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Tuesday, February 4, 2014
Should The Income Tax Be Scrapped?
There has been a lot of talk of late about drastically changing the nation’s income tax system, including getting rid of the Internal Revenue Service (IRS). 
Many people feel this is long overdue, while others believe such a dramatic change is too extreme and favor a general overhaul of the existing tax laws. 
Still others like things the way they are and prefer that nothing be done at all.
 
Before deciding whether or not the income tax and the IRS should be scrapped, we should also consider whether or not the present tax system is “fair” and, if not, what would be more equitable. 
Although arguments about this subject have raged back and forth for years, generally focusing on making the “rich” pay their “fair share,” we rarely hear specific facts about who actually pays most
of the income tax, or the least.
 
The Federal income tax, currently as high as 39.6% of “taxable income,” is increased by as much as 13.3% in state and local income taxes, plus another 6.20% and 1.45% in social security and
Medicare taxes, which makes the total tax burden for some taxpayers almost 61%, not including excise, sales and property taxes, along with a host of other taxes, assessments and fees too numerous
to mention. By contrast, medieval serfs were required to give only one-third of their production to the lord of the manor, and they were considered slaves. 
 
While those who have lower incomes pay the least, with tax rates that range from zero to 15 percent, they are also subject to Federal payroll taxes of 7.65%,
in addition to various state and local payroll taxes.
 
Because the same income is frequently taxed more than once, the effective cumulative tax rates are often much higher than most people realize. A simple analysis graphically illustrates the point:
 
If you track a $1,000 of corporate profits to a shareholder, the end result might be something like the following:
 
First, at the corporate level, the $1,000 may be taxed at around 35%. That leaves $650 available for dividend distribution. Those shareholders who receive a dividend and are in the top tax bracket
would pay 35% in Federal income tax on the $650 dividend income (married, filing jointly), leaving $257.40 to spend or save. If that money is saved and becomes part of the taxpayer’s estate, and
assuming the estate is taxed at the current maximum rate of 40%, it would be reduced by another $102.46 in Federal Estate Taxes, leaving a balance of only $154.
 
Thus, a $1,000 in corporate earnings, after passing through three levels of taxation, could conceivably end up being whittled down to $154. The original $1,000 of corporate profit would
have been assessed a total of $846 in taxes, or a whopping 84.6%. Is that the “fair share” that many politicians keep saying the “rich” should pay?
 
Facts generally don’t seem to matter much in these highly politicized arguments, but to properly frame the discussion, the following information should be considered (Source: Rush Limbaugh’s website):
·        Only half of all taxpayers pay 97% of the income tax (Federal). Putting it anotherway, half of all wage earners pay no income tax at all. 85% of federal income taxes are paid by the top 25%
of income earners.
·        The top 1% of wage earners (the “rich”) pay over one-third (39%) of the total Federal income taxes collected. (Up 2% from 2000 when President Bush took office).
·        The top 5% of wage earners (the “rich”) pay over half (54.36%) of all Federal income taxes.
·        The top 10% of wage earners (the “rich”) pay almost two-thirds (65.84%) of all income taxes, and
·        The top 25% of wage earners (the “rich”?) pay almost 84% of the total Federal income taxes received.
·        The Wall Street Journal reported, “In 1980, when the top income tax rate was 70%, the richest 1% paid only 19% of all income taxes. Now, with a top rate of 35%, they pay more than double
that share.”
 
And what percentage of all the income in the United States is earned by these groups?
·        The top 1% earn 16.77% of all income.
·        The top 5% earn 31.18% of the total income.
·        The top 10% earn 42.36% of the total income, and
·        The top 25% earn 64.86% of the total income.
 
So, although only 1% earn 16.77% of all the income, they also pay over one-third (39%) of the total income taxes collected. The top 5% earn a little over 31% of all the income but pay more
than half (54.36%) of the nation’s total income tax bill. And, while 25% earn about 65% of all the income, they pay almost 84% of the total income taxes.
 
It’s clear that the income tax burden is heavily skewed against those with higher incomes, some would say punitive, while almost half the filers pay no income tax at all.   
 
Just how much should the “fair share” be? Should the top 5% or 10% of the wage earners pay 80% of the income taxes? Or 90%? And, is it “fair” that almost half of all wage earners pay no income tax at all? 
 
When the 16th Amendment to the Constitution established the Federal income tax in 1913, the intent was to tax only the very rich. Rates began at 1% and increased to 7% for taxpayers with income in excess of $500,000. Less than one percent of the population paid any income tax at all, compared with almost 50% of taxpayers paying as much as 35% of their taxable income today. 
 
According to the U.S. Census Bureau, the median annual household income in the United States is roughly $50,000 per year. A Gallup poll found that those below $50,000 per year typically said they would
need to earn $100,000 or more in annual income to be rich. Those at or above the $50,000 level typically report they would need to earn $200,000 a year to be rich, which expands to $250,000 among those
well above the U.S. median income ($75,000 or more in annual household income).
 
Everyone would undoubtedly agree that taxes are necessary to operate the government, provide police protection, defend the nation, build roads, fund essential programs such as education and health care,
etc., etc., so the issue is really how to do it, and this invariably comes down to the question of whose ox should be gored, not what is “fair.”
 
We may have reached the point where changing our system of taxation is so long overdue that something more than tinkering is necessary. Three alternatives have been proposed: the Flat Tax, a national
sales tax, and ad valorem taxes. Politics aside (if that’s possible), perhaps we should examine these alternative options more closely.
 
© 2014 Harris R. Sherline, All Rights Reserved
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