Category: Taxes

While the estate and gift tax is insignificant in terms of federal revenue, it is quite significant economically. It wastes resources. It discourages work, saving and investment. And it does virtually nothing to redistribute wealth (as some who favor it would like). In short, the estate and gift tax is a failure. It should be abolished.

Recently released data from the Department of Commerce reveal that federal, state and local taxes consumed a record 31.3 percent of gross domestic product last year – the highest level in U.S. history. Even at the height of World War II in 1945 total taxes only consumed 25 percent of GDP.

There is a better way of taxing. Under a flat tax, all income is taxed, and it is taxed at the same rate. Furthermore, income is taxed only once, at its source, when it is realized.

A flat or single-rate income tax would replace the current system of five rates and hundreds of deductions, credits, exclusions, etc. This change is grounded in widely accepted principles of taxation.

As Congress considers whether to reduce the tax on capital gains, much of the debate has focused on who would benefit from such a reduction. Opponents claim that those with high incomes would gain disproportionately.

When people on welfare earn income, they face two types of penalties. Not only do they have to pay taxes on their earnings, but they have their welfare benefits reduced as well. This reduction in benefits is a de facto tax, because it reduces their net income the same way direct taxes do.

Most taxes are paid by taxpayers with high incomes while the poor pay almost none, so tax cuts generally appear to benefit the wealthy more than the poor.

From the harshness of tax policy debates in recent years, one might suppose that the tax burden had been shifted from the rich to the poor. In fact, major tax cuts in the 1980s did just the opposite. They shifted an increasing share of tax payments to the wealthiest taxpayers.

Six proposed tax cuts in the Contract With America are designed specifically to increase economic growth.  Republicans claim that these tax reductions will lead to more jobs, higher wages and a higher living standard for all.  Democratic critics claim that these tax changes are a giveaway to the rich that will have to be funded by higher tax burdens for everyone else.

The 42 million-plus Americans age 60 and over represent a vast store of human capital, rich in talent and ability. Yet this valuable resource is increasingly wasted.  If elderly workers under the age of 70 want to improve their standard of living or continue using their work experience and skills, the government takes the bulk of their additional wages through special taxes.

Changes in tax rates affect how hard and long people work and how much they save and invest. But the official revenue-estimating arms of government ignore this fact in making their calculations.  They assume that earnings and saving behaviors will stay exactly the same regardless of the tax rate.

Many married couples pay more taxes than they would if they were unmarried. This penalty can amount to several thousand dollars per year even for moderate-income families. President Clinton's tax increase in 1993 made the problem worse.

Social Security benefits were entirely free of taxes until 1983, when Congress voted to tax 50 percent of benefits above a certain income level. President Clinton raised this to 85 percent in 1993. The new Republican Congress has promised, as one of its first actions, to repeal the Clinton tax increase on Social Security recipients.

Our income tax system discriminates against long-term investments.  Under current rules, investments in short-lived assets are more attractive than investments in long-lived assets. In fact, the longer the required depreciation period, the less attractive the asset is – especially during periods of inflation. The remedy for this problem is called "neutral cost recovery."

The 1986 Tax Reform Act increased the maximum tax rate on capital gains income from 20 percent to 28 percent. This 40 percent tax hike has reduced government revenues, discouraged entrepreneurship and caused many investors to hold on to assets they would prefer to sell.

The Freedom and Fairness Restoration Act would scrap virtually all current deductions, credits, exclusions and exemptions, as well as the five current tax brackets. In their place, it would establish a single 17 percent tax rate on a much broader tax base.

Higher cigarette taxes do help fund health care reform, but they will take most of the money from the families that can least afford it.