Monday, April 18, 2011

Exposing the Greatest Tax Myths


Today is "Tax day" meaning all income taxes owed Uncle Sam are due today, and it is instructive to examine the myths that are rife in our society about who pays taxes and how much they pay. One thing that has come to light, since the IRS tracks returns for the 400 with the highest adjusted gross incomes in the nation, is that the super rich are even richer thanks to a jury-rigged tax code on their behalf. Don't take my word for it: As the IRS reports, for those with an average yearly income of $345 million, their average federal tax rate is now down to 17% from 26% in 1992. Meanwhile, Joe and Mary Schmoe with middle incomes and no kids are still in the 15% range. That is, barely 2% separates mammoth earners who can afford to play the markets from middle earners still trying to make up for huge 401k losses in 2008.

Analysis by the National Taxpayer Advocate, an independent watchdog within the IRS, discloses the tax code is now filled with more than $1.1 trillion in credits, deductions and exemptions. An average of about $8,000 per tax payer but mainly tilted to the richest. This follows because they are the ones who can afford to find and employ the high-powered legal teams that specialize in legal tax avoidance: finding all the loopholes possible to save their clients the most money. The Bush tax cuts alone give the average person in the top 1% (earning about $345,000/year or equal to 5 middle income salaries) an average annual tax refund equal to the purchase of a new Lexus. Meanwhile, Joe and Mary Schmoe collect maybe $450 total, if they're lucky and that will likely be at the expense of their future benefits in Medicare and Social Security.

One person who's done yeoman service in exposing tax myths is Day Cay Johnston, author of Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich - and Cheat Everyone Else. Among the myths he has exposed via his years invested in researh are the following:

1) The poor don't pay any taxes

This has made the circuit on the net in so many blogs it's now become a self-sustaining canard and hence ripe for the picking. It probably originated with a legit source, the Tax Foundation, but has been distorted along the way showed that in 2008, the average income for the bottom half of taxpayers was $15,300. This year, the first $9,350 of income is exempt from taxes for singles and $18,700 for married couples, just slightly more than in 2008. That means millions of the poor do not make enough to owe federal INCOME taxes.

BUT,....they still pay plenty of other taxes, including federal payroll taxes. Between gas taxes, sales taxes, utility taxes and other taxes, no one lives tax-free in America, but this is the myth the tax-hating Right wants you to believe.

When it comes to state and local taxes, the poor bear a much heavier burden than the rich in every state except Vermont. This was computed by the Institute on Taxation and Economic Policy from official data. In Alabama, for example, the burden on the poor is more than twice that of the top 1 percent. The one-fifth of Alabama families making less than $13,000 pay almost 11 percent of their income in state and local taxes, compared with less than 4 percent for those who make $229,000 or more.

2) The Rich pay most of the taxes

According to Johnston this is one of those oft-used canards. Sen. Rand Paul, the tea party favorite from Kentucky, told David Letterman recently that "the wealthy do pay most of the taxes in this country." The Internet's less savvy blogs meanwhile are awash with statements that the top 1 percent pays, depending on the year, "38 percent or more than 40 percent of taxes", never bothering to discriminate or qualify that percentage.

While it's true that the top 1 percent of wage earners paid 38 percent of the federal income taxes in 2008 (the most recent year for which data is available), people forget that the income tax is less than half of federal taxes, and only one-fifth of taxes at all levels of government. Social Security, Medicare and unemployment insurance taxes (known as payroll taxes) are paid mostly by the bottom 90 percent of wage earners. That's because, once you reach $106,800 of income, you pay no more for Social Security, though the much smaller Medicare tax applies to all wages. Warren Buffett pays the exact same amount of Social Security taxes as someone who earns $106,800.

3) Corporate Tax Rates are Way Too High

Despite all the noise that America has the world's second-highest corporate tax rate, the actual taxes paid by corporations are falling because of the growing number of loopholes and companies shifting profits to tax havens like the Cayman Islands.

And right now America's corporations are sitting on close to $2 trillion in cash that is not being used to build factories, create jobs or anything else, but act as an insurance policy for managers unwilling to take the risk of actually building the businesses they are paid so well to run. That cash hoard, by the way, works out to nearly $13,000 per taxpaying household. Worse, many companies actually use part of that hoard to hire lobbyists to operate against ordianry workers' interests, for example look at the Scott Walker campaign to destroy public unions. Who do you think put up a major percentage of that $$?

