Burning the current tax code and starting over from scratch seems too simplistic a solution…but damned if it wouldn’t be satisfying.

The only problem would be staging and containment of the huge bonfire.

I think if you burned your taxcode and start from scratch you’d be treating only the symptom,not the cause! Seems to me there are two underlying reasons for the state of your taxsystem:The way your parties are financed and the lobbying system.Both of these allow for too much contact and influence of corporations to the political leadership.
But thats just my opinion as a european.
By the way both of these activities are classed as corruption and punishable with prison in most european countries (exception: U.K.).That is not to say that this actlly happens very often,but quite a few politicians have at least lost their jobs and reputations.As an example german ex-chancellor Kohl lost his when it came to light that he accepted money for his party from an oil-company.In the end rich people and large corporations have enough advantages already
no need to make even easier!

Your observation about the electoral system and lobbying activities are pretty darn accurate. Politicians are beholden to their major campaing contibutors and wind up not looking out for their contributors, not their constituents. The reliance on TV adds and their expense has pushed to where we are today.

Lobbyists and special interest groups have far to much access. In fact these folks actually draft legislation. Guess who that benefits. The Republicans do so love privatization.

One of the tax lawyers that Johnson discussed in his book studied the laws of Rusian and of European ‘Socialist’ countries for law weak on principles. He concluded that “The U.S. tax code is the most political law in the world.“

Hey, now, let’s not paint all lobbyists with the same brush.  Fact of the matter is, if you care enough about something to be an activist and go and talk with your representative about it, presto!  you’re a lobbyist.  And because you’re probably talking about a specific topic that’s important to you, hello!  you’re a Special Interest Group.  Do you feel evil yet?

Where the problem comes in is that poor people usually can’t afford the time and expense of going to do this, whereas rich corporations can pay a highly trained professional (or eight) to do it for them.  When you can buy lots of squeaky wheels, you gets the grease.  What are they supposed to do, ignore everyone who cares enough to come talk to them?

(Submission word:  provide)

My three reps in Washington are all Republicans, so when I send the occassional email, I feel frusrated not evil. Although, I do enjoy editing their opinion surveys before I return them.

House members have to devote a great deal of their time to raising money for re-election. Their donors have access as well as the K Street crowd. To survive they can’t ignore these folks. But, who does that leave to look out for the interests of the 65,000+ people in their district?

GeekMom:  Most lobbyists are not activists.  They are very highly paid whores for whoever writes the check and they do very often end up writing the law.  I spent 8 miserable, eye-opening months working for lobbyists and came away from the experience disillusioned, disgusted and convinced it will never change.  By and large, the ones I met were sleazy, schmoozy, alcoholics and their “convictions” were as fluid as the huge amounts of PAC money they controlled.  I’m sure not all of them are bad, but damn…the vast majority are the scum of the earth.

There are some points and question I would like to raise:

Let us move past those general quotes, since you can effectively use them to support any position. One can talk about original intention and another person can talk about stagnation and the laws being stuck in the past. One can talk about general welfare and another can easily claim that general welfare is supported by tax cuts to the rich as they drive the economy, or the idea of equality.

Income Gap.
The question is whether are the rich getting richer or the poor getting poorer. Maybe the poor or whatever lower percentile have no growth while the rich are growing.

Another ‘problem’ with this statistics is the ability for people to jump from one category to another. Let us say a person is working on minimum wage. He would be in the lower percentile. But imagine if he invents something and became a billionaire overnight, his increase in wealth would not be reflected in the lower percentile but rather in the top percentile. In other words it does not take into account people slowing moving up.

Whenever, people talk about tax they will inevitably talk about the distribution of wealth. One reason is that income tax is a means of distributing the wealth. But taken on a deeper level it seems to suggest that it is wrong or not right to be making so much money. Or rather if you are making so much money you have to give a significant amount back to society. What has the fact that the richest 400 make got to do with the tax system? It has the insinuation that this is wrong. Or rather it reminds me of those playground scences where a kids says ‘gimme gimme, I want the toy he has’

Corporate Taxes:
Interestingly, I just recently read an article in the Economist I believe, talking about US corporate taxes and comparing it with other major developed nations. In the past 60-70s the US had one of the lowest corporate taxes but now compared to these other nations, the US tax rates are significantly less competitive.

“Flat” tax rate: Sales, gas, etc
Even if you have a flat tax rate, the rich will still pay more based on the percentage. 10% of a $1000 is obviously more than 10% of $100.

Perhaps you would want to tie this in with the idea that US is a consumer nation and that savings rate are very low. So if a lower or middle class person spends all his wages buying things then perhaps that may explain the percentage disparity. If the rich had spent all their money purchasing things, their level of taxes at least with regards to sales tax would be similar. There is this particular comment, which I would not entirely agree that says that the rich keeps getting richer because they keep doing the things that makes them rich while the poor keeps getting poorer since they keep doing the things that keeps them poor.

Tax Avoidance:
Most of the things you describe I would guess falls under tax avoidance which may be allowed. And everyone not just the rich can take part in them.

Subsidies for rich: Social Security tax
I am not too certain which programs are being funded by social securities. Are these programs specifically created to help the rich or are these programs that aid everyone such as education.

Of course one could simply claim that the problem does not lie so much with the tax cuts but rather with spending. Therefore the next step is to cut funding for programs.

Reliance on TV ads:
It takes two hands to clap. One could complain that the person relies too much on TV but one could also state that the reason why one relies so much on it is that the people are indeed influenced by it.

If the voting stops, so can the buying.

Question:
Les, when you mention separating legal and economic ownership, what is economic ownership. Are you referring to an equitable ownership? As in like in a trust like situation where the trustee holds the legal title but the money is given or distributed to its beneficiary or equitable owners?
————————————————————————
Here is a funny mass email sent around sometime back. You might have read of it before. It focuses on the idea of tax breaks for the rich.

How Tax Works?
This is a VERY simple way to understand the tax laws. Read on—it does make you think!!

Let’s put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men — the poorest — would pay nothing; the fifth would pay $1, the sixth would pay $3, the seventh $7, the eighth $12, the ninth $18, and the tenth man — the richest — would pay $59.

That’s what they decided to do. The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement — until one day, the owner threw them a curve (in tax language a tax cut).

“Since you are all such good customers,“ he said, “I’m going to reduce the cost of your daily meal by $20.“ So now dinner for the ten only cost $80.00.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six — the paying customers? How could they divvy up the $20 windfall so that everyone would get his “fair share?“

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, Then the fifth man and the sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. Each of the six was better off than before. And the first four continued to eat for free.

But once outside the restaurant, the men began to compare their savings. “I only got a dollar out of the $20,“ declared the sixth man who pointed to the tenth. “But he got $7!“

“Yeah, that’s right,“ exclaimed the fifth man, “I only saved a dollar, too . . . It’s unfair that he got seven times more than me!“.

“That’s true!“ shouted the seventh man, “why should he get $7 back when I got only $2? The wealthy get all the breaks!“

“Wait a minute,“ yelled the first four men in unison, “We didn’t get anything at all. The system exploits the poor!“

The nine men surrounded the tenth and beat him up. The next night he didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that!

And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.

Where would that leave the rest? Unfortunately, most taxing authorities anywhere cannot seem to grasp this rather straightforward logic!

[Quote]The question is whether are the rich getting richer or the poor getting poorer. Maybe the poor or whatever lower percentile have no growth while the rich are growing.[/Quote]

I would argue that if inflation exceeds growth then the poor/middle-class are indeed becoming poorer.

[Quote]Tax Avoidance:
Most of the things you describe I would guess falls under tax avoidance which may be allowed. And everyone not just the rich can take part in them.[/Quote]

This is one of the fundamental problems with our tax code and also explains why the story you attached doesn’t apply to our taxation system.

