The Conservative case for taxation

Conservatives tend to spend a considerable amount of time on the topic of taxes, it is a key campaign issue carried by the Republican party during every election. The definition of the TEA in the tea parties, a recent rightwing movement, stands in part for ‘Taxed Enough Already’. The Tea parties first began openly protesting government nationwide on April 15th 2009, the day when taxes are filed. Almost every republican presidential candidate since the party’s introduction ran on the position of tax reform.  It is a significant subject in American politics and one that any good debate in a political forum could not go without.

I should say that I agree that there needs to be reform in the tax system of the United States, but the ideas from the rightwing on tax reform appear to only to benefit the wealthy, the idea from that is to have that wealth trickle down. We are yet to see Trickle down economics, or Reaganomics, actually work effectively in comparison to other systems, but I’ll get into this more later on in the article. First, let’s look toward key arguments made regarding the current tax system and the true facts that lie behind them:

50% of Americans don’t pay income taxes

It is important we clarify the context or meaning behind this argument. You will have some people claim that some 40% of Americans typically don’t pay income taxes. Others will claim that 51% of households didn’t pay any taxes over a certain year. We should distinguish what people imply or mean by these statements, otherwise they will complain that you took them out of context, or didn’t understand what they meant or implied. Now it is probably true that around 40-50% of American residents/citizens do not pay any income taxes at all, but let’s break down this number.

The total US population as of 2011 was around 312 million residents/citizens (1), of which 20% of that population, just over 60 million, were 14 years and under. So there we go, we’ve already counted 20% of the population who don’t pay or file for taxes (understandably). They have parents who look after them and pay taxes on their behalf. Although if we count pocket money for some of these kids, money they earned, then rightfully they probably did pay sales taxes. The population of residents above the age of 65years, the average age of retirement, was about 13.1% of the population. Now there are a fair number of 65year olds or older still in the work force, although it’s understandably a small portion of that population. The AARP represents something of around 40million retirees (2) and near retirees so that’s another idea of the population of retirees. We’ll take around 3.1% of that number off and assume that this is roughly the portion of elderly still working or are semi-retired, this bring the number down to 10%. So really, we have 30% of the US population who represent the retired, elderly and children, who almost certainly will not contribute much in the way of taxes at all. As of 2011, 9% of the population was measured as unemployed in the country (3). 15-24year olds, young people, represent a total population of around 14% of the population (4) and it would be safe to say that a good portion of that number consists of high school and college students whom are not employed but are instead on full time study. We’ll take half and say 7% of the U.S population, or half of 15-24 year olds, do not work so in turn they do not contribute much if any in income taxes. So we’ve already explained why 46% of the American citizens would not pay federal taxes.

At times the argument that these 40-50%ers don’t pay income taxes are linked to the fact that the wealthy pay more taxes than everybody. I’ll be getting into the wealthy and taxes later, but to say that this percentage of Americans are being given a free pass by mostly the wealthy is misleading. To say the retired and elderly are being looked after thanks to the top percent of the working population is wrong, because those whom have retired had worked the vast majority of their lives, had paid taxes into the US economy, and have earned their benefits through means of medicare and social security. Children are cared for by their parents and don’t work for obvious reasons. It’s true though that there is a small portion of children cared for by the state, but this is but a fraction. Children have their parents to look after them and cover costs for them. It’d be pretty insulting to tell a hard working father, or a single mother of a child, to be thankful to the wealthy for looking after their children. Not only is it insulting, but delusional, however this is what’s often implied.

