With Democrats in charge of the White House and U.S. House, and (possibly as of this writing) the U.S. Senate, you can expect a push by left-wing activists and politicians to repeal some federal tax cuts enacted by the previously Republican Congress and signed by President Donald Trump.

Here in North Carolina, pandemic-related concerns about state revenue collections, combined with fiscal demands from reelected Gov. Roy Cooper and the spending lobbies who support him, will produce a push by progressives to roll back tax cuts enacted by the Republican-led legislature.

During the ensuing debates, you’ll hear strident claims about our “regressive” tax system, or about many Americans paying no taxes at all, or about “closing loopholes” as a reasonable alternative to raising taxes.

You’ll hear these claims from left-wingers, right-wingers and centrists, respectively. You should discount them. Each claim is wrong.

Is our tax system rigged in favor of the wealthy? Hardly. America’s tax system is either modestly or moderately progressive, depending on how you define the terms. “Progressive,” in this context, means that as your household income rises, the share of that income you pay in taxes — not just dollars paid — also goes up.

A regressive tax works the opposite way. The share of income paid in taxes goes down as one’s income goes up.

At the state and local level, most tax codes do skew somewhat regressive. That’s largely because most make use of sales taxes. Income saved is not subject to sales taxation, of course. And while most goods are taxed, many large service sectors such as medical care are not. Upper-income people tend to save more of their income and spend more of it on untaxed services.

On the other hand, our federal tax code, even after the Bush-era and Trump-era tax changes, is rather progressive. It taxes the wealthy at much higher rates than the non-wealthy. If you combine the effects of all taxes — and you should, because we all pay taxes at multiple levels and because lots of federal money sloshes through states and localities — the federal effect predominates.

According to the latest modeling from the Institute on Taxation and Economic Policy, the lowest-income quintile (or 20 percent) of American households pays about 20 percent of their incomes to government at all levels, either directly or indirectly (by paying higher prices for taxed goods, for example). The second-lowest quintile pays 22 percent. The middle quintile pays 26 percent. The upper-middle quintile pays 28 percent. And the higher-income quintile pays 31 percent.

Folks, that’s a progressive tax system.

By the way, notice that even the lowest-income quintile pays 20 percent their incomes in taxes. That should put to rest conservative claims about legions of tax slackers. Granted, most of these households have no net liability for federal income taxes. Thanks to exclusions, deductions and child-tax credits, they end up getting back more in refunds than taxes paid.

But federal income taxes are far from the whole story. Payroll taxes still hit them hard. As do sales and excise taxes, and tariffs, and property taxes (even if you rent, you bear much of actual cost of the property tax applied to your apartment or home).

Finally, let’s consider the frequent claim that “closing loopholes” is an attractive alternative to raising taxes. While there are some true special-interest giveaways embedded in federal and state tax codes, such as credits for certain investments or energy sectors, most “loopholes” turn out to be attempts, however clumsy, to define income properly so it can be fairly and efficiently taxed.

Governments shouldn’t be taxing gross incomes. They should be taxing net incomes. (In North Carolina, in fact, that is a constitutional requirement.) If a household or business spends money on raw materials, supplies, tools, equipment, training, marketing or other expenses, the amount must be deducted before income tax is applied. If you think this is easy, ask an accountant.

Whatever tax policy our leaders choose, it should be based on a clear understanding of the facts — not erroneous but widely repeated myths.

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John Hood is chairman of the John Locke Foundation and author of the forthcoming novel Mountain Folk, a historical fantasy set during the American Revolution (MountainFolkBook.com).

(1) comment


Here is how an argument like this typically works: a vague but sensational initial statement is made, the opposition’s arguments are misrepresented with invented strawmen, and then the author easily disposes of those strawmen with reasonable sounding counter-arguments that have very little to do with the reality of the situation.

John Hood has attempted that formula here, but fails to win against his own imaginary opposition by not even addressing their arguments. Let us look individually at his three proposed fallacies: (1) “the left” says taxes are regressive, (2) “centrists” say many Americans do not pay their taxes, (3) “the right” wants to close loopholes instead of increasing taxation.

(1) As is the case with all of these strawman arguments, we are not told who is claiming that taxation in America is regressive – is it Democratic leadership? Random lawmakers? Marginal online Leftists? What taxes are we even talking about – income, sales, payroll; federal or state? Hood accurately describes federal income tax quintiles (which are obviously progressive in theory) but then immediately undermines his own argument by admitting that other taxes are, in fact, regressive. Payroll tax is one of these – it hits low-to-medium income earners the hardest. Hood does not address whether a progressive income tax may not be so progressive in practice, given that income of the very wealthy is difficult to ascertain and is regularly underestimated for tax purposes by very high margins. He also neatly omits the fact that for the most economically prosperous decades in this country – from the World War period into the 1970’s – our average tax rate for the top centile of earners was a confiscatory 81%. It is now below 40%. Given that the most meaningful tax progressivism targets the top centile, our tax codes are clearly becoming less progressive over time. On top of this, the wealthy in particular tend to pay a much lower effective rate than their bracket implies. So yes, we have a mildly progressive federal income tax, but it doesn’t work that way in practice, and by Hood’s own admission, many other taxes are regressive on their face.

(2) This is true. Many Americans do not pay income tax; typically some of the wealthiest Americans. Our own billionaire president, Donald J. Trump, did not pay income taxes for decades. I doubt that Trump is singular in this regard. Amazon, the richest corporation in America, paid $0 in corporate income tax in 2018; General Motors, Southwest Airlines, and Goldman Sachs have all avoided income taxes at times during their operation. There are countless other similar examples. Hood, strangely, dismisses this argument by suggesting that it is the lower income earners who are accused of not paying taxes. I have never heard this argument made before, though I probably run in different social circles than John Hood. It is hard for me to imagine people sitting around and complaining that “we’d have a budget surplus if those poor folks would just pay their fair share in taxes.” Fortunately, Hood assures us that the working poor do pay their 20% in taxes; nothing more to see here. FYI, the current corporate income tax rate is a meager 21%. He never broaches the topic of the wealthy and large businesses evading income tax. This is, of course, the actual problem.

(3) Hood seems to be arguing that the tax loopholes commonly abused and debated are nothing more than personal and business expense write-offs. I will not argue against all ability to write off expenses – that is nonsensical. And while it is true that expenses and intentional debt can be exploited to greatly reduce taxable income (hello again, Amazon), these are not the only loopholes of concern. Massive estates regularly pass from one generation to the next without any estate/inheritance taxes being paid thanks to the tireless efforts of attorneys who have learned how to exploit the law for their clients. The wealthy hide their income in trusts, stock investments, and foreign accounts. At least 40% of annual income for the super-rich is derived from interest, dividends, and capital gains – which are taxed at a much lower rate than earned income. Hood again takes the path of zero resistance and makes no mention of these issues.

So what are we to do? Continue tax breaks for the rich for eternity and hope some of the crumbs fall through the cracks? John Hood offers nothing because he apparently sees no room for improvement with the status quo. But according to French economist Thomas Picketty, wealth inequality is one of the greatest destabilizing factors in societies across the globe. Look around at today’s United States after four decades of the Neoliberal experiment and you will see its failings. Picketty advocates for a three pronged solution utilizing taxation: (1) an enhanced and rigidly enforced estate tax, (2) a confiscatory tax rate of at least 80% for the top centile, (3) ending property taxes and instead taxing all wealth and capital progressively at a low rate. These practices, when used in tandem, could discourage individuals from accruing outlandish wealth, pay for the welfare state and infrastructure, and effectively redistribute wealth that can cycle upwards throughout the economy.

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