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Here’s What Real Tax Reform Looks Like

Paddy Quick Sep 22

President Donald Trump will not succeed in carrying out any significant tax “reform,” but it is likely that he and the Republican majority in Congress will further skew the existing tax structure to benefit the rich, the top 1 percert, at the expense of everyone else. This will continue the policies that have made the federal tax system significantly less progressive over the past several decades and thus contributed to increasing income inequality.

The fundamental cause of that growing inequality is that the income created by the increase in productivity that has taken place over the past 40 years has gone almost exclusively to capital, while wages have remained stagnant.

In contrast, the growth in productivity between 1945 and 1975 led to increases in both wages and profits. The main cause of this is the globalization of production, as multinational corporations transfer work to countries with much lower wages. Workers in the United States, however, have suffered more than those of many other “developed” countries such as Canada. The assault on the working class has worked systematically at both federal and state levels to undermine working-class organizations, in particular, trade unions. It has defeated hard-won restrictions on the power of money to influence elections, such as in the Supreme Court’s 2010 Citizens United decision that granted “free speech” rights to corporations and thus abolished limits on their financing of electoral campaigns.

The federal income tax’s structure is indeed “progressive,” as it requires those with higher incomes to pay a higher percentage of their income in taxes. Technically, they must pay 39.6 percent of their income in taxes, but the percentage that they actually pay is much lower.

While the top rate remained at 35 percent, the deductions that corporations can claim have allowed many to avoid paying any corporate income tax at all.

First, that percentage applies only to the portion of their income above the threshold for the highest tax bracket. A single person who makes $1 million has to pay the 39.6 percent rate only on the part over $418,400. They pay 10 percent on the first $9,325, the same rate as a minimum-wage worker, with the percentage rising in each higher bracket. (This top rate was 91 percent in the 1950s and stood at 70 percent through the 1970s, before Ronald Reagan cut it to 33 percent.) Second, the rate is a percentage of taxable income. The rich, like everyone else, are allowed to claim deductions that reduce the amount of their income that’s taxable, such as the standard deduction available to all taxpayers. There are many other deductions available that primarily benefit the 1 percent, however. The biggest is the deduction for interest paid on home mortgages. The rich have much more valuable houses, and the one-third of households that rent rather than own their homes can claim nothing at all.

The Social Security tax, however, is not at all “progressive.”

It is assessed only on wage and salary income, and income above the “cap” of $118,500 in 2016 was not subject to it. The many people whose incomes are so low that they pay no federal income taxes still have to pay 6.2 percent of their wages for the Social Security tax, plus 1.45 percent for Medicare. The Social Security and disability payments made from these funds, however, do provide a better return for those with lower incomes than the same money paid into private individual accounts would.

The share of federal tax receipts provided by corporate income taxes, which fall almost completely on the owners of capital, has declined from 15 percent in 1975 to 11 percent in 2015. While the top rate remained at 35 percent, the deductions that corporations can claim have allowed many to avoid paying any corporate income tax at all, as General Electric, a major defense contractor, did for eight consecutive years.

Looking at who pays taxes is only part of the story. The other part is what the federal government spends its money on. The largest item here is defense, whose department used to be called, with more honesty, the War Department. This pays for the military power the United States government uses to protect U.S. corporate global expansion. Federal domestic expenditures are also geared towards programs that benefit corporations, such as transportation networks, with no assurance that these will result in lower prices for the workers who use them.

Looking at who pays taxes is only part of the story. The other part is what the federal government spends its money on.

The Trump program for “tax reform” will be accompanied by arguments that the proposed tax reductions must be matched by cuts in federal government expenditures on the programs that provide benefits to the 99 percent, primarily Social Security, Medicare and Medicaid. (The campaign to abolish Social Security has led a large majority of the population to believe that they will not be able to collect any benefit when they retire. Yet the Social Security Administration’s Website is very clear that even if no changes are made in the system and it eventually brings in less than it pays out, planned benefits would not be cut to zero. The payments would be only 25 percent less than those authorized under current law, and they would be significantly higher than those currently paid to beneficiaries.)

We must demand a change in the federal tax structure. We need a structure that returns to us, at last, a portion of our increasing production, rather than allows it to continue to accrue entirely to the capitalist class.

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Illustration by Emily Gage.