51% of federal tax filers don’t pay any income taxes

Well that number varies, some say it’s 40% of working Americans whom don’t pay income taxes, I’ve seen figures of 60%, but regardless, I’m sure many folks would be looking at this and thinking ‘freeloaders’! While this statement is true (5) there is more to it than the eye readily perceives, so let’s look deeply behind this statement. We’re talking about registered working Americans who file federal taxes, right down to the student taking a part time job while studying, to the semi-retired 65year old earning every last penny before he fully retires. I should say as well that this statement has been exhaustively discussed and clarified but let’s take a look into this again. Why would 51% of federal tax filers be excluded from being taxed? Well they’re not excluded exactly. Many of those working folks within that 51% have already paid income taxes like everybody else, they just receive it back in the form of social welfare. We must also take note that there are many other working Americans whom earn so low in the income bracket they don’t qualify for being taxed by the federal government. This doesn’t mean that they don’t pay anything at all to society as there are state taxes to take into account, sales taxes, payroll taxes. Politifact did a very good analysis on this case:

 Estimates by the Urban-Brookings Tax Policy Center project that for tax year 2011, 46.4 percent of households won’t have any income tax liability. However, of this number, 28.3 percent will pay payroll taxes, the center projects. Of the remaining 18.1 percent with neither income nor payroll tax liability, 10.3 percent are elderly and 6.9 percent are not elderly but have incomes lower than $20,000. In other words, all but a tiny sliver of Americans without either income tax or payroll tax liability are either elderly or poor.

http://www.politifact.com/truth-o-meter/statements/2011/jul/08/john-cornyn/john-cornyn-says-51-percent-american-households-pa/

I don’t know about you but I certainly don’t see an issue with excluding somebody who barely makes $400.00 a week from income taxes, while having somebody who earns $10,000 a week in comparison to pay 35% (6). The latter still has a wage where they could live well beyond their means, but of course, any tax system that does not favour the wealthy is communism or socialism to my conservative counterparts..

The wealthy pay the most taxes in America

It is true that the wealthy pay more federal taxes than any other income group in the country, although there are obvious reasons to this. The top 1% of wealth holders in the United States paid something like 29% of federal taxes as recently as April 2011 (7). It’s a large tax burden to carry for just 1% of the working force right? Well not if you hold more wealth than the entire bottom 90% of the work force. As of 2007, the top 1% earned somewhere around 34.6% of the income and financial wealth in the United States (8), this is well above what they’re being taxed for. By December 2009 that wealth had increased to 35.6%, a significant rise for the wealthy in just two years. In contrast, the bottom 90% whom owned just 27% of wealth in 2007 saw that share fall to just 25% by 2009 (8). So yes, the wealthy do appear to may more taxes than the majority of the population, but that’s because they obviously earn more than everybody else, and that wealth continues to rise, in contrast to the middle and lower classes.

Tricke down economics and tax cuts

Tax cuts are the cornerstone to any Republican presidential campaign, and a core argument made by libertarians and fiscal conservatives alike. There’s nothing wrong with tax cuts as a measure, however it really depends in which way you end up cutting taxes that really gets my attention. I work in a small business, my employer, while I may not agree with him at times (as most us will) is a good guy. He is a hard worker, and he has spent a considerable amount of time building up his business. Thanks to him I am employed and it is individuals like him, small business owners, that are the cornerstone to economies in western nations. I would support any measure of the government to cut taxes for employers like him, even in bad times, not because I think he’ll hire more employees necessarily, but because these cuts will be essential toward him keeping his business afloat, and to promote him maintaining jobs.  My employer is not that wealthy, I had spent a considerable amount of time working with him on the financials of the company. To give you an idea, my employer earns around $120,000. He is a well off individual, but not wealthy, per say. After spending sometime researching, the latest research to what the average small business owner earned in the United States alone in 2011 was between $25,000 and $183,000 (9). Though this figure can be debatable, as there may be different definitions as to what constitutes as a ‘small business’, and other factors. Nevertheless, that is the best estimate I could come with in research, and appears more less to make sense. It appears that business owners would earn on average what typical upper middle class earners would, with some earning below and some earning above. Why is this significant? I’ll get into this soon, but let’s get down to the idea of tax cuts in the eyes of the rightwing of the political sphere.

Conservatives believe in this idea that every time you give tax cuts that primarily favour the wealthy, that wealth will somehow trick down to the lower classes and jobs will be created. There are a number of issues with this:

Issue 1: The assumption that all wealthy people are employers or job creators

Issue 2:  The assumption that once that wealth is created, parts of it will fall down to the lower classes

Issue 3: The assumption that business owners will create jobs as the result of tax cuts, even during financial crises.

Just how effective are trickle-down tax cuts? Well let’s account for the record tax cuts primarily favouring the wealthy over the last 30 years:

Reaganomics

From 1981 Reagan introduced and signed in the largest tax cut since World War II. The top income rate, the wealthy, saw their taxes cut from 70% down to 28% (10) and this was welcomed by the business community and investors alike. Following these tax cuts, inflation decreased from 10.3% in 1981 to 1.9% in 1986 (11) which was rather significant and expected when you cut taxes by more than half for the highest income bracket. However, by 1988, inflation had risen back to 4.1% and continued to rise in the preceding years, reaching 4.8% in 1989. By time Bush Snr took over in 1990, a year that Reagan’s policies were still in full force, inflation rose to 5.4% (11).

Despite Reagan’s record tax cut for the wealthy, inflation returned to it’s original state and continued to rise even after Reagan left office. When Reagan started his administration in 1981, US debt was around $950 billion. By the end of Reagan’s administration in 1988, debt had risen above $2.6 trillion, more than 2.5 times since he started, and more than any other president in US history. This is significant, considering that Reagan, being the avid fiscal conservative, campaigned on restoring fiscal discipline to government. Reagan’s policies would play an instrumental part to restoring responsible government including his record tax cuts. The end result was Reagan having dig deep in America’s wallet as the result of many of his ‘fiscal conservative policies’ including his trickle-down tax cuts. The was an interesting analysis done by Factcheck.org on this idea of cutting taxes, and expecting more revenue to come out of it:

In fact, the last half-dozen years have shown us that we can’t have both lower taxes and fatter government coffers. The Congressional Budget Office, the Treasury Department, the Joint Committee on Taxation, the White House’s Council of Economic Advisers and a former Bush administration economist all say that tax cuts lead to revenues that are lower than they otherwise would have been – even if they spur some economic growth.

http://www.factcheck.org/taxes/supply-side_spin.html

Around 12 years following the end of Reagan’s administration, the Bush administration came into play and with that, Bush junior intended to bring back many of the policies that had been around during the Reagan administration, including tax cuts in much the similar manner to that of the Reagan cuts. In 2003 Bush passed tax cuts, primarily aimed at the wealthy, that amounted to more than $800 billion, and these tax cuts continued even into the Obama administration, when he found himself having to cut a deal with the Republicans. In the end, more than $2 trillion in tax revenues were cut out (12) in order for the Bush tax cuts to be employed. The result? Well inflation somewhat increased even following those tax cuts in 2003.  Inflation was around 2% in 2003 and by 2005 it had risen to 4.3% (13). Debt 2003 was somewhere around $6.5 trillion in 2003 but by 2006 it had risen to $8.5 trillion.

Now I’ve had my fair share of debates with Reaganomic supporters, libertarians, and their defense always comes down to jobs, job creation. The fact that we see minimal change in inflation after these trickle-down tax cuts? Irrelevant. Debt creation? Unconnected (they’ll blame the democrats in congress for this). Income gap between the wealthy and poor following these tax cuts? Irrelevant, apparently. It’s just all about job creation down to the core. Let’s take a look into this claim. As the result of these record trickle-down tax cuts, libertarians and reaganomic advocates argued that Reagan created 20 million jobs over the course of his administration. The 20 million figure is a twisted ‘rounding’ method that conservatives use to argue in favour of Reagan’s policies, it’s actually 16 million jobs (14) that can be accounted for being created under his administration.  This is still an impressive number, but how does it compare to other administrations? Source from the Wall Street Journal (15):