The majority of income tax in the US is not paid by the extremely wealthy.  The tax burden is carried primarily by the middle-class and upper middle-class.  Case in point.  I worked for one of the big four during the late nineties and several of our partners and clients were multi-millionaires and virtually all of them paid less income tax than I did.  Even though I was drawing a hefty six figure salary I could not afford the sort of tax shelters and services that these people were using.

Two weeks ago on the senate floor, Sen. Dorgan (D - ND), alleviated to the same fact.  He said that he draws a salary around $170K and his wife makes around $200K and they have no children.  He went on to say how he and his wife pay less income tax than the single-mother staff member he has working for him on a $47K salary.  This system can hardly be called fair and balanced.

[Quote]And that, boys and girls, journalists and college instructors, is how the tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore.[/Quote]

This story has been floated around trying to muddy the waters with class warfare, when in reality the problem is getting everyone to the table in the first place.

This is in response to PT. It takes me so darn long to compose, that someone else got in first to some on some of the topics.

Income Gap

The rich are in fact getting richer.

Percentile..........Change in Income
Top 10%.............+88.8%
90% – 95%.........+29.6%
95% - 99%.........+84.2%
99.0% - 99.5%....+89.5%
99.5% - 99.9%....+144.8%
99.9% - 99.99%..+322.0%
Top .01%........  .+558.3%

(Johnson’s income data, which spans 30 years, is expressed in constant dollars.)

The information on the top 400 families is just an extension of this table in a different form. All of this just illustrates the growing income gap in this country.

Your post motivated me to look for data that shows the number of families below the poverty line during the 1970 – 2000 time frame. Unfortunately the easily available Census Bureau data in the Current Population Survey (CPS) deals with individuals not families. From 1970 to 1990 the poverty rate rose from 12.6% to 13.5% and then fell to 9.4% during the years of the Clinton administration. In 2001 it rose to 11.5%. 

http://www.census.gov/hhes/www/prevcps.html

To see the long term trend poverty rates see this graph: Number of Poor and Poverty Rate 1959 – 2000 at

http://www.census.gov/hhes/poverty/poverty00/pov00cht.pdf

Note the downward trend from 1959 to about 1969 when real wages for working people were actually rising

The poor may or may not getting poorer. It is hard to say from the data. However, it does appear to indicate that the poor are not moving up in any substantial numbers. The improbable event of a poor person suddenly making $1B wouldn’t do much to change the average income figures that Johnson presented in his book. It might distort the very top percentiles, but he further down the ladder the less the distortion.

The question is not ‘is it wrong to make a lot of money’, any of us would probably like to make a lot more. The question is whether or not the tax rates should be progressive.

Corporate Taxes

U.S. corporate taxes could well be less competitive. A number of the avoidance/evasion scenarios that Johnson describes involve being taxed overseas rather than here.

Flat Taxes etc.

Here is a quote from the book which supports your point.

Over the last three decades of the twentieth century the average income grew modestly, but the share of earnings of earnings going to income and Social Security taxes rose. At the same time the super rich saw their incomes skyrocket and, because their tax rates fell, they kept an even higher percentage than before.

In addition, the rates at which state and local governments levied sales and property taxes all rose in those last three decades, eating into incomes. Those taxes tend to be regressive; that is they tend to hit harder the lower one’s income

I didn’t really get onto this before, but the draft implementation of the flat tax proposed by Steve Forbes insured that some taxpayers (business owners I believe) would never have to pay any income tax.

Tax Avoidance

A lot of it is avoidance, thus the title of the book. Johnson did get into evasion: fraudulent returns, people not even filing returns, and participation in investment that may be in violation of tax law. (caveat emptor)

Those of us who file the 1040 have little opportunity to evade. All of those forms that we get reporting income also go to the IRS. If we don’t put the right number in the right bloke, we are liable to get a notice. People and corporations who can decide on what to report on their returns are much less likely to be audited. With the privacy laws enacted in the late 90s and the dilution of the IRS’s ability to audit complicated returns, there is a lot more incentive to evade than there once was.

Subsidies for the Rich: Social Security Tax

Social Security was designed as a safety net for working people. Medicare is a Social Security benefit, but is funded by a separate tax.