Worse, contrary to Republican propaganda, a corporate tax rate that is too low actually destroys jobs. That's because a higher tax rate encourages businesses (who don't want to pay taxes) to keep the profits in the business and reinvest, rather than pull them out as profits and have to pay high taxes. The 2004 American Jobs Creation Act, which passed with bipartisan support, allowed more than 800 companies to bring profits that were untaxed but overseas back to the United States. Instead of paying the usual 35 percent tax, the companies paid just 5.25 percent. Who do you think has to make up the difference there? The Rich? Think again!

One of the biggest beneficiaries of such "repatriation" was Pfizer (makers of Viagra). It brought home $37 billion, saving $11 billion in taxes. Almost immediately it started firing people. Since the law took effect, it has let 40,000 workers go. In all, it appears that at least 100,000 jobs were destroyed. So much for the odious Repuke PR baloney that tax cuts "create jobs" - no they don't, they give more incentive to destroy them to max out profits. Their reasoning is: "Hey, we got this much extra from Uncle Sam, let's parlay it into even more by getting rid of workers!"

The worst perfidy now? Congressional Republicans and some half-idiot Democrats (or "DINOS" as I refer to them) are gearing up to pass another corporate tax holiday, promoting a new "Jobs Creation Act". It would affect 10 times as much money as the 2004 law. Want to see the number of unemployed really skyrocket? Then wait and see what happens if this offal passes!

4. The GOP Since Reagan Have Always Opposed Higher Taxes

Not quite! The GOP does like taxes, put more targeted at the ordinary Schmoes than the GOP's rich benefactors. Reagan signed into law 11 tax increases, targeted at people down the income ladder. His administration and the Washington press corps called the increases "revenue enhancers." Reagan hiked Social Security taxes so high that by the end of 2008, the government had collected more than $2 trillion in surplus tax. And btw, while we're at it - to slay another canard circulting- that hike was made in order to "cover the expected Social Security demands made by Baby Boomers". In other words, the coming boomer benefits onslaught was ALREADY paid for!!! So, let's hear no more bollocks on how the Boomer Wave is going to wreck it!
\
Meanwhile, the memory disabled may forget, as Johonston points out, that George W. Bush signed a tax increase in 2006, despite his written ironclad pledge to never raise taxes on anyone. It raised taxes on teenagers by requiring kids up to age 17, who earned money, to pay taxes at their parents' tax rate, which would almost always be higher than the rate they would otherwise pay. It was a story that ran buried inside the New York Times one Sunday, but nowhere else.

In fact, thanks to Republicans, one in three Americans will pay higher taxes this year than they did last year.

5. Our Tax System is Already Very Progressive

Only nominally! In fact, when compared with other advanced democracies it's a damned disgrace. Johnston points out, for example, Germany has a far superior and smarter tax system. But then, Germany is the benficiary of a parliamentary system (where even its minority Greens Party has a chance to define policy) as opposed to a corporate, Wall Street-owned duopoly. Germans work less, make more per hour, and get much better parental leave than Americans, many of whom get no fringe benefits such as health care, pensions or even a retirement savings plan. By many measures, the vast majority live better in Germany than in America.

To achieve this, German singles on average pay 52 percent of their income in taxes. Americans average 30 percent, according to the Organizations for Economic Cooperation and Development.

At first blush, the German tax burden seems horrendous. But in Germany (as well as Britain, France, Scandinavia, Canada, Australia and Japan), tax-supported institutions provide many of the things Americans pay for with after-tax dollars. Buying wholesale rather than retail saves money! Better, Germans don't have a bloated and parasitical Military-war complex that bleeds down its resources! (For much more on this, see the arrticle: How to Save A Trillion Dollars, in TIME, April 25.)

A proper comparison would take the 30 percent average tax on American workers and add their out-of-pocket spending on health care, college tuition and fees for services and compare that with taxes that the average German pays. Add it all up, and the combination of tax and personal spending is roughly equal in both countries, but with a large risk of catastrophic loss in America, and a tiny risk in Germany.

Bototm line? Americans have been largely gamed and brainwashed. They've been gamed and duped into buying the hokum they can do better on their after tax savings than doing without it (e.g. being taxed at the German rate and deriving benefits from that). The sad fact is that our current system and its mounting deficit shows they can't and don't. While average Americans have been skating along believing they're the ones benefiting from lower tax rates, the rich are laughing all the way to their banks and hedge funds, knowing they've totally exploited the hoi polloi. It's now time for average people to wake up and stop working against their own interests!

No comments: