into the economies of virtually every advanced nation in the world, national governments have essentially relied on higher taxes and reduced government spending to try to dig themselves out of their fiscal morass.  That policy has not been adopted in the USA, however.  Under Presidents George W. Bush and Barack Obama, and under the various sessions of Congress with which they were associated, tax rates stayed low, while government revenues dropped even lower than before either man took office.  There is a persistent American conviction that low tax rates for both individuals and corporations result in higher tax revenues.  It is an interesting idea, yea verily a deliciously intriguing idea, but, as Messrs. George and Ira Gershwin declared, “It ain’t necessarily so.”  Sadly, for most of the past twelve years, it definitely has not been so.  Our national debt keeps rising like cumulonimbus clouds, but the money the IRS collects does not come close to offsetting that debt.  If it were undeniably correct that lower taxes inevitably create more jobs and miraculously bring in more revenue, then we should be in clover, because we have had unusually low tax rates for the past twelve years.


Arthur Laffer is the Stanford economist whose Laffer Curve has convinced conservatives that revenues rise with lower tax rates and fall with higher rates, because the rich do everything they can to avoid higher taxes when they consider the rates too high.  In the Reagan years, the rich indeed did pay less in taxes.  But the non-rich, those in the middle class, also paid less, and the national debt under every President since Reagan, except Clinton, skyrocketed.  Clinton created two years of a federal surplus by raising rates for nearly everyone and lowering spending, and yet the economy boomed.  As the Broadway song says, “Those were the good old days.”  But since 1999, no President and no Congress has had the courage to do what clearly needs to be done, which is, both to raise taxes and to cut spending.  Tragically, the current Congress seems to be too catatonic to do anything about anything.


Because of Congressional cowardice, and the inability to agree on any large-scale changes, Congress has consistently kicked the taxation can forward.  The Bush tax cuts were maintained throughout the Obama presidency because neither the President nor the Congress did anything substantive to address our tax mess.  It is like the weather; everyone talks about it, but no one does anything about it.  However, Congress agreed that because they couldn’t agree on anything else, the tax rates which were in effect under Clinton shall return on January 1 of 2013.  This is the result of something called “sequestration.”  What this strange word truly means is that neither party has the common sense to work with the other party to pass a reasoned law regarding taxes and spending, so they have meekly allowed the tax rates in existence under George W. Bush to come back into force. This could change between now and then if Congress discovers any hidden supplies of gumption, but we should not assume that shall happen.  In 2013 the federal government then shall begin to have considerably more revenue, but nothing will have been done to fix a hopelessly complex and inept tax system.  Furthermore, an automatic $1.5 trillion over several years in spending cuts shall go into effect because Congress refused to agree on any reasoned approach to spending cuts.  Sequestration is an amazing phenomenon.  If taxes are the price we pay for a civilized society, the United States of America has proven itself to be remarkably uncivilized, because our tax system is so corroded and so corrupt that it is rapidly sucking us into a maelstrom of fiscal collapse.  


Our infrastructure is falling apart, but Congress refuses to appropriate funds to improve it.  On average, other developed nations spend 52.7% more on infrastructure than we do, according to the Council on Foreign Relations.  Sixty-six percent of American voters loudly declare that funding transportation infrastructure is very important, but 71% say no to increased gasoline taxes, 64% say no to new tolls, and 58% say no to replacing the gasoline tax with a mileage fee on the number of miles driven.  We loudly talk the talk, but we resolutely refuse to walk the walk.


Grover Norquist is the President of Americans for Tax Reform.  He is perhaps the most dangerous and politically demented man in our dangerous and demented country.  He has convinced nearly 275 Members of Congress to pledge never to raise taxes. At the last count, there were 222 Members of the House and 46 Senators who signed onto the Nutty Norquist Licentious Libertarian Lunacy.  Perhaps you can guess the party affiliation of the great majority of them. 


