CONCERNS ANSWERED
 
Here I anticipate and answer some likely criticisms of the tax system proposed at this site. 
 
For proposal, see Proposed Reform. For more on justifications, see Tax Reform Essay.

Some will say a net-worth tax is a confiscatory tax (Wrong!) - that the government is seizing a portion of your property. Yes, your governments would require payment of a tiny portion of the wealth from those rich enough to pay. Every tax is confiscation, a required payment from your wealth. For income taxes, your earnings are generally withheld (confiscated!) before you ever see them. For sales and property taxes, the tax is taken (seized!) from your accumulated wealth, just like the proposed net-worth tax. The alternative to our governments requiring tax payments is, for starters, closing our schools, letting our bridges fall into the rivers they cross, discharging all of our soldiers, ending veterans' benefits, and stopping all Social Security and Medicare payments.

Some will say a net-worth tax is "double taxation" since the money the wealthy have accumulated has already been taxed as income (Wrong!). Firstly, much of this wealth is from unrealized capital gains that has never been taxed, or it is from qualified dividends and long-term capital gains that were undertaxed (at roughly 4-fold lower total federal tax rates) compared to work. Secondly, under the current system, nearly all money used to pay sales, excise, and property taxes has already been taxed as income. They, more than a net-worth (wealth) tax, represent double taxation and are regressive taxes to boot. Most of them should be done away with, certainly before dismissing a wealth tax as double taxation.

Taxing the wealth (net worth) of the most wealthy will increase their taxes. Some will say: "But the top 5% already pays 60% of the taxes." (Wrong!) Firstly, the top 5% own 55% of the wealth (net worth) in this country. It seems that they are under-taxed if they pay only 60% of the taxes while 15% of the nation lives in poverty.

However, secondly, the sound-bite is wrong. The correct statistic is: The top 5% of households in terms of federal adjusted gross income pay 60% of the federal income tax. That is, the sound-bite refers only to federal income tax on federally taxable income. Federal income tax accounts for only about 30% of taxes collected from individuals in the United States. Our other taxes, like payroll taxes, sales taxes, excise taxes, and property taxes, shift the total tax burden from the wealthy investing class to the working middle-class. It is more nearly accurate to say the top 5%, who hold 55% of the nation's wealth, pay only about 35% of all taxes in the United States.

Thirdly, the argument that "because the very wealthy pay most of federal income taxes means they are paying enough" is simply not a valid argument. Under that logic (in a 20-person economy), it would be fair to charge each of the 19 bank tellers a 100% tax on their $15,000 yearly salaries and charge the bank president a 4% tax on his $10,000,000 salary ... because, after all, the top 5% (the bank president) would be paying about 60% of all taxes.

In addition, the very wealthy, to a much greater extent than the middle class and poor, can take advantage of nontaxable compensation, adjustments to taxable income, more tax savings for each deduction, reduced tax-rates on some investment gains, no tax on other investment gains (such as unrealized capital gains, which are the largest source of wealth in the US), and tax-exempt accounts to avoid taxation on their actual income. The non-partisan Congressional Research Service found that 200,000 millionaires — almost two-thirds of taxpayers with taxable income above $1 million — paid a lower tax rate (combining income and payroll taxes) than the typical taxpayer making less than $100,000. This and the fact that accumulated wealth is ignored in the determination of taxes results in the wealthy shouldering far less than their fair share.

Reducing taxes on the middle class? We also often hear that, "half of American households pay no taxes." (Wrong!) This sound-bite is simply wrong. About half of households pay no federal income taxes, but federal income taxes amount only 30% of the taxes paid in this country. There is probably no non-institutionalized adult in the USA who truly pays no taxes - no Social Security taxes, no sales taxes, no property taxes, no gas taxes. Consider all the taxes paid by a single home health aide earning minimum wage for full-time work, $14,500 per year. She pays over $2500 in total direct taxes plus about $2800 in indirect taxes, in all 37% of her wages. Her direct taxes include $600 in federal income taxes and $1100 in direct federal payroll taxes ... and no, she would not qualify for the earned income tax credit or for food stamps. A widow living on Social Security benefits can easily pay 35% of her income on property and other taxes. [Both pay more than 3 times the rate paid by Warren Buffett on his investment gains.] The group paying no federal income taxes consists of mostly the elderly and disabled living on Social Security, those laid off in the current recession, students with part-time work, and large families earning very low wages. All of these groups pay other taxes, often exceeding their fair share compared to 1) their ability to pay and 2) their wealth derived from economic infrastructure provided by governments. The proposed tax system sets things right by considering all taxes and the two best measures of ability to pay and government-derived prosperity: income and wealth (net worth).

