Category: Taxation

Pay As You Go?
By Karl Peterjohn, Kansas Taxpayers Network

On the rare occasions the mainstream national news media bothers to cover federal spending and taxes you are sure to hear the phrase, “pay as you go,” as the primary talking point of the new congressional Democratic majority. This phrase is supposed to reassure us now that the profligate “Bridge to Nowhere,” free spending Republicans have been relegated into the minority.

New York City Congressman Charlie Rangel, who now heads the powerful tax writing house ways and means committee, wants to dismantle the most successful legacy of George W. Bush’s administration, the 2001 and 2003 federal tax cuts. These tax cuts are scheduled to expire because of arcane congressional budgeting rules. However budgets must be enacted now and not put off until after the 2008 election.

Liberal North Dakota Senator Byron Dorgan, who heads up the budget committee in the senate, is joining Representative Rangel in this push. While the national “news” media is focused upon Al Sharpton’s take on the Don Imus firing or the latest DNA results from the Bahamas, there is a large federal tax hike in your future as well as increased IRS powers to enforce tax laws.

Congressional liberals want you to “Pay MORE as you go,” and the lower federal income tax rate of 10 percent, increased child credit, and pro growth capital gains and dividend tax rates from the 2003 Bush tax cuts are all likely to be allowed to expire. The left wing blogosphere is determined to eradicate every last accomplishment of the Bush presidency.

March 28 the Heritage Foundation’s 2008 budget report warned, “The budget blueprint reported out of the House Budget Committee last week and supported by Democratic leadership is a study in fiscal irresponsibility … the House budget resolution boosts discretionary spending, does nothing to tackle out-of-control entitlement spending, and, worst of all, would impose the largest tax increase ever on the American people.”

A few days later the Wall Street Journal warned their readers, “The Bush tax cuts don’t expire until 2010, and Democrats aren’t about to tip their tax hand before the 2008 election. But under cover of zero media attention, Democrats are constructing a budget process that will make a tax increase all but inevitable.”

“The ploy here is ‘pay-as-you-go’ budget rules that Democrats are implementing in the name of ‘restoring fiscal responsibility.’ A few journalists even quote that phrase with a straight face. But everyone in Washington knows that ‘paygo’ is all about making tax cuts more difficult and not about slowing the growth of spending,” the journal editorialized.

The Heritage Foundation report criticized the Democrat budget, “… the (2008 proposed) budget assumes tax increases of $900 billion over five years which would be accomplished in part by allowing the 2001 and 2003 tax cuts to expire.” The U.S. economy has enjoyed solid growth and lowering unemployment rates ever since the 2003 tax cut was enacted. Federal budget deficits have also fallen despite bipartisan fiscal spending growth since 2004 too. This reduction in federal deficits has occurred because tax revenue growth grew more rapidly than federal spending hikes.

Fiscally responsible and informed citizens need to know, “… that the tax increase fuse has now been lit. Do nothing and taxes will rise as much as they have at any one time since World War II. Democrats have made the decision to obscure this burning fuse and the press corps is ignoring it. But that doesn’t mean the rest of the country has to play along … It’s a debate we should start having now, before the fuse burns down,” the Wall Street Journal warned April 5.

Kansans reading these words have now been warned. Tax and spend has returned with the Democratic majority that is now controlling congress.

As the annual tax deadline is upon us, we should take a moment to examine our level of awareness of the taxes we pay.

Many families don’t pay any federal income tax. According to a study by the Tax Foundation (link: http://www.taxfoundation.org/ff/zerotaxfilers.html) 58 million households, representing some 122 million people, or 44 percent of the U.S. population, pay no federal income tax. I made a few calculations, and Kiplinger’s TaxCut software for 2004 shows that a family with two children and $40,000 income (that’s approximately the median household income in Wichita), taking the standard deductions, pays $0 federal income tax.

These families probably do pay quite a bit in the form of Social Security tax, but as we’re told, that’s not really a tax. Instead, it’s the government saving for our future retirement. (I can’t write that and keep a straight face.)

For those who do pay taxes, they often aren’t aware, on a continual basis, of just how much tax they pay. That’s because for wage earners, federal and state taxes are conveniently withheld for us on our paychecks. Many people, I suspect, look at the bottom line — the amount they receive as a check or automatic bank deposit — and don’t really take notice of the taxes that were withheld. This makes paying taxes almost painless.

For local property taxes, anyone who has a mortgage probably has these taxes incorporated into their monthly mortgage payment.

An alternative would be to eliminate the withholding of taxes from paychecks and from monthly mortgage payments. Instead, each month or year the various taxing governments would send a bill to each taxpayer, and they would pay it just like the rest of their periodic bills. In this way, we would all be acutely aware of just how much tax we pay.

