For countries like the United States, taxes are a necessary evil. The government uses tax revenue to provide services such as public schools, roads, national forests, civil service, Medicare/Medicaid, and unemployment, as well as to encourage certain behavior, such as mortgage deductions to encourage homeownership.
Furthermore, taxes can be used to encourage other types of behavior, covered below in the “Why We are Unsure About Taxes” section.
Why to Not Pay Taxes?
Besides the fact that people like to hold onto their hard-earned income, especially if they feel they can spend it better than the government can, there are legitimate, economic reasons why taxes harm society. In all cases, taxes produce what is called “deadweight loss.” The simple explanation is that is that in free markets the price of any good and the quantity available of that good automatically reaches a point where the amount of the good that a company is willing to provide at that price is equal to the amount that consumers want to pay at that price. If a tax is imposed, the price for consumers goes up. Because of that, fewer consumers are willing to buy the product at that price. And because retailers aren’t making any more money off of the product and fewer people are buying it, their overall revenue goes down—both the consumers and the producers lose. Yet, the total loss is greater than what the government gains from the taxes. The difference between what is lost and what the government gains is called the deadweight loss.
Similarly, increasing taxes doesn’t always translate into a gain for society. For example, in the 1970’s those in the highest tax bracket had taxes of about 70% of their income. Yet, increasing the taxes so much actually decreased the amount of revenue for the government. Because most people don’t like to pay taxes, an increase in the percentage of income one pays in taxes often provides incentives to work less—after all, why should we work more just to give that money away?
Why to Be Unsure about Paying Taxes?
There is a lot about taxation that is left up to debate. In many ways, it is this grey area that forms the bulk of the debate about taxation. Most taxes are distortionary, which means that they change the relative prices of things, which in turn changes consumer behavior. Taxes can encourage certain behavior, such as saving or spending. Trying to regulate saving and spending is important for the government—an increase in saving usually leads to an increase in investment which drives the economy in a positive direction. But how people respond to taxation depends on the type of person. Economists disagree on the extent to which changes in taxes affect an individual’s likelihood to save. Proponents of tax cuts argue that the increase in a person’s income caused by paying less in taxes is often saved, triggering an increase in investment. Other economists argue that a decrease in tax cuts must necessarily lead to a decrease in government services, meaning that the government’s ability to ensure a basic level of living for all of its citizens is diminished (for example, a tax cut leads to less money for Medicare).
The problem is that there are so many factors that affect the final outcome including whether people use tax cuts to save, whether the government cuts expenditures, and whether most goods and services are produced domestically. http://en.wikipedia.org/wiki/Tax_cut Having a President who has a solid grasp on economics in order to make decision as well as appoint proper advisors (including the Chairman of the Federal Reserve) is key.
Taxes in the U.S.
The biggie is the Income Tax, which formed the bulk of federal tax revenue as of June 2001. The U.S. has a progressive income tax, which means that the more money you make, the higher your tax rate.
Next up is the Federal Insurance Contributions Act tax, or FICA, which covers contributions to social security. This is a tax on income paid partly by the employer and partly by the employee. While this tax isn’t up for debate, the way in which it is managed is—as the Baby Boomer generation starts to retire, there are not enough young people to cover the drain on benefits, meaning that the U.S. may need to switch from a pay-as-you-go system to a fully-funded one (more on this later). Also falling under FICA are taxes for Medicare (health care for the elderly).
The controversial Estate Tax is the tax imposed on a person’s wealth when they die. Currently, the Estate Tax is in the midst of a 1% point per year reduction, which will end in 2011, when the Estate Tax goes back up to 55% of wealth (interestingly enough, there will be no Estate Tax in 2010…). Proponents of the Estate Tax argue that the tax prevents accumulation of wealth in a small number of hands, that it encourages work for younger generations, and that it encourages charitable giving (one of the ways to avoid giving 55% of your wealth to the government upon your death is by forming a charitable trust). Opponents of the Estate Tax argue that it is a disincentive for investment, unfairly targets those who might not have access to or see the need for estate planning, discourages entrepreneurship, and imposes double or triple taxation (on income and capital gain, for example). Because the George W. Bush’s change to the Estate Tax ends in 2011, it is likely that Congress will make changes to the Estate Tax before then, making this an issue that the next President will almost certainly address.
Social Security
Because taxes are used to pay social security, we’ve included social security in this section. There are two basic types of social security- one is called Pay As You Go and the other is Fully Funded. Currently the United States has a Pay As You Go system.
Pay As You Go
In a pay as you go system, those who are working pay taxes that are used to provide a set level of benefits for the retired. This system is almost like a trading arrangement between the elderly and the young, with the number of people paying taxes and the interest rate increasing overall benefits. The greater the working population, the less each person has to pay in taxes and the greater the relative benefit when they are older (because the amount paid in taxes grows with a higher interest rate). However, this system relies on having the population grow faster than the interest rate. Currently in the U.S. as well as elsewhere in the world, such as Europe, the population growth rate is slowing, making the Pay As You Go system unsustainable without an increase in taxes, an increase in population (such as from immigration), or a decrease in benefits. Because the Baby Boomers are too powerful of a political force to warrant a decrease in benefits, and because national security has been cracking down on immigration, the likely outcome will be an increased tax burden on the younger generation (yep, us).
