Most people think that under our tax system the wealthy pay a higher percentage of their income in taxes than those with less income, with those with the lowest income paying the lowest rate. This is called a progressive tax system.
The reasoning behind a progressive system is twofold: one philosophical, one practical.
Philosophically, under our social contract, all citizens have a responsibility to support the work of the government in providing for the greater good and its helping insure that those in need still have a chance at “life, liberty, and the pursuit of happiness” as promised in the Declaration of Independence. Those citizens with more wealth, who have benefited more from the system, have a moral responsibility to give back and support their fellow citizens by contributing a greater share of their income through taxes to support the government.
Practically, the wealthier you are, the higher the percentage of your income you can afford to pay in taxes because despite that higher tax rate so much is still left over for your personal use. On the other hand, if you have only a very modest income, you can hardly afford to pay any taxes and still have a livable standard of living.
Our federal income tax is based on this theory, although it is far less progressive today than it has been in the past. For example, in the 1950s during the Eisenhower years, the wealthiest American’s payed a marginal tax rate of 90%. During the Johnson and Nixon years, that rate dropped to 70%. Under Reagan the rate dropped to 50%. And under Bush II, the rate dropped to 35%.
Did these higher federal income tax rates hurt the wealthy or the country during this period? No. The wealthy were still quite wealthy. And the country was strong economically, with of course the usual dips of the economic cycle.
So what have we gotten in exchange for these reduced taxes on the wealthy? Nothing but ever increasing deficits (despite a reversal in the last years of the Clinton presidency), reduced government ability to pay for infrastructure projects, education, and provide a safety net for those in need, and increased income inequality. The economy and nation have not grown stronger; the rich have just gotten richer.
But the story doesn’t end with the federal income tax. It gets much worse when factoring in state and local taxes, especially sales taxes, which fall disproportionately on those with less income and are thus regressive. This is especially severe in those states that currently have no income tax and so rely totally on regressive taxes. For example, the state of Washington has the most regressive tax system in the country. There the poorest 20% of residents pay seven times as much of their income in state and local taxes as the top 1%.
Each year, Citizens for Tax Justice issues a report, “Who Pays Taxes in America.” The most recent CTJ report shows that combined local, state and federal taxes produce a system that more resembles a flat tax than a progressive tax: In 2015:
The top 1% - those with incomes averaging $1.7 million - will pay 32.6% of their income in taxes.
The same is roughly true for the next 9% - those averaging more than $176,000.
The next 50% - those averaging between $49,000 and 125,000 will pay an average of 29%.
The next 20%, those with an average of $30,000, will pay 23%.
The bottom 20%, averaging $15,000, most of whom live in poverty as defined by the government, will pay 19% of their income in total taxes.
The unfairness of this system is manifest. It’s unfair even that those who earn $200,000 a year pay the same tax rate as those earning many millions. It is outrageous that the middle class pays virtually the same rate … 29% as opposed to 32%. It is beyond belief that the poorest 20% of Americans pay 19% of their incomes in taxes … yes, they typically pay little or no federal income tax, but state and local sales taxes take a substantial cut out of their pockets when they are barely scraping by.
This describes a tax system that should put the United States to shame. And it should put the wealthiest Americans to shame, although I think the evidence shows that that emotion is almost impossible to call forth from them, the example of Warren Buffet to the contrary notwithstanding.
The solution is that the federal income tax should be put back on a much more progressive scale, as it was for most of its history. And state and local governments should be required to use a progressive income tax for their tax revenue rather than a sales tax or other regressive tax system.
This not only makes moral sense, it makes economic sense. The result would be a substantial boost in real income for most Americans with a resulting boost in spending and thus to our consumer economy. If the net changes were not tax revenue neutral … that is if the changes resulted in higher tax revenues … that would provide much-needed funds to begin repairing our country’s neglected infrastructure and for other important but underfunded government tasks.
Our current tax system should be unconstitutional, but there is no measure in the constitution that requires fairness in the legislative process. But if legislators and the general population cannot see, when presented with these facts … and they are facts, that our tax system is unfair, not to the rich as they frequently complain but to the rest of the populace, and that it hinders a large portion of the population in the exercise of their right to “life, liberty, and the pursuit of happiness,” then our nation is at a very sad point.
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