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America’s Social Contract And The Measure of Our Commitment

(Note: contains some material from prior posts)

by Brian T. Lynch, MSW

A key element in America’s social contract is the idea that government derives its authority from the consent of the people. So the question should occasional be asked, is our mutual consent to be governed wearing thin? There is evidence to suggest a growing restiveness in certain populations. Some symptoms of declining consent include gridlock in congress marked by an inability to pass any legislation on a simple majority vote, the resurgence in states’ rights activism, calls in some states for secession, citizens arming themselves in fear (or perhaps the  hope) of armed resistance and wide spread efforts to manipulate elections.  Perhaps the best, most quantitative way to judge the degree to which we  consent (or commitment) to self-government is by our willingness to pay taxes.

The attitudes we have towards paying taxes, and the extent to which people and organizations will go to avoid them, is an underappreciated index of our consent to be governed. Just as taxation without representation was a rallying cry leading up to the Revolutionary War, the Tea Party and many other popular reform or resistance groups today rally around taxes as a central point of contention. Objectively speaking, the Tea Party’s opposition to taxes makes no sense since their complaint corresponded with the lowest federal tax rate since the Eisenhower administration. It isn’t until we understand that our attitude towards taxes is a barometer of our consent to be governed that the Tea Party’s tax objections become clear.

For the sake of discussion it is helpful to identify different segments of the population that are particularly opposed to taxes. But keep in mind that our personal attitude towards paying taxes is just as valid an indicator of where each of us falls on this measure of consent.

Let’s begin with those who see themselves through the lens of American individualism. They value self-reliance and see this as a patriotic duty. They tend to think less of those who are more collaborative, more dependent or less successful. They tend to discount the contribution of the public commons to their own welfare and don’t often recognize how massively interdependent advanced societies really are. They believe that less government is best for everyone. These folks are less willing to contribute to tax supported government services other than for military defense. They are ideological individualist. This group may include some libertarians and on the extreme fringes may also include some anarchists or survivalists.

There are those who are suspicious or uncomfortable with American pluralism. These folks tend to live in parts of the country where there is little diversity or just a single predominate minority group.  However, folks who hold this belief can be found everywhere. They believe a disproportionate amount of their taxes go to support other ethnic or cultural groups whose members don’t share their same values or work ethic. They may fear that these other groups are taking advantage of government largess. As a result, they are more resentful of paying taxes and more critical of what they see as wasteful government spending. These folks are pluralism-adverse and at the extreme fringes  this group may include racists or hate groups. A highly nationalistic subset of this pluralism-adverse group believe their government has already broken faith with them and is threatening their liberty. For them, paying taxes is akin to paying tribute to a foreign potentate. The most extreme of these consider themselves to be soverign citizens.

There are some religious fundamentalists who believe all secular government is evil. Some fundamentalist sects focus on The Book of Revelations and an apocalyptic view of the world in which governments plays a role in the rise of the false prophet. For these groups anything that expands government is evil as well, including increased taxes. They are usually considered to be on the fringe of the Christian community, but they have an impact beyond their numbers.

Then there are those who believe taxes compete or interfere with commerce and free markets. They believe that taxes reduce the capital available for businesses investments. They fear that more taxes will lead to more government regulations and further hinder commerce. They don’t see government spending as simulative for the economy. For them, the provision of government services to those who aren’t successful contributors is an unfair redistribution of wealth. Members of this group are more likely to have higher incomes and a sense of entitlement. They may pride themselves in their ability to avoid paying taxes. At the extreme fringes of this group members tend to see society as being made up of the have and the have nots, the makers and the takers. They are often contemptuous of taxes and government.

Next, there are the disaffected and those too self-absorbed to care much about government. For this group all taxes are an annoyance to be avoided.  This is a large and diverse group that is often underrepresented in our national conversations. They include many who are poor, but also many who are middle class folks working hard just to make ends meet. They tend to be swing voters when they vote and their grasp of politics and government policies are more maliable. The underground cash economy is significant for them.

The impact of this growing reluctance by some citizens to pay income taxes is huge. According to a GAO report called  “HIGH-RISK SERIES, An Update”, the Internal Revenue Service estimated that the gross tax gap–the difference between taxes owed and taxes paid on time–was $450 billion for tax year 2006. The IRS estimated that it would collect $65 billion from these taxpayers through enforcement actions and late payments, leaving a net tax gap of $385 billion. This doesn’t include the loss of tax revenue due to the underground cash economy and foreign US cash transactions. These  create an additional tax gap estimated to be between $400 billion and $540 billion annually. There is also the tax gap created when wealthy investors hide their money in off shore tax havens. According to a study by the Tax Justice Network  the world’s super rich have at least $21 trillion secretly hidden away in tax shelters as of 2010. This is equivalent to the size of the Japanese and United States economies combined, according to The Price of Offshore Revisited report. Further, the amount of secretly hidden wealth may be as high as $32 trillion.