Fully Funded
Another social security system is Fully Funded. In a fully funded system, the government invests the tax revenue in a private credit market. Benefits are determined by the payoff received from that investment. Another option is to allow taxpayers to decide how they want to invest their own taxes for social security. In short, a Fully Funded Social Security system is like a forced savings plan. If you already save a certain amount, you might benefit from this program. However, if you don’t like to save, being forced to save more might make you worse off than you were before. The current debate about privatizing social security is really about moving towards a Fully Funded System.
Why Should I Care?
This one is pretty much a no-brainer, as the tax system directly affects both social and personal welfare. The important thing to remember on this one is that taxes are in place to encourage certain kinds of behavior. So, if you’re voting for a candidate who promises tax cuts in the hopes that your savings will allow you to afford a Wii, it’s worth considering what the tax cut was intended to do. In some cases it may have been to stimulate spending. In others, it may have been to increase savings to stimulate investment. While your personal behavior is always your choice, it is worth considering what a candidate means to do with a tax cut or tax increase.
Senator Clinton believes in making the progressive tax system (which we currently have) more reflective of income—which means those who make the most should be paying the most. She disagrees with Bush’s tax cuts, which some have argued disproportionately benefited the wealthy. She has voted against raising the estate tax exemption to $5 million as well as against supporting permanent estate tax cuts. However, she did vote twice for retaining capital dividends tax cuts. If in office, she would likely raise taxes for the top-earning Americans and work to close tax loopholes for corporations.
When it comes to Social Security, Clinton opposes a privatized system that “would be tied to the fluctuations of the stock market.” Furthermore, she points out that a privatized system, that relies on an individual’s own earnings would penalize women, who often have less time in the work force due to childrearing. Despite her open criticism of private plans and stated dedication to find a long-term solution with Congress, Clinton has yet to shed light on how she would increase the solvency of social security with slowing population growth.
John Edwards
In the 2004 Presidential race, John Edwards made it abundantly clear that he dislikes George Bush’s tax cuts. In particular, he focused on how the Bush tax cuts shifted the tax burden from wealth to work (for example, reductions in taxes on passive wealth such as stock dividends or inherited wealth instead of on taxed labor). He voted against three major tax cuts, but for reducing the marriage penalty and increasing tax credits for college tuition. Repeatedly, Edwards has slammed those whose tax-rate on unearned incomes (stock dividends, etc) is less than that of a nurse or teacher. However, Edwards has proved he, too, has an aversion to a high tax rate—using legal methods of reporting self-employment income, Edwards avoided an estimated $500,000 in taxes.
Edwards has also attacked the complexity of the tax system, proposing a government-initiated tax filing system in which the government first sends a form to you saying how much you owe and why. Individuals could then review the form, sign it, and mail it back to the IRS. John Edwards’ plan also includes three tax breaks to strengthen “savings, work and families.” He proposes up to $500 in tax credit for saving, supplementing the Earned Income Tax Credit with bonds, making tax-exempt the first $250 of interest, capital gains and dividends. He also suggests raising the tax rate on long-term capital gains to 28%, capping executive pensions, and repealing the Bush tax cuts.
When it comes to social security, John Edwards is not for reducing benefits, nor for raising the retirement age. Instead, Edwards proposes a very bipartisan study group to find a long-term solution to the impending social security funds shortage. A possible solution is raising the earnings cap on social security taxes.
Mike Huckabee
Mike Huckabee’s proposed plan for taxes has ignited many a talk-radio show…. In lieu of the income and payroll taxes (the biggest tax revenues for the government), Huckabee proposes a steep (23%) consumption tax. The logic behind such a move is that because most people spend a fair amount of their earnings, the money will be taxed regardless if it is when the money is earned or when the money is spent. However, the sales tax encourages different behavior. For example, if you decide to save all your earnings for a year, and then spend it, you’ll be making interest on what you don’t spend. In short, proponents argue this plan can encourage people to save, while eliminating the disincentives to work that come with an income tax.
Opponents of the plan say it will disproportionately affect middle-income people (no more income tax credits that have helped many), and encourage black-market sales thereby causing a cycle of increasingly higher taxes. Other critics contend that Huckabee’s backing of the FairTax, as it’s known, is an elegant cover for the fact that he raised Arkansas taxes while governor of that state. Though the plan calls for the abolition of the Internal Revenue Service, rebates intending to reduce the effects of the tax on the poor and middle class would likely require another administrative behemoth. Under the rebate system, everyone would receive a rebate for purchases made up to the poverty level, meaning that those living below poverty won’t have any taxes at all.
