The Economist: The Wonderful World of Taxes
Worries about the long-term political ramifications of a complicated, less transparent tax policy
We've all heard Benjamin Franklin's reference to death and taxes being life's only certainties. They are why we've searched for fountains of youth as well as tax havens since the beginning of consciousness. With taxes, some celebrate victory, depending on who they are and how they earn and spend their money. Considering the recent hoopla over federal tax changes, it's worth reminding ourselves of basic tax realities.
Let's start with the total cost of government. This can be calculated in different ways, but excluding payroll and Medicare taxes (technically forced savings for our retirement years), the total federal tax burden was 14 percent of all personal income in 20115. To this we need to add 8 percent for state and local taxes in Colorado (which is the 15th lowest burden in the nation). Combined, 22 percent of our personal income is for government services.
Or is it?
At the federal level, deficits have become the norm. That adds another 2.8 percent of personal income, which essentially defers the cost to the future (probably our children). Locally, many states like Colorado have become fiscally balkanized, with taxes levied below the level of local government to pay for some costs like infrastructure, libraries, schools and fire protection. All told, including fees for specific government services and primary and secondary education, the total government sector costs close to 30 percent of total personal income.
Economists look at taxes from several perspectives. These include fairness among those with similar and different abilities to pay, simplicity in administration, connectedness between payors and beneficiaries, adequacy to cover costs and stability over time. Political scientists might add representation and transparency to the assessment since democracies typically assert people should vote to tax themselves and that taxes should be in plain view. Another tax element centers on whether some taxes effectively create incentives or disincentives for specific behaviors like investing, buying a home or smoking cigarettes.
There will always be arguments in democracies over people paying their “fair share.” In 2015, 4.4 percent of households earned more than $200,000 in taxable income, representing 42 percent of all taxable income. This group paid 56 percent of all federal taxes. Conversely, households earning less than $75,000 (75 percent of all households) earned 22 percent of all taxable income and paid 14 percent of all taxes. It’s worth noting that taxable income shown by the IRS is about half of all personal income reported by the Bureau of Economic Analysis, so these numbers could change dramatically if all personal income vs. taxable income were used. In total, individuals paid income taxes totaling 71 percent and 58 percent of all federal and Colorado taxes respectively. In contrast, corporate income tax comprised 16 percent of all federal tax receipts and 6 percent of all Colorado tax receipts. At the federal level, the corporate share of all taxes is half of what it was 60 years ago. Estate or “death” taxes are really a minor portion of collections at 0.8 percent in 2015.
As an economist, I am most bothered by the complexity of federal taxes and running a deficit all the time. Keep it simple and reserve deficits spending for bad economic times and major wars. Our aging population alone will drive the deficit up for the coming decade, and this is under a low interest rate scenario. At the local level, I sense a potential tax disaster in Colorado municipalities since we rely heavily on sales taxes. As consumption patterns shift from taxable items like electronics to non-taxable items like health care, and from local to online purchases, our sales tax base may prove inadequate. I also worry about our roads, where dedicated tax collections are woefully short at the state and federal levels. Pretty soon, major road expansion may be entirely through toll roads.
I worry most about the long-term political ramifications of a complicated, less transparent tax policy. It drives us to less flexible solutions like Colorado’s TABOR amendment, which is not all bad. Some advocate taxing corporations more and others advocate eliminating all income taxes and charging a value-added tax (VAT) to all businesses based upon their labor costs. Under a VAT, we would pay taxes as part of the price of all goods and services. Nice and simple, but no longer would we feel the pain of transparent taxes, which drives us to greater awareness of the cost of government. I prefer keeping the tax burden in view and right where it belongs – on the voter. Perhaps we could eliminate corporate taxes totally in return for no “dark money” in our election process. I wonder what Benjamin Franklin would say.