To make such a pledge is utterly absurd.  His ideas on taxes represent a strong repudiation of the Reagan tax reforms of 1986.  Norquist has often brazenly declared that the federal government should be shrunken to a size where it can fit into a broom closet.  The primary reason for the Norquist resistance to any increase in taxes is not economic, however; it is political.  More than that, it is foolishly ideological.  But in his extremist politics he has been remarkably successful.  Millions of voters have bought into his ideas, as dangerously flawed as they may be.  The congressional election of 2010 powerfully illustrates the political victory which Grover Norquist has sought to achieve, and in fact did achieve.


The Bureau of Economic Analysis says that the tax burden for all federal, state, and local taxes is at its lowest level since 1958, at 23.6% of income.  During the 70s, 80s, and 90s, individual Americans paid roughly 27% of all their income in taxes.  However, government spent at the rate of $18,086 per person for the first quarter in 2011, compared to $13,552 for that quarter in 2001, adjusted for inflation.  Thus our primary problem is obviously not that we are taxed too much, but that Congress spends too much while refusing to address our tax rates and our tax needs.


The economy grew as fast under President Clinton as it did under Presidents Reagan and Bush One, and certainly faster than under Presidents Bush Two or Obama.  We may thus deduce that lower taxes do not automatically translate into greater growth. Our main dilemma, obviously, is twofold: we spend too much, and we tax too little.  To repeat what shall be an oft-heard refrain in this lecture, we need to spend less and to tax more --- not a lot more, probably, but more.   


David Brooks is an always thoughtful and unusually fair columnist for The New York Times.  A while back he referred to a book by economist Bruce Bartlett called The Benefit and the Burden, which has the subtitle Tax Reform – Why We Need It and What It Will Take.  Messrs. Bartlett and Brooks talked about the complexity of our tax code, especially as regards deductions and exemptions.  As an example, in Europe, governments offer health care and public child care directly.  In the US, we pay for those benefits privately, but we can deduct many of the expenses from our taxes.  The effect of this is to lose many billions of dollars which otherwise would be collected as taxes.  We are fantastic at providing loopholes in our tax code, and pathetic at finding the funds to finance whatever government programs Congress authorizes.  What we should do instead, says David Brooks, is tax our populace a reasonable amount, close many of the exemptions and deductions, and pay for what we need with the increased funds collected by the IRS.  And neither David Brooks nor Bruce Bartlett, mind you, are hardly flaming tax-and-spend Democrats.  They are solidly Republican.


In a USA Today interview, Bruce Bartlett made a cogent observation.  He said, “The problem with Democrats is that they don’t have the courage of their own convictions.  Historically, going back to 60s and 70s, Democrats were the primary supporters of tax reform.  They’ve always felt that loopholes are per se bad because by and large they benefit the wealthy….  Somewhere along the way that’s a losing issue for them.”  That accurate allegation also can be directed at the Republicans.  We now have a crowd of politicians who refuse to tell voters what we don’t want to hear, but we desperately need to hear.  No one bites bullets, so we all continue to munch mushy marshmallows.  


Ah, but not to worry, citizens!  Paul Ryan has the answer to our fiscal malaise.  Mr. Ryan is the chairman of the House Budget Committee.  Here is what he proposes:  We would have just two tax brackets: 25% for higher income people and 10% for lower incomes.  The highest income people would no longer pay 35%.  According to the non-partisan Tax Policy Center, the result of the Ryan proposal would be a $45 trillion drop in tax revenues over the next decade.   However, Paul Ryan would also rescind many loopholes and tax shelters, which is probably a very good idea.  Of course the House Republicans have not identified which loopholes they would eliminate, but some of the most popular loopholes talked about include tax breaks for employer-provided health insurance, mortgage interest, state and local tax deductions, and retirement savings.  Will the Republicans – or Democrats – have the courage to rescind any of those?


The Tax Policy Center believes households with $100,000 to $200,000 income would save $7,000 a year in taxes under the Ryan proposal, but they would lose far more than that in deductions.  The result would be that they would pay $2700 more in additional taxes than they pay now, and this is on top of the increase in taxes which everyone shall experience once the Cowardly-Congress-pre-Bush-Two-tax-hikes go into effect on January 1.  Thus even the unusually affluent, the $100,000-to-$200,000 crowd, will end up paying $7500 more per year.