Some will argue that a net-worth tax will cause the wealthy to try to reduce their taxes  1) by spending rather than investing their money, 2) by legally shifting their status or the status of their money so that it is not taxable wealth, or 3) by hiding their assets (tax fraud). This they say will in turn reduce investment, slow the economy, lead to loss of jobs, and so actually reduce tax revenues. Firstly, it would be irrational for the very wealthy to react in one of these ways to a avoid tax that is a tiny percentage (less than 1% for millionaires and less than 4% even for billionaires) of their net worth. The net-worth tax replaces capital gains and estate taxes. Many rich people pay more than this 4% to brokers and mutual fund companies annually in investment fees. Their stock market investments often gain as much in a week. Few would stop investing in the USA, where some of the best opportunities are, in order to hide their money in foreign banks. Remember, middle-class wage earners still go off to work even though they generally now have a marginal income and payroll tax rate in the range of about 25%. Secondly, the enforcement portion of the reformed tax law could be designed to make legal or illegal evasion difficult.

Many will argue that, "increased taxes on the wealthy will hurt the economy,"  because "there will be less investment, which would reduce economic growth and increase unemployment." (Wrong!) Firstly, business investment is not needed to stimulate the economy. From 1900 to 2000, net business investment declined by 70% as a percent of GDP, and despite that, inflation-adjusted GDP increased 600%. What's more, tax breaks do not stimulate business investment (although they do drive speculative investment). Peter G. Peterson, a former commerce secretary for a Republican president, complained that despite President Reagan's cut corporate tax rates, we had “by far the weakest net investment effort in our postwar history.” The top 5% now hold 70% of the nation's wealth, up from 35% 30 years ago. Corporations are now holding a record  $1.1 trillion in uninvested cash. If giving more money to the already wealthy investors and corporations creates jobs, where are those jobs. No, the tax breaks for the wealthy and corporations are the real failed stimulus package, and cost the US Treasury 10 times more than Obama's 2009 stimulus.

Under the Fair Share Tax Reform proposed here, the working poor and middle class would be taxed less and so will have more money to spend and invest, which will stimulate the economy. Well-funded governments will be able to make the investments in education, research, and  infrastructure, which will make the economy more efficient, and cut deficit spending, which will free up capital for the private sector. As detailed in the Essay, ending favored tax treatment for investment (and the wealth concentration it leads to) will reduce investment bubbles and the recessions they trigger. The resulting strong, efficient economy will benefit rich as well as the poor. The poor and middle-class will invest more as their taxes increase and tax-free education and retirement accounts are encouraged. The rich who stay invested under the reformed tax system will likely earn more from the economic effects of the reform than they will pay in additional taxes. Academics studies show that reduced economic inequality, within reason, promotes economic growth (link). History supports this:

In 1993 under President Clinton, taxes on upper incomes were increased. Many Republican congressmen predicted this would lead to a recession, "kill jobs," and so increase the federal deficit. (sound familiar?) There are many influences on the economy. That said, this tax increase on the rich was followed by:

• the US's longest peacetime economic expansion (avg. GDP growth 3.6% 1993-00),
• the creation of 23 million new jobs in eight years,
• an increase in the median household income by $6000 over eight years,
• high tax revenue, elimination of the federal deficit, and the first surpluses in 40 years
  
• and low inflation.