Another quote

Critics who say the the Social Security is an income redistribution program are correct. Those with the smallest incomes get a benefit larger than they have earned and those that pay the maximum tax get less. The rich get nearly a free ride because of the cap on wages subject to Social Security taxes.

On joint return, income over $86K is not taxed. The tax at and above this income level is $10,788.

The Social Security trust is a myth. It is filled by IOUs issued by the Treasury Department. Much of the revenue from the Social Security tax funds government operations.

>>The next step is to cut funding for programs.

By my ground rules that is a separate question from the lack of equity in the tax code.

Reliance on TV adds
There is no doubt that political adds on television are effective. After the Nixon Kennedy debates both parties realized that TV was the medium to convey their message. It is expensive and the parties/candidates have to line up donors who, more often than not, expect and may receive a quid pro quo for their donations.

Economic ownership

Johnson mentions this in two chapters. As I understand one of those, it has to do with separating legal and economic ownership of stock or other capital in order to somehow take advantage of tax differentials that can be found in offshore trading.

Let me clarify some of me points:

Wage Growth:
My point on that poor person becoming a billionaire was an extreme analogy. Perhaps if I were to use a more moderate example. Remember the show “Friends?“ Let us take the example of Rachael (Jennifer Aniston).

When she ran away from the wedding and her dad cut her off and before she found a job, at that point with zero income she would be in one of the lower brackets. She then became a waitress and thus perhaps move slightly up. Then as an assistant to a purchaser. Again another increase. I sort of lost track of her jobs after that until she was offered a job at Ralph Lauren which would take her even further up, maybe even to middle or upper middle class. At the end of the show, she probably is making quite a bit of money. However, the graph for the number of poor/middle/rich does not seem to measure this. Obviously there are a number of people stuck in the lower gap. But there are also a number of people who I are merely on transit such as Aniston in Friends. There should be a data measuring that. If one wants to talk about mobility or improvement on has to track not just class size at any one moment but whether individuals in it have ‘graduated’ to the next bracket. That is my point on why figures on the percentage of poor by itself may be misleading.

Getting richer or poorer.
If inflation is higher than growth of wages of the individual than that individual is getting poorer. But my point on whether the poor is getting poorer or the rich is getting richer relates to the widening income gap. An analogy. Let us keep inflation at a fixed rate. Imagine two neighbours, Mr Jones and Mr Catch. Both of them have the same jobs, say as a lawyer and start of with let us say $90,000 per year. Mr Jones is brilliant and within a few years is pulling in $200,000. Mr Catch however is not so brilliant and only manage to get his salary up to $100,000. The income gap between the two have widen considerably. But the reason may be due to the growth of Mr Jones rather than the decline of Mr Catch.

To claim that the income gap is solely because of tax policies does not seem right since some of the growth is more than 100%. After all you cannot be tax at more than 100%. Perhaps one reason for the gap is that the rich are able to exploit (I use this term without any bad connotation) the changing world economy better. Let us compare two people. One is a factory worker producing top end luxury cars and the other is the boss or top management of the luxury car line. Now, when China’s middle class start making enough to purchase the luxury car, both person will benefit. The worker may get a small increase in wages and maybe more job security. But it is the top person who will reap more profits. It is just that one person is more suited to making money than the other which of course results in the growing income gap.

Paying Taxes:
From your experience it would seem that the tax system operates in a curve manner. One will be taxed more and more until the point one makes enough to become an ‘employer’ and hire a person to manage your taxes.

Cap on Taxes:
Even in a progressive tax system, I am sure there is a cap on taxes. I mean you cannot tax 100% of the next dollar the person makes can you. So once one hit that cap, and I am sure the 400 rich can easily fulfill, even with a full progrssive system, there is a very high chance that given their ability to make money the income gap may still widen.

Burden:
To a certain extent because one have benefited so much from society one perhaps should give more back. However, to claim that just because one benefited the most from society one would have to bear the heaviest burden may not seem right. The tax burden may be carried by the middle class because they form the significant proportion of the segment of the population.

