February 8, 2025

Ed the Income Tax

IMMEDIATE RELEASE 23 November 2024
WASHINGTON MERRY-GO-ROUND
Today’s Events in Historical Perspective
America’s Longest-Running Column Founded 1932
              End the Income Tax?
By Douglas Cohn and Eleanor Clift         
 
WASHINGTON – End the Income Tax? It sounds like a good idea. It may be a good idea. It certainly is a popular idea. So, a populist president-elect is embraced the idea in the closing week before the election.
              This is the essence of populism: promote and promise a popular idea regardless of the intent or ability to implement it.
              First, is ending the Income Tax a good idea? Arguably, yes. The IRS is the least-liked government agency in the country. Few will be the marchers and banners to “Save the IRS.”
              Ratified in 1913, the 16th Amendment created the pathway to income taxes as a means of countering the concentration of wealth held in the hands of the Robber Barons, the name given the Rockefellers, Vanderbilts, et al. Income inequality was at its peak, and the first tax was only levied against the top three percent of income earners. However, with America’s entry into World War I in 1917 and World War II in 1941, the tax became an obligation of most adult citizens, albeit on a graduated basis.
              The graduated income tax was designed to be progressive, and for a time it worked. Income inequality narrowed. This changed direction in the 1980s when the Reagan administration lowered the top rate from 70 percent to 28 percent, and a new generation of Robber Barons arose. The top rate subsequently moved up and down, but especially down during the George W. Bush and Donald Trump administrations.
              Further undermining the progressive tax is the Social Security tax, the largest single tax most taxpayers pay. People believe they are paying for their own retirement and employers are paying half the tax. This is false. It is an inter-generational transfer tax. In other words, we are paying for the previous generation’s retirement, and anything an employer pays on behalf of an employee is considered to be included in the employee’s compensation package. Further, the tax is not levied on incomes over a certain level, currently $168,600.
And finally, there is no money in the Social Security Trust Fund, a fund supposedly on the brink of insolvency because by law all Social Security taxes paid into the fund are immediately loaned to the federal government through the purchase of Treasury Bills. If the Social Security tax were to be wrapped into general graduated income taxes, the average taxpayer would see a dramatic reduction from the existing two-tier system of income and Social Security taxes. The mantra should be: Keep Social Security; end the Social Security Tax.  (This subject is covered in detail in my upcoming book, “The World We Leave You.”)
              Meanwhile, wealthy individuals and companies lobby and contribute to politicians, aided by the weakening of campaign finance laws, most notably through the political action committee exemption that allows unlimited donations.
              In the end, the income tax has failed. In 1913, 1 percent of wealthiest households held 18 percent of the nation’s wealth. By 2021 the top 1 percent held 32 percent. (Source: Econometrics Laboratory. University of California, Berkeley. “The Quarterly Journal of Economics. Income Equality in the United States.”)
              In the absence of Social Security taxation reform, campaign finance reform, and income tax loophole reform, the problem of income inequality will persist. And since these reforms are unlikely to occur, it is reasonable to consider a replacement for the Income Tax, but with what?
              Trump advocates a return to the high tariff era of the 19th century that proved to be sectionally divisive, unfair, and regressive. High tariffs increase inflation and initiate trade war retaliation that will adversely impact U.S. exports.
              A regressive value-added tax (VAT) especially popular in Europe is nothing more than multiple sales taxes, being assessed at every change of hands from production to distribution to consumption.
              On the other hand, a complex direct national sales tax would exempt non-commercial food and energy, and possibly other items such as the first $30,000 of a vehicle.
The vehicle example would actually fall under another category, the luxury tax. This was attempted in 1991 with a 10 percent tax on automobiles over $30,000, planes over $250,000, and jewelry over $10,000. The result? It stifled consumption, cost jobs, and was rescinded between 1993 and 2002.
              Asset taxes, most notably the real estate tax, are inherently subjective and can literally price people out of their homes, a fact that is especially punitive to the elderly unless they are exempted.
              A return to the original concept of the 1913 Income Tax would tax individuals on a graduated basis for incomes in excess of $500,000 with no deductions necessary because the first $500,000 would be exempt.
              Corporate income taxes are in a different category and should be lowered, not raised, because businesses are employment generators. Further, they are a source of disincentive when raised too high, resulting in the offshore relocation of companies.
              Clearly, there are these and other options, and they must be considered and determined before there is any resort to a populist call to simply End the Income Tax.
 
See Eleanor Clift’s book Selecting a President, and Douglas Cohn’s latest books The President’s First Year: The Only School for Presidents Is the Presidency and World War 4: Nine Scenarios (endorsed by seven flag officers).
          Twitter:  @douglas_cohn
          © 2024 U.S. News Syndicate, Inc.
          Distributed by U.S. News Syndicate, Inc.
END WASHINGTON MERRY-GO-ROUND

Leave a Reply

Your email address will not be published. Required fields are marked *