It is a broadly accepted principle in our system of taxation that people who can afford to pay more – to support the workings of government on behalf of all of us – should pay more. This is why we have long had a system of “progressive taxation,” in which the percentage of one’s income that must be paid in taxes rises as income rises.
Yet we have a bewilderingly complex tax code. When one embarks upon a thoughtful analysis of our current system of taxation, the conclusion – unlike the code itself – is simple. This is a tax code written to benefit large corporations and the wealthy. This is hardly surprising, given that the legislators who write the tax code must seek elected office, and keep seeking re-election to stay in office, and their campaigns are often largely financed by big corporations and the wealthy. (See campaign finance reform as a separate issue.)
One of the most outrageous features of the current system is that unearned income – produced as return on investment of capital (interest and dividends) – is taxed at the capital gains rate, much lower than the rate at which that income would be taxed if it were earned by working. In a society in which work is valued highly, this is inexplicably unjust. If anything, “earned income” – produced directly by working for a living – should be taxed at lower rates than unearned income, not higher.
Some economists and policymakers, as well as legislators and other politicians, have argued for a flat tax as a way of simplifying the tax code, eliminating all manner of deductions and “loopholes” that exempt various kinds and amounts of income from taxation. Others favor doing away with the income tax and replacing it with a tax on consumption (a value-added tax), because that is much more difficult to evade. But a flat tax or a consumption tax turns the established principle on its head, going from “progressive” to “regressive,” as those with lower incomes would certainly end up paying the same or a higher percentage of their income in tax than the wealthy, instead of lower. Dramatically overhauling the tax code in this way could be made at least somewhat more fair only through elaborate mechanisms to protect Americans with lower incomes, and then the new system is not so simple after all, and fairness remains an elusive goal.
While simplicity has its appeal, if we want to preserve the principle that the wealthy pay more, we should have more – not fewer – graduated tax brackets, and unearned income should be taxed at higher, not lower rates than earned income. Many of the “loopholes” – perfectly legal devices used by the wealthy to avoid paying taxes – should be eliminated.
Finally, we must reform our system of taxing corporate earnings. Conservatives like to say the US has higher corporate taxes than most other countries, but that is deceptive. I believe corporate profits should be taxed the way we tax income: with progressive rates. The larger a corporation’s profit margin, the higher should be the rate of taxation. Critics of corporate taxes say they are just passed along to consumers as higher prices for goods and services. That is possible. But they can instead be “passed along” to investors as lower rates of return. Corporations that take that approach will be more competitive in the consumer marketplace.
One more thing: in the pursuit of economic justice, we should seriously consider moving from taxing income earned through productive work to taxing wealth. The more we tax income, and the less we tax wealth, the more we promote the growing inequality in distribution of wealth in America, and there is abundant evidence that this inequality is wrecking the US economy.