As lawmakers in Washington take on the subject of taxes, here are some of my ideas. This is not presented as a comprehensive tax package, but rather as points to be considered in the process. As a CPA, I would love to be at the table for those discussions as the District 24
1. Income is income. There should be no distinction for tax purposes between ordinary and capital gains income.
Ordinary income is the money you make in your paycheck, or as the profit from your business. It is taxed at one rate, which goes up as your amount of income grows. Currently, those rates range from 10% to 39.6%. In addition, there are Social Security and Medicare
taxes withheld from that money.
Capital gains income is money from dividends and from the sale of assets like stocks. For the most part, wealthy people have capital gains income, while the rest of us do not. Even if you own stocks or mutual funds in your retirement accounts, distribtutions from those accounts currently are taxed as ordinary income, so you still don’t get the benefit of capital gains rates.
I’ve heard capital gains income referred to as “mailbox money.” There is no work involved in producing it…just a walk out to the mailbox to collect the check. And it is taxed at a much lower rate than ordinary income, currently 15 to 20%. Also, there is no tax collected on this money for Social Security or Medicare.
For some reason, when “tax reform” is discussed by Republican lawmakers, the first suggestion on the subject of personal income tax is to lower the capital gains rate. Give me a break. That is squarely targeted to benefit the lawmakers themselves and their wealthy donors, not the middle class. And it accounts for how Warren Buffett’s secretary pays taxes at a higher rate than Mr. Buffett pays himself.
My suggestion is to eliminate the distinction, and just let income be income. That would truly simplify our tax system, and would eliminate one provision that provides benefit almost exclusively to the wealthy. And if the money that’s currently called capital gains income were also subject to tax for Social Security and Medicare, that would produce a huge inflow of money into those systems, ensuring their sustainability.
2. Another frequent suggestion in discussions of “tax reform” is the elimination of the estate tax. Or “death tax,” as Republicans like to call it. But in the fine print, you’ll learn that the only money subject to the estate tax is the amount of the estate that exceeds 5.5 million dollars. I don’t know about you, but I don’t know many people who have estates that large. So again, this “benefit” is only for the wealthy.
3. The discussion seems to always start with corporate taxes. This is part of the famous “trickle down” theory. As it’s explained, when corporations pay less in tax, that will generate more jobs, thus benefiting those who are newly hired. My experience indicates that corporate boards do not say, “We just got a tax cut! Let’s hire more people!” Rather, the decision to increase staffing is made when the current staff is unable to handle the level of business
Therefore, I believe we should start by increasing the minimum wage. That, combined with affordable healthcare, affordable education, and smart workplace policies around family leave, paid sick leave, and gender pay equity, will produce a much larger population of people eager and able to participate in the economy. This is “bubble up” economics.
When wealthy people have additional income, it is largely stashed away and used to build an ever-increasing wealth. When middle class people get additional income, that money is much more likely to be spent. And the exchange of money for goods and services is the definition of an economy, so we would by definition be promoting economic growth by concentrating the benefits at the middle to lower end of the spectrum. And that would “bubble up” to also benefit the owners of those businesses who would see increased activity in their operations.
By contrast, providing the impetus at the top of the spectrum is what’s been tried repeatedly. Always Republican lawmakers say that those incentives will grow the economy. But even though they’ve said it for decades, that hasn’t made it true. It has, in fact, just increased the ever-widening gap between the have’s and have-not’s in our country.
4. There has been what’s called an “alternative minimum tax” (AMT) on individuals for about 35 years. The idea was to ensure that wealthy people would always pay some minimum amount of tax, even if all the “magic” done by their tax preparers would be able to eliminate any tax liability. Maybe one idea would be to introduce an AMT on corporations. We hear about the competition-stifling excess of the current 35% corporate rate. Yet we also hear of huge corporations that actually pay no income tax at all. Sounds like exactly the type of situation an AMT is designed to prevent. So maybe the compromise position is a lowering of the 35% rate, coupled with an AMT to ensure that everyone is paying in.
In a group discussion recently, one woman expressed it well. She said that Republicans and Democrats seem to have different perceptions of taxes altogether. Republicans think of taxes as penalties. But Democrats look at taxes as part of the normal course of participating and contributing in the larger society that we’re all a part of. I like that framing!