“The only two certainties in life are death and taxes,” Benjamin Franklin wrote in a letter to Jean-Baptiste Leroy in 1789. While it’s hard to argue against the fairness of death, a growing number of Americans feel the same is not the case when it comes to taxes.
Americans are growing increasingly frustrated with their tax system. The Pew Research Center for the People & the Press found in a survey in December that this frustration is driven not by their own tax dues, but the perception that the rich are not paying their fair share.
In an election year, such debate is fuelled by partisan rhetoric. [Democrats are traditionally more likely than Republicans to favour higher taxes on the rich.] But in this one, the pain caused by a weak economy is another factor.
“While Democrats and independents feel most strongly that high income people should pay higher taxes, even a significant minority of Republicans share this view,” said Howard Gleckman, resident fellow at the Urban Institute. “This may be in part because economic growth remains modest.”
U.S. President Barack Obama, a Democrat, wants to raise taxes on those making more than $250,000 a year by letting the tax cuts instituted for them by his predecessor, George W. Bush, expire. He opposes eliminating the estate tax, but would like to increase the exemption level to $5 million and lower the top rate to 35 percent. And he wants to put in place the Buffett tax to ensure that those who make more than $1 million pay their fair share. The proposal got its name from billionaire Warren Buffett, who in a not-so-subtly titled column in the New York Times last summer, “Stop Coddling the Super-Rich,” first argued for higher taxes on the ultra wealthy like himself.
To some analysts a Buffett tax is not a perfect solution. “Simply adding a Buffett tax does not resolve the problems of complexity and economic inefficiency and may not even properly address equity,” said Mr. Gleckman.
The two top contenders for the Republican Party’s nomination to challenge Obama in the presidential elections in November, Mitt Romney and Rick Santorum, want to permanently extend the Bush tax cuts and eliminate the estate tax. A third hopeful, Newt Gingrich, has proposed major changes to the federal tax code.
The rising budget deficit has focused attention on the need for additional government revenue, said Alan Viard, resident scholar at the American Enterprise Institute.
“When additional revenue is discussed, the issue of how revenue can be raised most fairly inevitably comes up. Also, the increase in inequality that the United States and other countries have experienced during the last few decades spurs concern about fairness in taxation.”
This inequality has been a key driver of the Occupy Wall Street protests, which started in New York City in September and spread to cities across America. Among the protesters’ demands is higher taxes for the rich. “We are the 99 percent,” placards and posters declare at the protest sites.
But Mr. Viard contended that the top 1 percent are taxed at a higher rate than the rest of the population. To corroborate his argument he cited a Congressional Budget Office report which found that in 2007 people in the top 1 percent income bracket paid 29.5 percent of their income in federal taxes, while the population as a whole paid 20.4 percent of their income.
However, Mr. Gleckman explained that a relatively small number of the very highest income earners do pay lower tax rates because they, like Mr. Buffett, make most of their money from investments. This is because the maximum tax rate on capital gains and dividends is 15 percent. For example, Mr. Romney and his wife, Ann, paid an effective tax rate of 13.9 percent in 2010 because most of Mr. Romney’s income comes from capital gains on investments. Wage earners, on the other hand, pay a maximum tax rate of 35 percent.
It will take a major overhaul to close these loopholes. “The entire code needs to be reformed,” said Mr. Gleckman.