Bill Clinton (2 terms): 23 million jobs, 34% top tax rate

Ronald Reagan (2 terms): 16 million jobs, 28% top tax rate

Jimmy Carter (1 term): 10.5 million jobs, 70% top tax rate

George W Bush (2 terms): 3 million jobs, 34% top tax rate

George H Bush (2 terms): 2.5 million jobs, 28% top tax rate

http://blogs.wsj.com/economics/2009/01/09/bush-on-jobs-the-worst-track-record-on-record/

With Ronald Reagan, George H & W Bush stacked among others, it’s fairly apparent that their trickle-down tax policies didn’t amount to much of a difference in performance, historically. Even Carter, whom is considered the worst president by most conservatives, created more jobs than either of Reagan’s individual terms, with the top tax rate more than double that.

So tax cuts are bad?

No. As I stated earlier, I believe that tax cuts are an essential and important component toward an economic strategy to stimulate growth, job creation and spending. Tax cuts however are only temporary in effect as historically demonstrated.  They also have minimal effect during financial recessionary times, when people are understandably reserved about spending. For a middle class family on a mortgage, credit debt and on a tight budget, a $100.00 a week in additional funds as the result of tax cuts will assist them, but it is unlikely that it will motivate them to spend. Trickle-down tax cuts are not the solution to bringing about financial growth, especially during recessionary periods. The idea that we should give more money to the wealthy while the lower classes are struggling and suffering, with this broad assumption that more jobs will be created and spending restored, is a farce.  It’s this trickle-down tax policy that has only served to grow the wealth of the wealth, under the deceptive guise that this serves in the best interests of the lower classes. Mind you, there many of the wealthy are successfully and productive individuals to our society, but a system aimed and benefitting them to the maximum does nothing more but expand their control of the economy.

Myth: The wealthy are the job creators

Going back to my previous mention of small business employers earlier, I found that the vast majority of them earn within the middle class income bracket (9). Just to clarify to the readers, a small business is that fewer than 500 employees in the United States. Small business owners in the United States earn an income between that of $25,000 and $183,000, a far cry from the top 1% earners. What does this mean? Well considering that more than 50% of the American workforce are employed under small businesses, and considering that 70% of new jobs are sourced from small businesses it’s well off target to credit the wealthy as the job creators (17). So by logic, if we’re focusing the tax incentives and cuts on those whom provide the jobs, why are we focusing solely on the wealthy?

 References

(1)   https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

(2)   http://www.thedailybeast.com/newsweek/2011/02/20/who-rules-america-retired-people.html

(3)   http://www.bls.gov/news.release/empsit.nr0.htm

(4)   http://www.cdc.gov/motorvehiclesafety/teen_drivers/teendrivers_factsheet.html

(5)   http://www.politifact.com/truth-o-meter/statements/2011/jul/08/john-cornyn/john-cornyn-says-51-percent-american-households-pa/

(6)   http://www.moneychimp.com/features/tax_brackets.htm

(7)   http://www.politifact.com/truth-o-meter/statements/2011/apr/18/michele-bachmann/michele-bachmann-says-top-1-percent-pay-40-percent/

(8)   http://blogs.wsj.com/wealth/2010/04/30/top-1-increased-their-share-of-wealth-in-financial-crisis/

(9)   http://www.payscale.com/research/US/Job=Small_Business_Owner_%2f_Operator/Salary

(10)                       http://www.huppi.com/kangaroo/L-carterreagan.htm

(11)                       http://www.presidentreagan.info/inflation.cfm

(12)                       http://www.washingtonpost.com/blogs/fact-checker/post/revisiting-the-cost-of-the-bush-tax-cuts/2011/05/09/AFxTFtbG_blog.html

(13)                       http://texasenterprise.org/article/core-vs-headline-inflation

(14)                       http://transcripts.cnn.com/TRANSCRIPTS/0311/09/le.00.html

(15)                       http://blogs.wsj.com/economics/2009/01/09/bush-on-jobs-the-worst-track-record-on-record/

(16)                       http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=213

(17)                       http://archive.sba.gov/advo/research/sb_econ2001.pdf

(18)

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