When it comes to social security, Mike Huckabee is a proponent of private accounts (similar to a fully funded system). Those individuals who have a certain level of wealth would be allowed the option of a one-time payout, though details on this plan have yet to emerge. By scrapping income and payroll taxes (including social security), social security would be paid for by the new FairTax consumption tax.
While John McCain has emphasized the need for a bipartisan solution on social security, he has also said that raising social security taxes is off the table. In the 2000 election, McCain called for allowing taxpayers to invest at least 20% of their payroll taxes in private accounts. Previously he had also stated that he wouldn’t use social security money for other spending, as sometimes happens. McCain is critical of the social security earnings test, which sets a level of income (roughly $13,000) for those 65-67 that, if exceeded, results in a reduction in benefits. He supports individual savings accounts.
A believer in the Progressive Tax in deed and not just in word, Barack Obama has backed up that sentiment with votes for keeping taxes such as the Capital Gains Tax, the Estate Tax, and the Alternative Minimum Tax. In particular, Obama is vehemently against repealing the Estate Tax , referring to it as the “Paris Hilton Tax Cut” (this trend was started by authors Michael Graetz and Ian Shapiro). Additionally, he uses 2009 estate tax rates (when the tax exemption level is 3.5 x greater than normal levels) to cite that the Estate Tax affects only the “wealthiest ½ of 1%.” Obama’s tax plan includes eliminating income taxes for senior citizens making less than $50,000 a year (currently seniors are taxed on income over ~$13,000), granting universal credit to homeowners who do not itemize their deductions (typically people making less than $50,000/year), and providing $1,000 tax breaks to an additional 150 million working Americans. To pay for these tax cuts, Obama proposes closing tax loopholes in corporate filing, getting tough on international tax havens, and increasing the capital gains and dividends tax. Additionally, Obama, like other candidates, intends on simplifying taxes so that they “can be paid in five minutes.” Like Edwards, Obama believes that because the IRS already has bank and payroll information, there’s no reason why they cannot send taxpayers pre-filled tax forms.
On social security, Obama proposes raising social security taxes on those making more than $97,500 a year, which he states amounts to 6% of all Americans. He does not believe in cutting benefits, nor in raising the retirement age. He’s voted against amendments to privatize social security.
Like Mike Huckabee, Ron Paul wants to do away with the income tax. Paul would make up for the loss of revenue by increasing non-protectionist tariffs and excise taxes as well as by cutting government spending to its 2000 levels. Though Paul might not be able to realize such a drastic change in the tax system, one can be confident that he will certainly not raise taxes. He is strongly opposed to them and would likely push for tax cuts instead. Paul’s biggest concern, however, is not the taxes themselves, but government spending. Paul believes that any change in the tax code should be met with a large reduction in government spending, by eliminating programs—such as foreign aid and farm subsidies—and departments, like the U.S Education Department. Paul’s website is very thorough and contains a lot of his writing about taxation. (In an interesting, unrelated side note, Paul would like to make gold and silver legal tender in the U.S., meaning that people could choose to pay in dollars or gold--digital gold currency. He would also like to phase out the Federal Reserve.)
When it comes to social security, Paul believes the government use of social security funds is “a big lie.” Current pay-ins to the system, Paul argues, are used to pay current benefits as well as for other government spending. What we pay in social security taxes is nothing more than an IOU, Paul says. He identifies the need for the next generation to pay for current benefits, but disagrees about its interest enhancing benefits, especially when faced with shrinking population growth. While he believes in privatization of social security, he strongly opposes the government managing our social security funds. However, he does think that the government should apply 10% of the current budget to a stable trust fund for social security benefits. Paul believes that people should have the option to opt out of social security.
Mitt Romney
Though outspoken about his refusal to raise taxes, Mitt Romney has come under some fire for the manner in which he balanced the budget while governor of Massachusetts. He never raised taxes in that state (nor did he cut them), but he did raise fees from everything to driving and marriage licenses to professional registrations and firearms licenses. He also closed some corporate tax loopholes to generate another $150 million for the state. On the flip side, he did cut some aid programs to completely balance the budget. As a businessman by trade, Romney takes a natural interest in balancing budgets—he famously did so for the Salt Lake Organizing Committee for the Salt Lake City Olympics, which was $379 million short and suffering from a bribery scandal. Romney was also one of the first Republican candidates to sign a pledge vowing to oppose any attempts to raise taxes. Interestingly enough, he refused to do so when campaigning for governor, opposing signing a document that would prevent him from looking at all possibilities of revenue for Massachusetts. Romney has proposed eliminating the capital gains tax for those making under $200,000 a year. He has also advocated for eliminating the estate tax.
Mitt Romney approaches social security as a problem that can be solved. He sees four options to solve the growing problem—raising the retirement age, raising taxes, indexing benefits to prices rather than wages, and put the current social security surplus into private accounts. Romney is a proponent of the two latter solutions and has mentioned raising the retirement age as another possible solution. He definitely supports private accounts.