In 1997 President Clinton agreed to Republican demands to give investment income and gains favored tax treatment over income from work. This distortion of market forces contributed to the "irrational exuberance" dot-com stock market bubble. That bubble burst 4 years later in 2001, triggering the recession that year. Two-thirds of President Bush's 2001 and 2003 tax cuts went to the top 5% incomes earners. They gave further favored tax treatment to the investing class. He claimed the cuts would stimulate the economy, create jobs, and so increase tax revenue. In 2001 he said: "My plan reduces the national debt, and fast. So fast, in fact that economists worry that we're going to run out of debt to retire."  His tax cuts for the rich were followed by:

• a choppy economy (average annual GDP growth 1.6% 2001-09, < half Clinton's),
• only 3 million new jobs (1/8th of Clinton & the lowest rate among last 11 presidents)
• widening economic disparity between poor and rich,
• a decrease in the median household income by $1000 over 8 years,
  
• a large drop in tax revenue with doubling of the national debt,
• and the worst economic crisis since the Great Depression of the 1930's.

In the 18 years before the special tax rates for investment gains went into effect the inflation-adjusted annualized return on the S&P 500 was 8.8%. Since those favored tax rates for the wealthy went into effect the inflation-adjusted annualized return on the S&P 500 (1998 to mid-2011) dropped to 1.6%. That is, the historic typical return on stocks dropped 80%! This hurt the wealthy much more than the tax cuts helped them. It also hurts the middle class, which has much of its retirement savings in the stock market.

Extending the analysis over the past roughly 60 years produces the same association between more progressive taxation and improved economic growth. From 1950 to 1980, America’s highest marginal tax rate ranged between 69 percent and 92 percent, and the nation’s inflation-adjusted average annual economic growth (real GDP growth) was 6.4%. Real GDP growth is the best measure of an economy's strength. During 1980 to 2010, after President Reagen took office and started cutting  the top rate so it ranged ranged between 28 percent and 50 percent, the economy grew at an average annual rate of just 4.1%. Thus, average annual GDP growth was 55% higher (6.4 vs 4.1%) when tax rates on the most wealthy were higher. [If we take out the Clinton years of somewhat higher taxes on the wealthy from last 30 years, average real GDP growth was 2.7%, less than half the rate of economic growth of the 30 years prior to Reagan]

Three-quarters of all capital gains, taxed at only 15%, go to the top 1% of income earners (Krugman 2012). In fact the top tax rate now for most taxable investment gains is 15%. This explains why the top 400 taxpayers in the US now pay an average federal tax on reportable income of about 17%.  On top of that, most investment gains are not reportable as income and so not taxed at all. On top of that, here are no social security (payroll) taxes on any investment gains, while workers pay 7.7% of their wages in payroll taxes in addition to any income taxes. (Most economists say the real rate of payroll taxes is about 15%, since employers reduce workers' wages to pay the employer share of the payroll tax.)

It is not coincidental that the Great Depression was triggered by the US stock market crash just after the last time our wealth disparity reached the levels reached in 2007. The Great Depression followed the real estate and stock market bubble - of the Roaring Twenties - which was caused by the massive Republican tax cuts (from 73% to 25%) for the wealthiest. Sound familiar? That is exactly the scenario that led to our recent financial meltdown. Thus it is clear that reasonable tax rates on the wealthy do not hurt the economy. History supports the opposite conclusion.

Undaunted by this all this historical evidence, some will continue to argue that increased taxes on wealthy investors, like Warren Buffett, will ruin the economy, because they are the "wealth creators" and their investments are critical to the economy and "job creation" for the rest of us. The thousands of people teaching in our schools, caring for the sick and disabled, mining coal, and working at assembly lines are creating wealth too. Mr. Buffett trades securities. In 2006, his annual income and investment gains equaled the wages of over 100,000 middle-class workers put together. Does his contribution to the economy equal that of those 100,000 workers combined? It does not. Does his daily effort equal that of those 100,000 workers combined? It does not. Therefore, his efforts and contribution to the economy certainly do not justify the fact that his total tax payments are about one-third of the total tax payments of those 100,000 workers.