I suddenly thought of something. If the top 400 families do indeed foot the majority of the taxes, would it not make the political system even more susceptible to these people. Imagine if 20% (seems high) of income taxes are paid by these people. And let us say that taxes can never be changed. If this 400 families form a lobby, they could really wreck havoc. The threat of exit can play a significant role.

Just a question, why is the data based on the top 400 FAMILIES instead of individuals? And what is the definition of families? How wide does it extend?

Economic Ownership:
I believe what is mentioned may be a trust. If it is a trust then I would not really have a problem.

Cut funding:
I think you misread. I cannot seem to find the original point on social securities but I recall it is about subsidies for the rich. About how tax cuts are resulting in the use of money for social security to fund government programs. My point on spending money on social security to fund government program is that it has nothing or little to do directly with the tax system. If one is complaining about the lack of fiscal restraint and using money that one should not use, then the two solutions are either 1) Raise taxes 2) Cut the funding.

Amount of taxes paid:
Is there a graph to show the total amount of taxes each wage group pays?

Lack of Equity tax code:
On one hand the people who are rich may wonder why should they pay so much money. After all in terms of government services, they may get less out of it as they use private schools, transport, etc.

Yet on the other hand people may claim that since the rich made so much out of society they should be significantly more back.

Of course the rich can argue that (if for example they are employers) they are already giving a lot back to society by providing jobs for people and creating wealth.

The poor would claim that these jobs are provided solely for the reasons of personal gain.

Then one would counter with the comment that who cares about intention for at the end of the day they are contributing to society.

Well this can go on and on. But equality in tax for one person can mean one thing and for another something different.

——————————————

Alright now for some fun and games. And I mean that literally!

Balance the national budget: Not too terribly interesting compare to the other budget games. This one seems more like an exercise in excel. But it gives you a good idea of where all the money is spent. Bang Bang, its the military. I could increase funding for almost all programs some up to 100% and even keep all tax cuts and increase benefits with a simply I believe 40-60% cut in military budget. Not bloody likely.
http://www.budgetsim.org/nbs/

Massachusetts’ Budget: This is a very good one and it gives good explanations. However, it relates only to cutting funds rather than setting tax rates. But it is very good. Have to try it.
http://www.playmassbalance.com/

New York: This one is quite nice and great too. You can set taxes. Has a better interface and also tells you the political consequences of tax increases.
http://www.gothamgazette.com/budgetgame/

Minnesota
http://news.minnesota.publicradio.org/features/2003/03/10_newsroom_budgetsim/

Cut military spending by 50%,Iraq by 20% and remove all tax breaks and everybody else gets a 50% increase apart from veterans,the environment and intl. affairs who get a 100% increase.
Yet the budget deficit is cut by 281.59 billion to 75.41 billion! Easy really,the most difficult part was spending all the money I saved without inducing recession by having massive surplusses.

Burden:

I put this part of my reply at the top to indicate an oversight in my original post. Hopefully that will clarify some of what follows.

>>The tax burden may be carried by the middle class because they form the significant
>>proportion of the segment of the population.

The middle class is getting the shaft. There are a lot of conservative think tanks successful lobbies that have been attending to that.

>>Just a question, why is the data based on the top 400 FAMILIES instead of
>>individuals? And what is the definition of families? How wide does it extend?

All of the income data that Johnson used is based on families, and I apologize for not having made that clear. I can’t help with additional definitions. I couldn’t quite sort out which government agency provided the source data used by Pickerty and Saez in their study. I do know that when you have to use someone else’s data in a large study, you are grateful for what you get. (And, of course, perform due diligence as best you can.)

Wage Growth:

>>There should be a data measuring that. If one wants to talk about mobility or
>>improvement on has to track not just class size at any one moment but whether
>>individuals in it have ‘graduated’ to the next bracket. That is my point on why figures
>>on the percentage of poor by itself may be misleading.