But surely somebody must benefit from the Ryan plan.  Well yes, as a matter of fact, a few do.  For those who earn a million dollars or more per year, under the current tax rates they would see a tax cut of $300,000 annually, or $150,000 when the old pre-Bush rates go into effect.


We need clearly to understand what the Ryan tax plan will do.  It will greatly reduce taxes for the very wealthy, and it will considerably raise taxes for the middle class, who used to represent, and perhaps still do (barely), the majority of Americans.


What, politically, does this mean?  It means that the great majority of Republican voters still imagine that somehow lowering tax rates means everyone pays less in taxes, and that the economy will grow as a result of this.  Objective numbers, however, declare that to be a false notion.  Quite the contrary, they suggest the Ryan plan is a colossal shell game.  Whether it becomes law will depend on what happens now that Barack Obama has been re-elected.  Voters, we are in a huge mess!  Both parties are badly failing us, because decisions are not being made!


Allow me to speak briefly about the corporate tax rate.  As has been proclaimed many times recently, the US has the highest corporate tax rate in the world, at 35%.  However, in 2010, GE paid nothing in taxes.  Between 1996 and 2000, 61% of corporations paid no taxes at all, including 39% of the biggest companies.  Part of this occurs because we have no workable system for taxing multinational companies.  Further to add to these dismal numbers, in 2007, corporations paid 14.4% of all federal income taxes.  In 1940 that figure stood at 50%.  Furthermore, experts estimate that annually the US Treasury loses $100 billion because of shell corporations set up deliberately to avoid paying corporate taxes.


The combined income of some CEOs exceeds the amount paid in taxes by the companies of which they are the chief executive officers.  In 2010, of the hundred largest corporations, 25% of their CEOs paid more in taxes than did the corporations they headed.   South Carolina, by the way, is the fifth-lowest state in collecting corporate taxes.  The Palmetto State seems to like being at the bottom of lists.


American corporations on average pay a tax of 12% on their income. Have I yet mentioned loopholes?  I believe I did.  Well, corporations, just like individuals, have gobs of loopholes.  And they use them.  Who wouldn’t?  Germany, on the other hand, has a corporate rate of 30%, and it collects 30% from every company in the Federal Republic.  Exxon Mobil earned $41 billion in profits last year, and paid 18% in taxes on that amount.  Loopholes, folks, loopholes.  Everybody complains about them, but nobody does anything about them.


In light of all these dismaying numbers, what should be - - - you should pardon the expression - - - a fair and balanced philosophy of taxation?  We definitely have a huge problem, but how shall we adequately address it?


 First, we know the Social Security system and Medicare shall be bankrupt within a few decades if nothing is done to change the way the system is financed and dispersed.  Currently employers pay 7.65% of their employees’ pay into the system, and the employees pay the same amount.  If we raised the tax paid by only a few tenths of a percentage point, say .2, .3. or .4%, it would bring in many billions of dollars over time.  For many years there has been a cap on payments for Social Security, beyond which neither employers nor employees pay anything into the system.  If there were no cap, it would generate trillions of dollars for the system over time.  And if Congress deemed this would be too big a burden on corporations, they could continue the cap for companies, but require wealthy individuals to pay 7.65% (or whatever) of their entire income.  Anyone making a million or ten million or a hundred million dollars a year would not go to the poorhouse by contributing up to the full 7+% of their income into the social network for retirement and medical care for the elderly.