Some will argue that "wealthy investors put their money at risk and so that should qualify them for Investor welfare in the form of favored tax rates" with their capital gains and dividends taxed at about one-third the rate paid by workers on their wages. (They are dead wrong since they ignore the following) Workers give away their time, about half of the waking hours in their lives. They don't just put those hours at risk - they will definitely lose those hours for all time, and those hours are much more valuable to them than Mr. Buffett's money is to him. In addition, many workers - coal miners, police, folks in stressful jobs -  put the remainder of their lives at risk every day. Shouldn't workers, certainly contributing the hours of their lives and often risking an early death, get at least the same tax rates as those that are only putting money at risk?

Some will say, "Some property is not liquid. You can't ask a farmer to pay a tax on the net-worth he has tied up in his land." The farmer's land, his means of production, is currently taxed with a "property" tax. (It's actually a "real estate" tax. The tax is on the full value of the property even if he has huge mortgage so that in effect, he owns only a small portion of it.) However, all the money held by the investor class in stocks and bonds, their "means of production," escapes untaxed. The Fair Share Tax Plan fixes that injustice. Under the plan, the real estate tax, which singles out land among all the assets in this country, is eliminated. Instead all assets - land, stocks, bonds, gold, etc.- are equally subject to the net-worth tax. Put another way, the hedge-fund manager is taxed the same as the farmer so the farmer's tax can be reduced.

Some will exclaim, "the proposed tax system is taking away your home-interest deduction, your charitable contribution deduction, your property tax deduction, etc., all  used by the middle class. (Because so many families claim the standard deduction, the mortgage interest deduction saves a typical middle-income households about $200 a year. The average family in the top 1 percent saves more than $5,000 from the mortgage deduction.) "Your gasoline tax will increase!" "Your tax free accounts will be capped!"  (All Misleading!) None of this matters. The important information is on the bottom line: the total amount of taxes each household pays each year. Under the proposed tax system, everyone in the middle class will pay less total taxes than they do now. Only the wealthiest 10% or so will pay significantly more taxes, finally their fair share.

Some may initially think, if my net-worth is taxed at 2% (combined federal-state-municipal because I have a $3 million fortune), "in 50 years all of my wealth will be gone." (Wrong!) Of course, anyone with that sort of wealth generally earns an average 8-10% rate of return on it annually. Assuming a 9% annual investment return and the proposed wealth tax indexed for inflation: after only 10 years (without working to add a single penny), the $3 million would have grown to nearly $5.8 million ($4.5 million adjusted for inflation). After 50 years, the 3 million family fortune would have grown to over $50 million despite the proposed wealth tax. Remember under the proposal, capital gains taxes, corporate taxes and estate taxes are eliminated.

Some will claim that under the proposed combined federal, state, and municipal net-worth tax, your savings will be taxed at the maximum rate of 4.0% (combined federal, state and municipal). That would only be the case if you are lucky enough to have a fortune of over $30 million. The combined federal and state-municipal net-worth tax would only exceed a rate of 2% of net worth for those with a net worth greater than $3 million (2% of households). The wealth tax would only exceed a rate of 1% for those with a net worth greater than $1.8 million (4% of households). Only the wealthiest 12% of households, those with net-worths over $800,000 for a typical family, would pay any wealth tax at all. Finally, under the proposal, these households would be freed of capital gains taxes, estate taxes, real estate property taxes, and sales taxes.

One way to view the almost 4% wealth tax (combined federal, state, and municipal) that would be paid by those with a net-worth of over 30 million is by dividing the 4% by 4 as follows: 1.0% would replace current capital gains taxes for the federal government (a 20% tax on presumed very conservative average 7% investment capital gains on 70% of assets - This seems more than fair since middle class workers have for years paid 25-40% of their wages from work in total taxes.); 1.0% would replace current capital gains taxes for the state and local governments; 1.0% would replace about the current 30% estate tax on a fortune (just taken out in small annual chunks rather than breaking up the "family farm" on the death of a multi-millionaire); 1.0% would represent a very mild claw-back for all the unrealized capital gains that have never been taxed; and is furhter justified  because net-worth is the best measure of a) ability to pay and b) the extent to which she profited from the economic infrastructure that government (other taxpayers) provide.