A curiosity is that many people are happy during tax season because they get a refund. And they’re delighted to get that refund, so much so that many will pay high interest rates on a refund anticipation loan just to get the money a little earlier. The irony is that by adjusting their withholding, they could take possession of much of that money during the year as they earn it.

The other people happy during tax season are tax preparers. As a country we spend an enormous effort on tax recordkeeping and compliance. Another study by the Tax Foundation estimates that in 2002 we spent, as a nation, 5.8 billion hours and $194 billion complying with the federal tax code. (5.8 billion hours is equivalent to about 2,800,000 people working 40 hours per week, 52 weeks per year.) By simplifying our tax code, we could eliminate much of this effort, and return that effort to productive use.

Since tax withholding from paychecks and mortgage payments reduces our awareness of just how much tax we pay, it’s unlikely that governments will stop the withholding of taxes and submit a bill to taxpayers. Instead, it’s left to ourselves to remain aware of how much we are paying.

The recent news that Warren Buffet is giving away the bulk of his fortune to charity is good news to me, as I greatly prefer private charity to government spending of taxes. That’s true for me even if Mr. Buffet were to use his philanthropy to support causes that I might not agree with.

But there is an irony here. Mr. Buffet is a vocal supporter of the inheritance tax (or estate tax or death tax). By giving away much of his wealth, he escapes paying the tax he wants others to pay. Mr. Buffet is wealthy enough that he can give away a lot, but he stills retain great wealth for supporting himself in his declining years and providing very well for his children.

Most people who have enough wealth to be subject to inheritance taxes don’t have enough wealth to do what Mr. Buffet has done. Instead, they must be content with the government spending much of their estate after they die.

If Mr. Buffet really thinks inheritance taxes are good, he should keep his wealth and let the government tax it when he dies, just like most others have to do. Alternatively, if he wishes to enjoy seeing how his wealth is spent while he is still living, he could pre-pay his inheritance tax and watch our government at work.

Commentary surrounding two recent tax cuts reveals the backwards thinking about taxes that is common.

A New York Times editorial from May 11, 2006 asks this question: “Whose taxes will be raised in the future to pay for today’s tax giveaways?”

A question like this reveals several prevalent lines of thinking: First, that the government has a legitimate claim on a large part of our incomes, and that if the government “gives” any of that claim back to us, it somehow has to be paid for. Second, it’s the people who “give” tax money to the government, not the government who “gives” it back to the people in the form of tax cuts. If the government reduces taxes, the government “gives” us nothing. It simply takes less of what is ours in the first place.

This backwards thinking about taxes happens even close to home in Kansas. As reported by David Klepper in the May 12, 2006 Wichita Eagle: “They [Kansas lawmakers who supported the cuts] consider the cuts a wise, $128 million investment to spur new investment by business, new jobs, more economic activity and, consequently, higher tax receipts.”

Further in the same article: “Gov. Kathleen Sebelius, a Democrat, who first proposed the business machinery tax cut, agreed. ‘We’re not giving away money for the sake of giving it away,’ she said. ‘I’m hoping that the economic growth will actually help fund the school plan that we just passed.’” (emphasis added)

It is quite revealing to hear the Governor of Kansas equate letting people keep more of the money they earned with the state “giving it away.” Furthermore, the motives of the politicians are revealed: they are “investing” in tax cuts in the hope that the state will collect even more tax money in the future. What their remarks really reveal is that high taxes are a drag on our economy.

There is one thing the New York Times editorial got right: “Neither Congress nor the public has the stomach to slash government programs anywhere near enough to bring spending in line with revenues.” That is the heart of the problem. Government at all levels spends too much, crowding out private initiative. Government at all levels should cut both taxes and spending.

Writing from Miami, Florida

As the annual tax deadline is upon us, we should take a moment to examine our level of awareness of the taxes we pay.

Many families don’t pay any federal income tax. According to a study by the Tax Foundation (link: http://www.taxfoundation.org/ff/zerotaxfilers.html) 58 million households, representing some 122 million people, of 44 percent of the U.S. population, pay no federal income tax. I made a few calculations, and Kiplinger’s TaxCut software for 2004 shows that a family with two children and $40,000 income (that’s approximately the median household income in Wichita), taking the standard deductions, pays $0 federal income tax.

These families probably do pay quite a bit in the form of Social Security tax, but as we’re told, that’s not really a tax. Instead, it’s the government saving for our future retirement. (I can’t write that and keep a straight face.)

For those who do pay taxes, they often aren’t aware, on a continual basis, of just how much tax they pay. That’s because our taxes are conveniently withheld for us on our paychecks. Many people, I suspect, look at the bottom line — the amount they receive as a check or automatic bank deposit — and don’t really take notice of the taxes that were withheld. This makes paying taxes almost painless.