Many liberals would like to see the income tax rate considerably raised for the top 5% or 1% or 1/10 of 1% of  taxpayers.  There is an economic limit beyond which we cannot go without serious damage to the economy, however.  Perhaps there should be a higher tax on capital gains, some say, the ever-confrontational economist Paul Krugman among them.  Krugman claims three-quarters of capital gains go to the top 1% of American taxpayers, which I find impossible to believe.  But if it is true, the 1% most assuredly can pay more.  And on the other hand, others insist there should be very low taxes on capital gains, because the wealthy use those gains to invest in other economic-boosting enterprises.  And on the other hand from that hand, if taxes on wages are high and those on capital gains low, corporations tend to lower salaries and raise stock options and dividends for their executives.  If you are concluding that tax policy is an extremely complicated matter, you are making the correct conclusion.  The real problem is that few Members of Congress have the courage to push for any increase in any taxes, because they know that voters don’t want any increase in any taxes, or at least in their taxes.  Congress also is loath to close loopholes which have been properly bought and paid for by lobbyists who successfully twisted the arms of the Members of Congress.  Therefore Congress continues to do nothing.


Take the tax on gasoline as an example.  The federal gas tax is 18.4 cents per gallon, which is a little less than 5% of the total price.  It has remained at roughly 18.4 cents for years.  When state taxes are included, Americans pay about 43 cents per gallon in tax, or one-eighth of the total price.  In Europe, drivers pay twice as much per gallon as Americans, about half of which is tax.  The British pay ten times as much in tax for gasoline as we pay.  The gas tax is a direct tax.  That is, its proceeds come from drivers, and the revenues are directly used to improve roads, bridges, and other transportation infrastructure.  Car-and-truck related infrastructure issues are some of the most obvious weaknesses in our transportation system.  And yet state and federal legislatures refuse to bite the bullet and do what clearly needs to be done, namely, to raise the gas tax for the good of the entire populace.          


Taxes are an obvious means of redistributing wealth.  Many people, especially those with high incomes, feel that is unjust.  But the fact is that currently a fairly large proportion of wealth redistribution is taken from the young, whatever their income may be, and is given to the old, regardless of their elderly income.  This happens by means of Social Security and Medicare.  All of us should be pondering the justice or injustice of that factor.  Should there be a means test for receiving Social Security or Medicare?  Should people who don’t need the money, yet paid in the money, get the money? 


Think about some of the others ways in the tax code by which wealth is redistributed.  Those who don’t have mortgages have money taken from them and given to those who do have mortgages.  Pension contributions aren’t taxed.  Neither is employer-provided health insurance.  That represents nearly $300 billion per year in wealth redistribution, which basically goes from everybody who can’t afford to purchase their homes and to those who don’t have very good jobs to those who can afford to buy homes and those who do have good jobs.


The best way to prevent a national fiscal collapse, many liberals claim, is to tax the rich at considerably higher rates.  Some among the super-rich affirm that concept themselves.  Warren Buffett, Bill Gates, Mark Zuckerberg, Abigail Disney (Walt’s great-niece) and others have publicly supported higher taxes for themselves.  But I have read the opinions of enough experts to convince me that cannot come close truly to shrinking the size of our growing national debt.  The tax burden for all of us needs to be re-considered, and probably 60-to-70% of us are going to have to pay somewhat more in taxes, while the lowest 30-to-40% of us will pay no more or even less than they are paying now.  But none of this will happen unless we get a Congress with courage.  And the only way for that to happen, sadly, is probably to vote almost all of them out.  But because they spend so much more than their out-of-office opponents to keep themselves voted in, that, also sadly, probably won’t happen.


Nevertheless, either rates really do need to be raised on those with the highest incomes or some of their loopholes must be eliminated, or both.  We have heard a great deal about “the 1%.” The average income of the top 1% is $1,530,773 per year.  The average income of the entire bottom 99% is $54,792.  (That is all the rest of us put together.) You can get a little more blood out of the bottom 99% of the turnips, but, relatively speaking, there is quite a bit more nourishing blood which could be gently drawn from the turnip top 1%.


