For a progressive tax system | Arkansas Blog

For a progressive tax system



Warren Stephens' complaint about his taxes -- which have really hampered his capital formation -- prompted a speedy response from Mac Campbell, the former candidate for state treasurer, congressional staffer and tax lawyer in Little Rock and Washington.

Campbell understands -- though Stephens apparently does not -- that not a single one of the working poor in this country are exempt from taxes, even if they're poor enough to merit a pass on income taxes. The regressive payroll tax is a bite they all still pay. It hurts when you're making the minimum wage. (Even if the tab amounts to little more than a couple of bottles of premier cru vino for Master Stephens.)

Read on the jump for Campbell's idea on making the tax system fairer.


Why The Payroll Taxes Should Be Absorbed By The Income Tax

As we watch the federal government move in to bail out Wall Street investment houses, banks, and insurance companies, it is hard not to be reminded of the justifications of a "progressive" income tax system. Those with little to pay should not be expected to carry an equal tax burden to those with much to lose.  Arguably, a government which provides law and justice, market regulation, infrastructure, global trade protection, and financial bailouts is more valuable to successful capitalists than it is to paupers.  However, America's progressive income tax system is being stealthily replaced by the regressive payroll tax as the general fund becomes dependent on payroll tax revenues and the entitlement trust funds become dependent on IOUs from the general fund.

Payroll taxes are regressive.  Since everyone pays the same tax on a set group of dollars, payroll taxes take a far higher percentage of the pay of a low-income worker relative to a high-income earner.  The income tax is bracketed to provide a progressive mitigation of this effect.  To "fund" Social Security, every American worker pays a 12.4% payroll tax (employee and employer share) on their first $102,000 in wages (in 2008).  Wage earners also pay a Medicare hospital insurance tax of a 2.9% (employee and employer share) on all of their wages.  "Unearned" income such as capital gains and interest income is not taxed by payroll taxes.  A "marginal" income tax is used to "fund" general government activities such as military interventions, courts, and bailouts.  While capital gains and dividends have been singled out for special lower rates, the income tax generally taxes dollars earned above certain amounts at a higher rate, but taxes income up to that point at lower rates.  Under current law, for a single taxpayer after deductions, the first $8,025 of income is taxed at 10%.  Income from $8,026 to $32,550 is taxed at 15%, from $32,551 to $78,850 at 25%, $78,851 to $164,550 at 28%, $164,551 to $357,700 at 33%, and amounts over $357,700 are taxed at 35%. 

With the exception of two years during the Clinton Administration, the income tax system has been deficient in its purpose of funding government spending since 1960.  The difference has been made up, to a large extent, by borrowing from the payroll tax system.  Currently, the progressive income tax system owes the regressive payroll tax system approximately $4.2 trillion.  Starting this year, the payroll tax system will need some of its money back.  In their 2008 report, the Social Security and Medicare Boards of Trustees stated, "This year Medicare's Hospital Insurance (HI) Trust Fund is expected to pay out more in hospital benefits and other expenditures than it receives in taxes and other dedicated revenues."  They continued, "The difference will be made up from general revenues which pay for interest credits [the IOUs] to the Trust Fund."  By 2017 the Social Security payroll tax will also be inadequate for fully funding payments made to seniors and other recipients.  At that time, the Social Security system will also start relying on general revenue funds to make up the gap.  Because of the reliance that the entitlement trust funds have on debt repayments from an inadequate income tax, there is no longer a valid argument that the payroll taxes protect Social Security and Medicare as separate and independent funding sources.  In fact, entitlement benefits are threatened in the immediate term because of insufficient general fund revenues.  If income taxes are not raised to a level where they can pay for regular government spending, as well as the debt owed to the trust funds, the payroll taxes of the last half-century will have been little more than regressive taxes on wages used to subsidize lower income taxes. 

Taxpayers and their representatives must move away from the myth that payroll taxes are dedicated to Social Security and Medicare, and they should revamp the tax system for the circumstances at hand.  Social Security and Medicare are important to our economy and our national conscience. Integrating the payroll tax into the income tax would immediately broaden the tax base, provide the opportunity to lower the tax burden on wage earners, and provide a dedicated source of income that could adequately fund Social Security and Medicare for all generations.  Placing a tax burden on all income, both earned and unearned, in lieu of current payroll taxes, would be a more fair and progressive toll for funding not only Social Security and Medicare, but especially the general fund obligations owed to these critical safety nets.

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