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Why is reducing taxes so complicated?

As I See It

Ever since our leaders in Washington expanded tax policy to include redistribution of wealth from the financially successful to those at the other end of the economic spectrum, we have been embroiled in class warfare.

America is the land of opportunity where anyone can, by combination of luck and hard work, improve his economic condition. Every citizen is guaranteed the right to pursue their dreams unhampered by official class distinctions that limit one’s future at birth.

Admittedly, the system is not perfect and prejudices do exist which make it harder for some groups to “get ahead.”

Those politicians who benefit from social unrest fan the flames of class warfare. There is a presumption that the wealthy are somehow not entitled to enjoy the fruits of their labor. Though America is the land of opportunity, those who have seized that opportunity and achieved financial success are despised by those who have not.

Go figure.

Taxes are required to fund government operations. We have come to expect government to be the solution for everything from national defense to a skinned elbow. The more government we demand, the more we must pay. Additionally, we now expect government to provide funds for our retirement (Social Security) and pay our medical expenses once we reach the age of 65 (Medicare). These services come with a hefty price tag and require substantial taxes to be levied on our paychecks.

A relatively new twist in the tax arena is the idea of redistributing wealth from the haves to the have-nots.

We accomplish this by taking more from the affluent than is required to fund government and passing it out to the less affluent through government programs and direct payments, such as the earned income credit. This assures that America will always have a permanent underclass who are dependent on liberal politicians for their daily bread and would not consider voting them out of office.

The individual income tax is the biggest revenue-producing arrow in the federal government’s quiver. Our tax system is designed to be progressive whereby the tax rates increase as income goes up. Starting at nothing for the lowest paid 20% of the workforce who pay no income taxes, the rate goes up to almost 40% for the higher income taxpayers. Former President Clinton raised the top bracket by about 7% during his term in office after former President Bush raised it about 5%. When President Reagan left office, the top tax rate was 28%.

New President Bush wants to reduce the top tax bracket to 33% under the theory that paying a third of one’s income to the federal government is enough. Additionally, many economists believe that reducing taxes will spur our exit from the current economic slowdown. That occurred when President Reagan significantly lowered income tax rates in the 1980s. The deficits that occurred during that period were the result of an enormous increase in government spending, far in excess of the increase in tax collections.

The liberals are all cackling that the tax rates should be left high on the wealthy and the earned income credit increased to help offset the payroll tax withholdings for Social Security and Medicare. Say what? It is not enough, say they, to totally remove the bottom 20% of the workforce from the income tax roles; the wealthy are now obligated to pay for their retirement and medical expenses also. This seems ridiculous to me and I hope the whole idea dies the painful death it deserves.

What are the real issues in the tax cut controversy?

1. If the government is collecting too much tax, someone has paid too much. If I accidentally overpay my bill at the store, I expect the store to give my money back. I would be appalled if they called and suggested that my overpayment be given to someone else the store deemed more deserving or needy.

If Presidents Clinton and Bush Sr. hadn’t raised the top tax brackets, the extra money would still be in someone’s pocket. Conservatives want it returned to the pocket from whence it came and President Bush’s tax cut is designed to do just that. Liberals want to target the tax cut to lower income workers without regard to whether they paid any of the tax in the first place.

2. The Bush-proposed tax cut is based on projections of future tax collections. Is it prudent to significantly lower tax rates before the money is in the bank? Many hard rock conservatives say yes, go ahead and cut the tax rates and everything will be OK. Most liberals, and many conservatives, suggest taking more of a wait and see attitude. Some favor putting triggers in the law that would restore the higher tax rates if revenue projections don’t materialize.

3. From my point of view, the real tax issue is none of the above. The real issue is the portion of the national income that goes to fund the federal government, roughly 21%. This percentage has remained fairly constant over the last decade or so, but it may be too high. How much government could we get for 17% of the national income? How about 15%?

Lowering governmental involvement in our lives would encourage independence, whereas big government always promotes dependence. There is no prospect of liberal politicians ever relinquishing any part of their fiefdom voluntarily to promote independence for their constituents.

No, the only answer is to mechanically reduce the size of government by reducing its income.

On the outside chance that my proposal to reduce the size of government falls on deaf ears, I suggest that putting triggers in the tax cut legislation makes a lot of sense. No mortal being can predict the next five years with any certainty, much less the next decade.

Thought for the Moment – No one has a finer command of language than the person who keeps his mouth shut. — Sam Rayburn, former Speaker

of the U.S. House of Representatives

Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at cpajones@msbusiness.com.

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