For the government to do what you suggest would require two things: a longitudinal survey that tracks individuals or households over time and a consumer (agency) that would sponsor and use such data. I am fairly certain that the govt has to do longitudinal tracking to generate the unemployment rate, but I couldn’t find anything that reported what you are looking far. Searches on “social mobilityâ€? and “social mobilityâ€? site:.gov didn’t yield anything useful—i.e. easy to find, and something that gets at your question.

I tried to address mobility in my 6/10 post by bringing in data on the % of individuals* below the poverty threshold. The graph that I linked to there strongly indicates upward social mobility during the sixties and the early seventies. After that it indicates less dramatic motion in both directions.

Real wages for the 90% of taxpaying households has been flat for 30 years. (Income change in constant dollars -1%) Now, let us say that a large group of Rachaels got much better jobs with some pretty good increases in real wages. They would have moved up to a higher percentile on the income ladder, but not necessarily into the top 10%. Real wages then had to fall for another group of people. That is upward mobility for some and downward mobility for others.
The stars on Friends and the actors who do the voices on The Simpons did pretty well for themselves when they did some collective bargaining. The administration was asleep at the switch for not passing some rules favorable to the show’s producers.

* Although the govt considers household composition and household income when they decide on classification, they report the number of individuals above or below the poverty threshold.

Getting richer or poorer.
>>...But the reason may be due to the growth of Mr Jones rather
>>than the decline of Mr Catch.

Your example is correct but see above.
>>To claim that the income gap is solely because of tax policies does not seem right since
>>some of the growth is more than 100%. After all you cannot be tax at more than 100%.
Apples and oranges. More to the point here is another quote from the book.

Over the last three decades of the twentieth century the average income grew modestly, but the share of earnings going to income and Social Security taxes rose. At the same time the super rich saw their incomes skyrocket and, because their tax rates fell, the kept an even higher percentage than before.

So there is more going on here than just taxes, but do consider the compounding effect of lower tax rates or no taxes. That effect would not be inconsequential over a period of years.

With respect to the two people making luxury cars. If it’s an American factory, the person on the shop floor may well not have a job when the Chinese start buying in quantity.

Paying Taxes:

My experience on paying taxes is that I file and will continue to file the 1040. I have little opportunity to be ‘inventive’ with my return and being relatively easy to audit I have no incentive to do other other than file a ‘by the numbers’ return.

When I did some estate planning last spring one of the folks I was working with tried to explain the benefits of a charitable trust. Since I didn’t have any equities that had substantially appreciated, the discussion didn’t take much time.

On many (all?) of the schemes (I’m using that as a neutral word) that Johnson describes, you have to pay big bucks to shelter much bigger bucks.

Cap on Taxes:

The tax rate never never went to 100%. On an individual return taxable income falls into bands. Each band has its tax rate. The higher the band the higher the rate. During the 70s (double digit inflation) Congress didn’t mind the store and adjust the bands so middle class tax payers were hit with bracket creep as well at the same time that they were seeing no increase in real wages. When the Reaganites took office, tax reductions were an easy sell, and, in the process, marginal rates where adjusted that such that Dick Cheney and I pay the same rate on the last dollar of our taxable wages. (I think I am right on that.)

Reagan cut income tax and social services. However, because of the defense build up he had to enact a series of revenue enhancements—a contrived term so that he didn’t have to admit to imposing regressive taxes. Because of cuts in federal programs, states have had to raise taxes. All of this pretty much wiped out tax cuts for all but the rich.

Would the rich continue to get richer under a more progressive system? Possibly.

Economic Ownership:
>>I believe what is mentioned may be a trust

Nope. That chapter dealt with corporate trading.

Cut funding:

>>If one is complaining about the lack of fiscal restraint and using money that one should
>>not use, then the two solutions are either 1) Raise taxes 2) Cut the funding.

It looks like Golix took care of this one with your first game. I’ll need to learn how to use a broad brush. The State of Missouri needs one of those games.

Seriously though, true.

Amount of taxes paid:
>>Is there a graph to show the total amount of taxes each wage group pays?

An excellent question. I would like to see it myself. I have a inquiry in with the Center on Budget and Policy Priorities.

Lack of Equity tax code:

Yep