Equitable Taxing to Meet America’s Needs

We have been hearing a lot about the wealthy paying “a little bit more” or paying an undefined “fair share” in federal income tax. Unfortunately, a consensus has been building that the top marginal tax rate should be no more than 39.6 percent, established in the 1990s, although the United States was economically prosperous in the 35 years after World War II, when the top marginal tax rate was never under 70 percent.

It has now become generally accepted among taxation experts that, on the average, those in the 35 percent taxation bracket actually pay about 18 percent on their income in federal income tax. In studying taxation rates, I recently learned that those in the 91 percent bracket in 1961 paid an average of 42 percent in federal income tax. I was struck by this correlation of close to 50 percent between the top rate levied and the percentage of taxable income paid. The correlation between now and about four decades ago brings home the important point that the percentage of taxes paid by high earners is well below their tax bracket percentage.

The contention that the wealthy are not paying their fair share of income tax is usually met with a counter-argument that a major share of the income tax revenue comes from the few percent at the top of the economic pyramid. The deep flaw in this argument is that the nation’s income goes overwhelmingly to the wealthiest households. A previous blog of mine gave the breakdowns on wealth possession in the nation: over 80 percent by the top 20 percent and 40 percent by the top one percent. Senator Bernie Sanders regularly includes in his emails a wealth breakdown of the much poorer Americans: the bottom 60 percent own less than two percent of the nation’s wealth and the bottom 40 percent own 3/10s of one percent of the wealth. Another startling factoid used by Sanders is that in 2010, 93 percent of all new income went to the richest one percent. 

A restructured income tax system should have two main goals: 1) it should tax income in some rough approximation to the income stratum that receives it; and 2) it should increase the percentage of households that pay federal income tax — this should change the conversation focus from one of just “soaking the rich” to “we’re all in this together.” 

My taxation plan would be presented in conjunction with a single payer health insurance program, financed through general revenue. A major selling point for single payer would be that millions of households would receive substantial annual financial windfalls by being freed of paying health insurance premiums and subject to sizable deductibles.

The main features of the taxation plan would be: 1) tax rates starting at 16 percent and topping out at 60 percent; 2) capital gains taxed at the same rate as regular income; 3) cutting in half the too-generous child  tax credit; and 4) taxing corporations under the same provisions in effect in the 1950s, when corporations paid a much higher share of national government revenue than they do today. A cap on the home mortgage deduction could also be considered.

The first $35,000 in taxable income would be taxed at 16 percent and the next $35,000 would be taxed at a 24 percent rate. Subsequent rates would go up in six percent increments through 42 percent, after which they would go up in three percent increments to 60 percent. The elimination of the current 10 and 15 percent rates and the initial jump from 16 to 24 percent are primarily designed to raise the percentage of households paying federal income tax.

Following are some examples of the impact of my tax plan, compared to the 2011 taxation provisions. The numbers employed correspond to those found on Form 1040, starting with line 38, adjusted gross income and ending with line 44, tax owed before any further adjustments.

Example I: Husband and wife, filing jointly

2011 tax schedule                            16-60 percent tax schedule

38 – $50,000                                    38 – $50,000

40 – $11,600                                   40 – $11,600

41 – $38,000                                   41 – $38,000

42 –  $7,400                                   42 –   $7,400

43 – $31,000                                  43 –  $31,000

44 –  $3,804                                   44 –   $4,960

The couple pays $1,156 in additional taxes; however, with single payer enacted, the couple is freed of a $7,000 health insurance premium and a $3,000 deductible. The financial windfall is $8,844.

Example II: Husband and wife with two minor children, filing jointly

38 – $100,000                               38 – $100,000

40 –  $11,600                                40 –  $11,600

41 –  $88,400                                41 –   $88,400

42 –  $14,800                                42 –  $14,800

43 –  $73,600                                43 –  $73,600

44 –  $10,656                                44 –  $15,080

The $10,656 is reduced by $2,000 child tax credit and the $15,080 is reduced by $1,000 child tax credit. The family of four pays $5,424 in additional tax; however, with the enactment of single payer, the family is freed of a $8,000 health insurance premium and a $4,000 deductible. The annual financial windfall is $6,576. 

Example III: Husband and wife, with two minor children, filing jointly

38 – $75,000                                   38 –  $75,000

40 – $11,600                                   40 – $11,600

41 – $63,400                                   41 – $63,400

42 – $14,800                                   42 – $14,800

43 – $48,600                                   43 – $48,600

44 –  $6,444                                    44 –  $8,864

The $6,444 is reduced by $2,000 child tax credit and the $8,864 is reduced by $1,000 child tax credit. The family of four pays $3,420 in addditional tax; however, with the enactment of single payer, the family is freed of a $6,000 health insurance premium and a $3.000 deductible. The annual financial windfall is $5,580.

Example IV: Husband and wife, filing jointly

38 – $65,000                                    38 – $65,000

40 – $11,600                                    40 – $11,600

41 – $53,400                                    41 – $53,400

42 –  $7,400                                     42 –  $7,400

43 – $46,000                                    43 – $46,000

44 –  $6,054                                     44 –  $8,240

The couple has no health insurance. They will pay an additional $2,186 in taxes, so instead of being free riders on health insurance costs, they will be contributing to pay the costs.

What the examples above show is that with a single payer plan, most families with good coverage health insurance plans and a taxable income into the low six digits will receive a financial  windfall measured in the thousands of dollars. The national government will have the necessary revenue to fund essential services and begin to climb out of a deep deficit situation.

My next blog will deal with communication of deeply misleading information about small businesses, job creators and the capital gains tax.

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