Blog No. 161

February 9, 2023

Fixing America – Idea 27

Reading Time: 10 Minutes

By Mack W. Borgen

University of California at Berkeley (Honors, Economics); Harvard Law School; National Award-Winning Author, The Relevance of Reason (Volumes I and II) (2013) and Dead Serious and Lighthearted – The Memorable Words of Modern America (Volumes I, II, and III) (2018-2019); and The Writings of a Lifetime (2021).

My Continuing Resolution for the Year: To write shorter blogs.

See all my articles, essays, blogs, and book synopses at  https://www.mackwborgen.com/ .

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Using the Right Numbers

To Track Americans’ True Tax Burden

Introduction

Over the last two and a half years, I have presented a wide range of ideas for “resetting” and “fixing” America. This blog presents Idea 27 in this his “Fixing America” series of articles. 

The Background Issues and

America’s Incorrect Focus upon Income Taxation 

Every month and every year; in every election and every new Congress, debates arise about taxation – higher taxes for the rich; “fair-share” and “flat taxes” for everyone; closing loopholes; reviews of “special tax treatments” and “tax incentives” for some people or industries; elimination of the capital gains or the estate tax, and on and on. The debates are tedious, circular, and endless.

However, what is far more frustrating is that these debates usually miss the point. They can be terribly misleading because, to a large degree, they are based upon inaccurate data – or, more precisely, both incomplete and dangerously wrong data about Americans’ tax burden per individual, per family, per annual income category.

To understand the true tax burden upon Americans, the far more “correct” data to use is that which reflects the total money spent on all “taxes” — i.e., the composite average tax rates paid by Americans. Since the debates are almost always about income taxes — as opposed to all of the taxes each of us pay, the debates are, in truth, almost de facto misdirected.

The good news is that there is a much better way to understand the relative tax burdens which we all share. However, before I present my recommendation for the development and use of “composite tax burden,” allow me to make some preliminary observations. Allow me to identify some aspects of America’s tax policies which are over-looked in the hustle and bustle of partisan screeching.

Tax Burdens Come from Many Sources.

First, the tax burden faced by Americans comes from many sources – local taxes, state taxes, and federal taxes. Only by an aggregation of such taxes — for each individual or family or for each income or wealth category — can we track the true “tax burden” of our governments (federal, state, and local) upon our citizens.

Many of America’s Taxes Are Already Flat Taxes.

Second, Americans should not be misled by political forces into focusing upon income taxation in their analysis of the progressive or regressive nature of America’s tax system. To a huge extent, for example, most American taxation is already based upon “flat taxes” such as sales taxes and property taxes. It is true that the wealthy may pay more each year in sales taxes, but sales taxes are a flat tax. The only reason they may be paying more is because they get their food at Gelson’s and their clothes at Nordstroms. That is their right and privilege, but it is also their choice. In the context of their tax burden, WinCo is open and Costco is always looking for more members. Similarly, the wealthy may pay each year in property taxes, but property taxes are also flat rate taxes. The only reason they are paying more is, once again, their choice – and their right — to live the good life … you know, the one with the pool and the guest house … which is fine, but don’t complain!

Little Distinction Made by Americans Between Various Taxes and the Need for Calculating a Composite Tax Burden.

Third, although most tax debates focus upon income taxation, taxes are taxes. Americans don’t care if it is a sales tax or an income tax; a property tax or a payroll tax; an inheritance tax or an estate tax. No, taxes are taxes, and the money is gone. Admittedly, because we are required to file annual income tax returns, income taxes get more focus. Every spring we are faced with how much we owe in “taxes.” However, we talk about income taxes only because we do not track the thousands of dollars we pay in other taxes. Americans are nickel and dimed by sales taxes and gas taxes. Property taxes are paid twice a year or are buried in our monthly mortgage impound accounts. Payroll taxes make a big difference between our “pay” and our “take-home pay.” For this reason, the only true measure of Americans’ tax burden is to track our composite tax burden – the aggregate tax burden on Americans from all of our taxes. And that is now possible. We can now understand who really pays what and what the real tax burden percentages are by income or wealth level. We can finally come to realize that we are basically a flat tax nation. We can finally understand, for sure, whether or not each income and wealth category of Americans is truly paying their “fair share” of taxes.    

Income Tax Rates Are (Very) Misleading.

