Here’s a riddle for you: When is an income tax not an income tax?
To get to the answer, let’s take a look at the way incomes are taxed. There’s the personal income tax that 53 percent of us are familiar with. Most of us automatically pay this tax to the federal government before we can spend even one dime of our paychecks.
Allegedly, the other 47 percent don’t pay any income taxes at all—so they think.
That 47 percent includes the government-designated poor, those who are unemployed and those who have so many deductions that their taxable incomes fall below the minimum 10 percent tax rate. There are also those who have managed somehow to game the system.
I’m not including the payroll tax (FICA), which also is deducted from every worker’s paycheck no matter how low his or her income is. Payroll tax is a completely different issue. It is the second most “regressive” tax that our government imposes.
Ha! You thought I would say that it’s the most “regressive” tax, but it’s not. I will explain later. The payroll tax just complicates things, so for this discussion, I’ll stick exclusively to the “income tax.”
There also are the taxes that businesses pay on their incomes. The rate for that averages around 35 percent. It is one of the highest corporate tax rates in the world, a close second to Japan’s.
Actually, the designation “corporate tax” is a misnomer. The corporate tax is embedded in the price of everything we buy. Corporations don’t pay it; they just collect it from us when we purchase something and they pass it along to the IRS.
There is yet another embedded tax, one that we don’t think about; one for which there is no federal form for us to fill out; one that does not provide refunds if we overpay; and one which provides a benefit only to a handful of U.S. citizens.
It is part and parcel of the income tax, and every person in the United States pays it whether that person is working or not. It is the cost that taxpayers must pay in order to comply with the unfathomable 67,000-page U.S. tax code.
According to economist Art Laffer, this cost of compliance is approximately $430 billion per year. That’s 30 cents out of every dollar paid in income taxes by individuals and businesses.
Oh, but remember, the taxes businesses pay are built into the prices we pay for everything, so we individuals are saddled with the whole burden of compliance. This affects everyone from the “fat cat” who buys a $10 million yacht, to the Cobb County panhandler who has just enough dough for a Big Mac.
Eliminating compliance costs would allow both these individuals to Super Size their purchases. It wouldn’t mean much to the “fat cat,” but the panhandler could probably use some extra fries.
Combined, the corporate tax and the cost of compliance represent the most regressive tax of all. Most experts estimate that it adds more than 20 percent to the cost of goods and services, and everyone pays the same rate regardless of economic status.
So when you hear that a national sales tax that replaces individual and corporate income taxes will hurt the poor, be aware that the poor already pay a tax on everything they buy, to the tune of more than 20 percent.
Anything less than 20 percent would be a tax break. No matter what you want to call it, that 20 percent is, in itself, a sales tax that is a direct consequence of our current income tax code.
So, the answer to the riddle, “When is the income tax not an income tax?” is “When it is a sales tax resulting from the corporate income tax plus the cost of compliance.”
Eliminate it and pressure from free-market competition could reduce prices on nearly everything by at least 20 percent.
Eliminate it and all Americans would have more cash in their pockets to spend or save as they please.
Eliminate it and American businesses could once again compete on a global level and our economy would skyrocket.
Eliminate it and jobs would be abundant again. Rich and poor would flourish.
With that said, reforming our current federal tax code will do little to improve the situation. That would only add more levels of complexity. We need to start from scratch with a new tax system that simplifies how we fund our government.
There are a lot of ideas out there espousing a consumption tax or a flat tax, but currently none are simple enough. None reduce the hidden cost of compliance enough, while eliminating the pass-through corporate income tax. And none are flat enough to eliminate class warfare that politicians love to exploit.
The good news is that we’re beginning to talk about real tax simplification, and even repealing the 16th Amendment. Perhaps in 2013, on the 100th anniversary of the insidious federal income tax code, we’ll see the beginning of the end of this repressive system and the class warfare it incites.