Some will say that calculating taxable net-worth (in addition to taxable income, as we do now) will be too expensive and time-consuming (Wrong). Despite the addition of a Net-worth Tax for the wealthiest, the tax calculation is vastly simplified under the Fair Share Tax plan. A look at the Sample Tax Form demonstrates this. It covers federal, state, and municipal taxes. Just as banks, brokerages, and mutual fund companies report investment income now, they would report year-end assets, both to the taxpayer and the IRS.  Municipalities would remain responsible for establishing and reporting the value of real estate with a largely automated process standardized across the US. States would report car ownership with the value determined by model and year. The first $50,000 in household and personal items would be exempt from the net-worth tax. As they do now privately-owned businesses of any significant size would need an accountant to calculate their year-end value and divide it between the different partnership stakes. With these figures and the Tax Form in hand the calculation is easy. In the end 75% percent of households would be able to certify they have nowhere near the net-worth limit that is exempt from the Net-worth Tax. About 15% of households would probably end up making the calculation but owe no taxes. Only about 12% of households would owe a Net-worth Tax. No more than the wealthiest 1-2 % of households (those owning complicated securities and involved in complex business partnerships) would need to hire an accountant to sort out their taxes. This is a vast improvement over our current tax system in which 80% of households need help with their income tax returns. There could be online and spreadsheet versions of the tax form in which, after you fill out about 20 lines, the calculations would be done for you. In fact, since all figures are from forms both you and the IRS would receive, the IRS could send every household a pre-filled tax return form. The household would then need to confirm or correct the information, sign it, and send it back. Right now individuals and corporations spend $200 billion each year to calculate their taxes. I estimate that under the Fair Share Tax plan this figure could easily be cut by 80-90%. Governments (i.e. taxpayers) would also realize similar saving in tax administration under this vastly simplified tax system.

Some advocate supplementing or even replacing our income tax with a sales tax (or a similar "value-added tax") (Bad idea!). Two Republican Congressmen have repeatedly proposed replacing the federal income, payroll, and estate taxes with a 30% national sales tax and dubbed it the "Fair Tax." Since the poor and middle class spend much more of their income and wealth than the wealthy do, under such a tax the wealthy would pay even less of their fair share than they are paying under the current regressive system. For instance Warren Buffett's taxes would drop from 11% to about 0.04% of his investment income and gains. See VAT Criticism. Income and wealth (net worth) are the best measures of households' ability to contribute to the cost of government services and so should be the basis for taxation.

Some will ask: "Why does the plan eliminate the corporate income tax? Giant corporations are much richer than individuals." I'll answer with a quote from an economist, Lester Thurow: "While corporations are legal entities that write checks to government, they do not pay taxes. They simply collect money from someone--their shareholders, their customers, or their employees--and transfer it to government. There is no such thing as taxing corporations as opposed to individuals. This immediately raises the issue of who ultimately pays the corporate income tax. The incidence of the corporate income tax is an area of economics with a large literature and little or no agreement. Depending upon the exact assumptions used, the definition of incidence, and the time periods under consideration, it could be a tax on shareholders, a sales tax on consumers, or a tax on employees. (Personally, I believe that it is a tax on shareholders in the short run and a sales tax in the long run, but my advocacy of its elimination does not hang on that belief.) While there may be a certain perverse political virtue in collecting a tax where no one is sure whether he pays it, simple economic efficiency and equity would seem to call for the elimination of taxes where incidence is uncertain. Only if we do so can we establish a tax system that is fair and has the economic consequences we intend."

Some will question the Constitutionality of a net-worth tax. Article 2 of the Constitution allows for federal taxes only in proportion to the census, and the Sixteenth Amendment authorized an income tax. A net-worth tax could be justified as a type of income tax that includes for the first time unrealized capital gains. In other words, a 1-2% annual tax on net-worth could be considered a 25% tax on a typical annual investment income of 6%. Alternatively, the Constitution could be amended to authorize a net-worth (wealth) tax.