Most loopholes exist for, and have been politically purchased by, the very top income Americans.  But no one can blame anyone for paying only the minimum amount the law requires.  It would be foolish not to do so.  But you need to understand how badly the system is skewed toward the very wealthy.  In 2008 the top 400 earners in the USA paid an average of 18.11% on their taxable income.  Some of you pay at a considerably higher rate than that, but I strongly suspect none of you is among the 400.  However, the top 1%, those with a taxable income of at least $353,000 per year, received 19.4% of all the income of all Americans in 2007, and paid 28.1% of all federal income taxes.  By comparison, in 1987 the top 1% got a mere 11.2% of all the income in the country, and paid a mere 16.2% of all the taxes.  Stated differently, the topmost echelon are now earning a greater percentage of the Total American Pie, but they also are paying a greater percentage of the total American taxes.  Nonetheless, the percentage they pay in taxes in much lower than the percentage of millions who make far, far, far less than they. Loopholes, loopholes, loopholes.  Loopholes giveth, and closed loopholes taketh away.  We need to raise the amount of taxable income for millions of us by lowering the number of loopholes we can use to shrink the total amount of income on which we must pay taxes.


In addition, the exceedingly wealthy have discovered ways to hide their income from prying federal eyes.  Swiss banks and other offshore accounts are favorite means of averting the IRS.  Most of us don’t have enough money in the bank to worry about, and what we do have doesn’t stay there very long.  Additionally, some very affluent people spend at least half a year plus at least one day outside the country, so they can avoid being declared US residents.  That is especially true of people who like to live in New York City.  N.Y.C.: What is it about you?  You have a 3.6 rate of city tax on taxable income, that’s what, and therefore many part time New Yorkers see to it that they do not set foot in the city for at least 183 days per annum.     


Sarah Palin and others of her political persuasion refer to the estate tax as “the death tax.”  It is obviously, like “Obamacare,” a pejorative term.  It is also obvious folly for Congress ever to vote the estate tax out of existence.  Those who acquire a large enough estate to tax (which must amount to several million dollars to be taxed, thus representing only a few thousand deceased persons per year) may claim that they earned their income and they paid tax on their income while they were living, and it is unfair to tax them again when they are dead.  But, to be technically accurate, it is not they who are being taxed; it is their estates which are being taxed.  Incomes are for the living; estates are for the dead.  Besides, for some or perhaps many of those who amassed an estate of several million dollars, some of that money they acquired came from parents, who acquired it from their parents, who acquired it from their parents, all the way, theoretically, back to the Mayflower or beyond.


In fairness to the body politic, very large estates must be taxed in order to prevent the very rich from making their children very much richer relative to everyone else.  It may be argued there is no justice in an estate tax, but in fact, there is no justice if there is not an estate tax.  It is unfair not to tax very large estates.


Without doubt, no one shall go into an emotional swoon when I announce I shall now conclude.  Nor shall you swoon to learn that I shall conclude very quickly.


Taxes are the price we pay for civilized society.  There must be taxes.  That, however, raises all kinds of questions we as a nation must answer: What kinds of taxes, who pays them, at what rates shall they be paid, what are the most just forms of taxation for all taxpayers, is our current tax code broken (YES!), what can be done to fix it (Something, for heaven’s sake, because nothing serious has been done for years), and how large an effort is required to help reduce the national debt.


One thing is certain: Taxes are not a necessary evil, as millions of shortsighted citizens seem to believe.  Even to harbor such a thought indicates a huge philosophical blindness.  Quite the contrary, taxes are a positive good.  Without them, our entire society and our standard of living would be completely unacceptable to all but the wealthiest  of our fellow citizens. 


Advanced societies require advanced taxes.  But they also need to be wise in their use of tax funds for the good of all the people.  Wasting tax money is both deleterious and dangerous.


Historically, in primitive societies there were and are no taxes.  Instead, inevitably tribute is paid one way or another by the weak for the benefit of the strong, with no benefit for the larger society.  Those who do not want to pay reasonable taxes should not flee to such tax havens as Monaco or the Caymans.  Let them go to Somalia or Yemen or Afghanistan, or perhaps even to Greece.   There they can see for themselves what it means when everyone pays very low taxes.


Finally, long live a prosperous and properly taxed United States of America!  Without proper taxes, it can’t last for very long.  Next April 15 keep that in mind, fellow taxpayers.