The common theme in our democratic republic is that all those who have representation will pay something in taxes to support our federal government and receive the fruits of such via protection from foreign adversaries and today, a “safety net” to ensure the poor and unwell are not abandoned. However, the theme of shared responsibility in our democracy is gradually dying due to our federal tax policy. As we in Virginia ready to pay our state taxes by the May 15th deadline, confidence in our system will be begin to fade once Virginians realize that nearly half of all Americans pay no federal income tax at all!
Below is a chart of the distribution of all taxes in the U.S. done by the Joint Committee on Taxation of the Congress in 2007. It shows that of the 153,176 million returns filed in the U.S., 65,361,000 paid no tax or had a negative tax rate (checks are actually mailed out to them under the earned income tax credit). This means that 42.67 or 43 percent of all taxpayers in the U.S. don’t pay any taxes or get tax refunds exceeding their tax liability.
It also shows that 23,658 million Americans, all those earning over $100,000 per year, or 15.4 percent of all taxpayers, pay 83.3 percent of all taxes; and that the 5.138 million top taxpayers earning over $200,000 per year pay 58.1 percent of all income taxes.
Under President Obama’s tax plan to increase taxes on the “rich” (those making over $200,000 per year), and to provide more tax relief to working (and non-working) Americans, this 43 percent number will grow substantially, perhaps reaching the 50 percent threshold. And yes, non-working Americans will get tax relief, but not in form of a tax cut as most taxpayers know it, but in the form of an actual check from the federal government through expansion of the earned income tax credit where Uncle Sam sends checks to those working part time or at low wages. This “negative” income tax also threatens the fabric of our society. Why? Because when government shrinks the tax base and increases taxes on only a few taxpayers to send checks to taxpayers in another income class, it ensures increased non-compliance, anger and eventually the destruction of our tax system as we know it.
The answer is a flat tax or a modified national sales tax such as the “Fair Tax”, but this kind of reform is only likely in the event of a catastrophic war or national catastrophe. The danger here is that like many countries in Europe it could be added on in an emergency to the income tax and never goes away!
As our tax policy begins to morph into those of our European allies where tax evasion is an art and onerous add-on Value Added Taxes or VATs are the only way to ensure adequate revenue flow, we must decide which direction we will head on tax policy. Should we simplify our system and ensure everyone except the truly poor and infirm pay some tax, or should we increase the burden on those who provide jobs, investment and the basis for growth in our Gross National Product.
When those who live and work in our nation are not asked to participate, and in fact rewarded for not doing so, a decline in our economic stability and democratic way of life is just around the corner.