Fourth, it is necessary to focus — one more time on income taxes because w need to change our way of thinking. We need to stop focusing so obsessively upon income tax rates. Why? Because (a) there is a substantial distinction between 37% “ordinary income” taxation and 20% “capital gains income” taxation, and (b) the far more favorable capital gains taxation rates are used far more frequently by the wealthy than the rest of America. (See Note 1 below) It can be obnoxiously complicated, but discussing income tax burden by reference to the 37% maximum rate “of the wealthy” is terribly misleading for many reasons, For example, disproportionately, the wealthy either (a) gain their wealth by holding and selling of capital assets (then paying the lower 20% capital gain taxes thereon) or (b) transfer their assets tax-free through the use of tax minimization planning (See Note 2 below). One of the most common – and absurd – tax avoidance tools involves transfers upon death whereby the recipient heirs get the assets with what is called a “stepped up basis.” As a result, all capital assets, which would have otherwise been subject to even the lower 20% capital gain rate, are transferred tax free. No ordinary income taxation, and even the capital gain tax liabilities evaporate. It is cruel, but it is also common knowledge that to the wealthy, rich, and famous, W-2s are for losers. For confirmation, just talk with their accountants who meticulously prepare their tax returns each year. Again, this is not their “fault” — it is our miswriting of the tax laws.

Note 1: Even the common reference to the 37% income tax rate is highly misleading since it rarely applies. First, it applies only to taxpayers with more than $693,750 in annual income. Second, the average income tax rate for the Top 1% Americans is only about 26.8% — not 37%!

Note 2: Some argue that most “tax minimization planning” is synonymous with “tax avoidance planning” since such planning is largely available only to the wealthy and is implemented by the use of sophisticated accounting measures with the advice of tax attorneys and accountants. On this, however, I disagree. It is only prudent for these individuals to plan. Also, they certainly have the right to such counseling because, in the opinion of this author, it is wrong to ask the wealthy – or any person — to voluntarily pay more in taxes than they are required to pay. It is the tax laws which are wrong, and true tax law changes can best be made by our slow understanding and use of correct data — the composite tax burden of Americans.      

Any Tier-3 Techie Can Put This Together – Americans Aggregate Tax Burden Can Now Be Measured

Fifth — and possibly most important of all — is that the calculation of American’s composite tax burden can now be measured. The computer age has created many social and political complications, but it has also brought new wonders. One of those new “wonders” is that we now have the capacity to calculate the true composite tax burden imposed by our governments upon its citizens. The relative progressivity of the income tax can finally be juxtaposed with the regressivity of America’s many, many flat taxes. Because of sheer number of taxing jurisdictions – the federal government, 50 states, 3,033 counties and parishes, over 108,000 cities and towns, and an endless number of special mandate jurisdictions, it was previously impossible to track the composite tax burden. Now, we can. There would be a lot of initial data entry, but any tier-3 techie can develop the necessary tracking program. Admittedly, (a) it will be necessary to define “tax” in order to determine whether Item A or Item B should be included as a “tax, (b) certain assumptions will have to be made about projected per capita annual purchases subject to, for example, sales taxation, and (c) data will have to be regularly updated to reflect new taxes or tax law modifications. But all of this can be done. And the end result will be invaluable.

Conclusion

Why Is This Important – Why Is This So Critical! 

Calculating, tracking, and basing our tax policies upon the composite tax burden on Americans is critical because otherwise the discussion about (income tax) progressiveness are terribly misleading. Only by using a composite tax burden calculation can we finally know who really pays for what; who really pays for the goods and services of our federal government; who may or may not need tax relief.    

It is the hope of this author that everyone pays his or her “fair share.” But it is also, very bluntly, my concern that the wealthy are not currently doing so. As noted above, in many instances this is not their “fault.” They should not be criticized for “only” paying that which is owed under the law. They should not be expected to make “donations” or to pay more than is “due.” However, (i) the inordinate obsession with merely focusing upon income tax brackets, and (ii) the reality that the wealthy rarely pay anything near their full 37% “share” highlights the need for using a composite tax burden analysis.

In closing, it should also be noted that some lower income families receive more in terms of “government benefits” such as welfare (and, personally, I am entirely committed to major welfare reforms), but most government services from the DOD to the FAA and our judicial system; from interstate highways to local parks departments; from street cleaners to local planning offices are intended to benefit of all Americans. 

I have written before that to address our country’s problems, the “place to begin is everywhere.” This is true, but the place to begin in the context of taxation is accurately understand who is really paying; who is really paying what percentage of their income in taxes? Idea 27 – start basing our tax legislation after taking into account the true composite tax burden of our citizens by income or wealth level.

It is time.

It is needed.

It can now be done.

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Copyright 2023 by Mack W. Borgen. All rights reserved. No part of this article may be reproduced or transmitted in any form or by any means, electronic or mechanical, except in the case of brief quotations embedded in critical articles or reviews, without prior written permission by the author.