An alternative would be to eliminate the withholding of taxes from paychecks, and from monthly mortgage payments, too. Instead, each month or year the various taxing governments would send a bill to each taxpayer, and they would pay it just like the rest of their periodic bills. In this way, we would all be acutely aware of just how much tax we pay.

A curiosity is that many people are happy during tax season because they get a refund. And they’re delighted to get that refund, so much so that many will pay high interest rates on a refund anticipation loan just to get the money a little earlier. The irony is that by adjusting their withholding, they could take possession of much of that money during the year as they earn it.

The other people happy during tax season are tax preparers. As a country we spend an enormous effort on tax recordkeeping and compliance. Another study by the Tax Foundation estimates that in 2002 we spent, as a nation, 5.8 billion hours and $194 billion complying with the federal tax code. (5.8 billion hours is equivalent to about 2,800,000 people working 40 hours per week, 52 weeks per year.) By simplifying our tax code, we could eliminate much of this effort, and return that effort to productive use.

Since tax withholding from paychecks and mortgage payments reduces our awareness of just how much tax we pay, it’s unlikely that governments will stop withholding and submit a bill to taxpayers. It’s left to ourselves to remain aware of how much we are paying.

Writing from Orlando, Florida

Two recent Wall Street Journal articles (“A Golden Opportunity” in the November 1, 2005 issue, and “Triple Jeopardy” in the November 2, 2005 issue) make the case for simplification and reform of our current income tax system. In these articles we learn these things:

“… true reform — changing to a broad-based income or consumption levy that taxes income only once — could yield once-and-for-all annual household income gains of 9%.”

Our tax system has a bias against saving and investment. That slows capital formation and wage growth.

“It is the marginal tax rate — the rate on the additional dollar earned from work, saving or entrepreneurship — that sets incentives and governs the pro-growth gains from tax reform.”

“Eliminating the tax bias altogether in favor of employer-provided insurance is sound tax policy and would increase efficiency in health-care spending.” I have written in the past about how employer-provided health insurance is not good for our economy, or for consumers of insurance.

“A tax system should generate the government’s required revenue with as little economic distortion as possible, while distributing tax burdens fairly. It should not discourage work, saving or entrepreneurship more than is necessary, and it should not discourage individuals from acquiring the skills and education that will increase their productivity. It should not discourage investment, or favor investments in one asset over those in another. In short, an efficient tax system alters economic decision-making as little as possible.

“Although many see simplification as the primary goal of tax reform, promoting economic growth is a more important objective. Even in the relatively short run, the economic costs of a tax system that slows growth are likely to exceed compliance costs. U.S. households spend roughly 1% of GDP in complying with the income tax system. Halving the costs of compliance would be equivalent to raising GDP by one half of one percent — no minor accomplishment. The increase in GDP that might result from a tax reform that reduces tax burdens on investment and shifts the tax system toward a consumption tax are much larger.”

“Tax reform, as distinct from tax reduction, inevitably involves curtailing some entrenched tax benefits. If reform proposals are dissected by politicians in an attempt to promote provisions that reduce their constituents’ tax liabilities while excising those that increase constituents’ tax liabilities, reform will inevitably fail. But if reform proposals are viewed instead as a collection of provisions that leave most families in a position not very different from their current one, while also shifting the tax system toward a structure that will promote long-term economic growth and reduce the burden of tax compliance, then these proposals can command broad popular support and even enthusiasm. Genuine tax reform is a difficult process that requires commitment to the goal of creating a more efficient, simpler and fairer tax system.”

With so much to be gained, why isn’t there a rush to implement tax reform and simplification? The primary reason is that there are many special interest groups with a lot of political power that favor the present system. These interests include those industries and companies powerful enough to manipulate the tax system to their benefit. Politicians, of course, enjoy the present system, as it offers many ways to reward those who help them stay in office and increase their power. It also lets them influence the behavior of nearly everyone through manipulation of the activities that the tax code favors with deductions and breaks.

Sadly, neither promotes economic growth and prosperity, which is what would really benefit the average person. Instead, people cringe at the idea that they might not be able to deduct their home mortgage interest. In reality, the mortgage interest deduction is worth very little to most middle-income families. (I get the feeling sometimes that people think they get to deduct the interest from their tax liability rather than from their taxable income.) Considering today’s low mortgage interest rates, the relatively low marginal income tax rate many people pay, and the fact that the benefit of the deduction is only valuable to the extent it exceeds the standard deduction, many families may not see any benefit from the mortgage interest deduction. But they would probably revolt against any politician who supported its elimination.