17 April 2010
In 1789, Benjamin Franklin wrote “In this world nothing can be said to be certain, except death and taxes” (Martin 1). The fairness of death must be taken up with a deity but the fairness of taxes is very much a human issue. The idea of tax fairness is like motherhood or apple pie – everyone is supports it. Yet there is a wide disparity in what constitutes tax fairness. Investopedia offers little clarity with its circular definition: “[Tax fairness is] a tax platform based on an ideal that aims to create a system of taxation that is fair, clear and equivalent for all taxpayers” (Investopedia 1).
The folks at FairTax.org do not specifically define “fair ...view middle of the document...
This comparison will demonstrate how much tax fairness has eroded. I will conclude by endorsing a proposal that may not restore “fairness,” but can at least stabilize whatever fairness remains.
The Federal income tax came into being with the passage of the 16th Amendment in 1913. The U.S. Department of Treasury’s history of the income tax notes that Congress created this tax with a progressive scale, taxing less than 1% for those with the least incomes. The rates increased progressively up to a top rate of 7% for those with incomes over $500,000 (U.S. Treasury 1). We just stumbled upon the meaning of tax fairness in the minds of those who first created the tax – namely, that those with high incomes should pay a higher percentage of their income than those who earn less.
If we consider this as the baseline of tax fairness – with the highest earners paying seven times more than those earning the least – then the proposed Fair Tax Act, with its single rate sales tax, is in direct opposition to the 16th amendment’s sense of fairness. Describing the Fair Tax Act as nonpartisan is laughable.
In the ninety-seven years since the 16th amendment was passed, the tax rates have changed frequently. Within five years, the top rate was increased to 77% and it reached a peak of 87% in 1954. The top rate was chopped down to 50% under Ronald Reagan, and when the Bush tax cuts are fully implemented, it will be 33% (U.S. Treasury 1). Those with the lowest incomes who pay taxes currently pay 10%. Compared to the baseline of the wealthy paying at a rate seven times greater than the poor, the wealthy now pay only three and one-third times more. Expressed another way, the system is now less than half as fair as when it started.
In 1942, the tax law began recognizing “capital gains” differently. As opposed to wages for work performed, capital gains are “unearned income.” They are “pay back” from owning investments. Currently, the top tax rate on capital gains is 15%, less than half of the top tax rate on wages. Since capital gain income is heavily concentrated among the wealthiest Americans, the result is that the wealthy are paying most of their taxes at the same tax rate (15%) as earners with wages in the 35,000-45,000 range. How’s that for fairness?
With the creation of the Social Security system, a new tax was levied against wages. These taxes are not progressive – everyone pays the same rate, 7.65% of wages. (Note: since capital gains are not wages, they pay 0% of this tax). One more thing: a wage cap was placed on Social Security taxes. The tax stops when one’s wages exceed $106,800. Curiously, the National Taxpayers Union identifies $113,000 as the threshold to enter the 10% of income earners (National Taxpayers Union). So, let me correct what I wrote earlier: not everyone pays the same Social Security tax rate; the richest pay less. How does this compare with the sense of fairness established in the16th amendment?
While the Federal...