Perhaps states and municipalities would not be willing to abandon their current tax systems in favor of the proposed one. This is important to adopting a fair tax system. State and local sales taxes and municipal property taxes are among our most regressive taxes. If taxes are to be made proportional to ability to a household's ability to pay and the extent to which it has prospered from the economic infrastructure provided by governments (other taxpayers), those taxes must be based on income and wealth. The reform proposes that states and municipalities simply set surcharge rates on the federal income and wealth tax. For efficiency, states and municipalities could voluntarily have the federal government collect their taxes and directly transfer the revenue to them. The federal government would be forbidden by law to attach any conditions on this transfer under the reformed tax system. This would eliminate to costs of tax collection to states and municipalities. If this is not a sufficient enticement, the federal government could encourage states and municipalities to participate in the tax reform by reducing federal aid to state and local governments that wish to subject their residents to the current, regressive tax system. [A less desirable alternative way to neutralize the regressive nature of state and local sales and property taxes would to provide a federal tax credit for all of these taxes (including for renters, 70% of their landlords' property taxes)(as opposed to current tax deductions for some of these state and local taxes).]

Some will call the tax reform proposal socialism or communism (Wrong!). In socialism or communism the government rather than market forces control the economy. The proposal calls for neither. Market forces still operate. In fact, with the tax proposal offered here in effect, they would begin to operate without government manipulation to give investment income an advantage over work income. The two would be taxed equally. The talented and hard-working would do better financially. They are left free to build better lives for their families. However, they also give back to the society that has given them the opportunity to do well. We can almost all agree that taxes are necessary - to educate our children, to build roads, to defend our nation, to care for our veterans, and to assure that  the retired, the sick, the disabled, and the unfortunate do not suffer in poverty. It is also clear that we cannot ask the paper boy to pay the same taxes as the billionaire CEO of a bank. Taxes should be commensurate with each household's ability to pay and the extent to which each household profited from the system (that prior generations bought it with their lives, their hard work, and their taxes). The only remaining argument is: How do we reform our system so it is both fair and good for our nation?

Some will criticize this tax reform proposal a "redistribution of wealth" (Wrong!) or a call for "class warfare."  [First let us agree to drop second term. In warfare, courageous men and women risk and give their lives for their country and the well-being of their fellow-citizens. It seems disrespectful to soldiers, veterans and those disabled or killed in combat to use this term for what amounts to an argument over money.] The fact is there has always been a fight over the distribution of the a society's wealth and that all taxes redistribute wealth. It is an undeniable fact that over the last 30 years in this country wealth has been redistributed - from the middle class to the wealthy - and the tax system has contributed to this.

When polled, US citizen's believe that the most talented and hard-working should get ahead - within reason. On average, whether rich or poor or Republican or Democratic, they feel that it would be fair for the wealthiest 20% to hold about 32% of the nation's wealth. The wealthiest 20% now holds 85% of the nation's wealth. This website shows that our current system of taxes, taken as a whole, has long favored the wealthy over the middle class, using the tax system to divert money from the middle class to the already-wealthy. Warren Buffett, a billionaire, has said, “There’s class warfare, all right. But it’s my class, the rich class, that’s making war, and we’re winning.” The wealthiest 1% now own about 40% of the nation's wealth. Many have become fabulously rich by being born into a wealthy family, hand-picking corporate boards that will give them over-generous compensation packages, risking the money of others, using their wealth to corrupt government officials and amass more power, having tax laws written in their favor, managing or investing in businesses that exploit workers, despoil the environment, and relying on the government (all taxpayers) for cleanups, subsidies, and financial bailouts. However, many others have become very rich by being smart, working hard, and taking personal risks. They should not be punished; however neither should they receive the special favored tax treatment they now enjoy. They and everyone should pay their fair share. It is time to set things right and, in doing so, set about building a better nation.

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