Over the past week, we have heard how the Administration is considering making changes to our tax codes. There are proposals to increase the top tax rate. There are discussions to do away with many of the available deductions. There are even bills and amendments to waive the Alternative Minimum Tax from a year-by-year basis. I have a question for you, “Who needs them?”
It is well known that the highest wealth holders, those that fall within the highest tax bracket, pay the most in taxes. It is also well known that they are more capable of taking advantage of the tax deductions (which are abundant in our tax code). These deductions can lower the overall percentage of tax paid by the wealthy to the government, as Warren Buffet has stated in the past. According to him, his overall tax percentage in 2007 was 17.7%, while his secretary was paying 30%. So should we increase the top tax rate so Buffet pays more?
While Buffet paid 17.7% in 2007, even though he made $46 Million that year, his tax rate is 35%. Increasing the tax rate would likely increase the 17.7% to at least 18%, if not more. However, Buffet’s fellow citizens in that tax bracket can make as little as $350,000, and while Buffet can afford the higher tax load, the citizens on the bottom end of that tax bracket might not. The same can be said about removing tax deductions, since in effect that would also be a “tax increase.”
The Alternative Minimum Tax was created to get around that problem by making sure the most wealthy households in the nation pay their fair share of taxes, especially if they are capable of taking advantage of the numerous deductions in our tax code. While this worked initially in 1970, targeting the top 150 households, the AMT had a hard time keeping up with the constantly changing economy. This means many regular households were required to pay this additional tax, even though they were not “wealthy.”
So why is the Administration and Congress considering making more changes to our tax code to address the three items listed above? As we can already see, the tax code is overly complex and the alterations to the existing tax rates and deductions don’t solve the problem. So what can we do to ensure that the tax code is simplified, those at the top of the wealth bracket don’t pay less than those at the bottom, and get rid of the annual pain (both legislative and economic) of the AMT?
I believe it is time we address and adopt a flat tax policy. The benefits of a flat tax system include:
- replacing 6 tax brackets with just one
- simplify tax code for clarity
- remove deduction loopholes
- decreases the amount of paperwork during tax time
- decreases the size of the IRS, saving the government money
Let us consider the following. The third tax bracket in the current structure is 25% for those making $32,550 or more. If we remove the tax brackets for those making less than that figure (making those citizens tax exempt), and then establish a 20% flat tax rate for everyone else, the tax burden decreases for everyone except the wealthy. You might be asking yourself how that could be, let us go back to the point where Buffet’s realized tax burden was just 17.7%. By removing the practice of tax deductions, the wealthy cannot cut their tax burden. In Buffet’s case, his tax payments would go from $8.142 Million to $9.2 Million.
Will there be complaints to this type of change? Of course. For starters, some jobs will be lost at the IRS since the tax filing practice will be streamlined. With the simplified tax rules, some tax filers probably wouldn’t have to submit anything more than a single sheet of paper indicating that their 20% was deducted from their paychecks already. Other groups to see a loss of jobs and business would be the personal tax filers such as H&R Block and Jackson Hewitt due to the lack of tax deductions in the code. There remaining clients would primarily be those who are active in the stock market and owe capital gains taxes. The last primary groups to complain would probably be the more liberal groups in society who still feel that the wealthy must pay more. Additionally, they might view the drop of the 35% tax bracket as a tax cut for the rich, even though the offset comes from the removal of tax deductions that artificially lowered their realized tax burden to begin with.
I am not promising this to be an easy transition, but it is the most practical solution to the headaches the government and individual filers experience on an annual basis. Additionally, with the removal of deductions from the tax code, there is a chance that charitable giving would decrease. But with more money in their pockets, the decrease in giving by the wealthy might be made up by new donors in the middle. With those concerns aside, in this environment of change, I think the government might be able to implement real change in the tax code and end the constant tinkering and expansion of the existing tax code once and for all.
Related articles:
CQ Politics – “Senate Finance Chairman Questions Limits on Tax Deductions”
Modern Healthcare – “Charitable donations provision in reserve fund scrutinized”
The Chronicles of Philanthropy – “Tax-Deduction Proposal Would Cause Giving to Drop by 1.3%, Study Finds”
Lake County News – “Taxes and money: More on the Alternative Minimum Tax”
Phoenix Business Journal – “Phoenix small business owners criticize Obama tax hike, dispute $250,000 is ‘rich’”
The Moderate Voice – “The Gospel According To St. Newt”
Times Online – “Buffet blasts system that lets him pay less tax than secretary”
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