Arguably the most tax resistant groups, which also have the greatest fiscal and political impact, are businesses and corporations. The largest loss of tax revenue, representing the lowest level of consent to be governed, comes from the corporate sector. The shift in the percentage of total federal income taxes paid by individuals verses businesses has grown substantially over the years. Individual income taxes raised 41% of the total tax revenue in 1943 while business income taxes made up the rest, or more than half of the income tax receipts. Compare this with today where 79% of total revenues comes from individual income taxes. This shift in tax receipts from corporations to individuals cannot be explained by a shift away from C corporations (who pay the corporate income tax) to S corporations (who don’t). According to the financial site NerdWallet, the 10 most profitable U.S. companies paid an average federal tax rate of just 9 percent  in 2011. The group includes such giants as Exxon Mobil, Apple, Microsoft, JPMorgan Chase and General Electric. The Economist recently posted a graphic by the Bureau of Economic Analysis that depicts the decline in corporate taxes juxtaposed to the rise in corporate profits.

The inability of the federal government to collect taxes from the nation’s elite and its biggest corporations is a serious sign of trouble. It signals a real strain in our social contract and severly limits the ability of the government to serve its people. The problem is compounded by the fact that anti-tax sentiments are being exploited by wealthy business interests to ferment dissatisfaction and distrust of our government. A coalition of the most anti-tax, anti government constituents from the various tax adverse segments of society described above would look very similar to the Tea Party base of today’s Republican Party. The power we invest in civil government is the only check we have to balance the power of the largest corporations to do as they wish in pursuit of profits. It would be a mistake to weaken our commitment to good government now when it is under assault.

There are still many who believe taxes are the price we must pay for a just and robust society. Paying taxes is our civic duty and evidence of our commitment to one another. It reflects confidence that our government is representing us and upholding the social contract. The present IRS scandal over the targeting of Tea Party groups for selective scrutiny of their 503(c)4 tax status is really a minor but convenient distraction from the real tax crisis we face. We are facing a crisis of confidence in self-government. It is a challenge of our time to rekindle a popular passion for civil government that is truly of, by and for the people.

Taxes and America’s Social Contract

The American social contract is threadbare in certain parts of America.  Areas of this great country are falling into disrepair, dissolution as if under a spell . In places like the Camden, New Jersey and now Josephine County, Oregon, public safety has been compromised by the failure of will to raise taxes.   Below you will find a very disturbing report on the latter situation from Oregon Public Broadcasting.  It dramatically highlights what can go wrong when citizens can’t make the connection between good government and the tax revenue it takes to have it.  First, let’s consider the various segments of our population who oppose raising taxes.

There are those who see themselves through the lens of American individualism.  They value self-reliance and see this as a patriotic duty.  They tend to think less of those who are more collaborative or more dependent or unsuccessful. They tend to discount the contribution of the public commons to their own welfare and don’t often recognize how massively interdependent our advanced society really is.  They believe that less government is best for everyone.  These folks are less willing to contribute to tax supported government services other than for military defense.  They are  ideological individualist. They may include libertarians. On the extreme fringe they may include anarchists or survialists.

There are those who are suspicious or uncomfortable with Ameican pluarism.  These folks most often live in parts of the country where there is little diversity or only a single other minority group.  But folks who hold this belief  can also be  found everywhere.  They believe a disproportionate amount of their taxes go to support other ethnic or cultual groups whose members don’t share their same values or work ethic. They sometimes fear other groups are taking advantage of government largess.  As a result, they are more resentful of paying taxes and more critical of wasteful governement spending.  They are  pluralism-adverse. At the extremes this group may include racists and hate group. A highly nationalistic subset of this pluralism adverse group believes the federal government has already broken faith with the people and threat our liberty.  For them, paying taxes is akin to paying tribute to a foreign potentate.

There are some religious fundamentalists who believe all secular government is evil. For them, anything that expands government is evil as well, including raising taxes.

There are those who believe taxes compete or interfere with commerce and the free market.   They think that taxes only reduce the capital available for business and contribute to government regulations. They don’t see government spending as stimulating for the economy.  For them, the provision of services to those who aren’t successful contributors to the economy is an unfair redistribution of wealth.  This group are more likely to have higher incomes and to pride themselves in their ability to avoid paying taxes. In the extreme they tend to see society as made of the have and have nots, the makers and the takers.

I believe all these groups are being aggitated and moulded into an anti-government political movement to reduce the power of government to regulate powerful corporate interests.  But regardless of what you or I believe, the truth of who we are becoming is reflected in the hopes and fears of this 911 caller in Josephine County, Oregon.

With No Officers To Respond To 911 Calls, Josephine Co. Considers Tax Levy

OPB | May 14, 2013 3:40 p.m. | Updated: May 15, 2013 10:50 a.m. | Grants Pass, Oregon

http://www.opb.org/news/article/josephine-county-tax-levy-would-add-deputies-fund-the-jail/

Corporate Taxes Fall as Profits Soar

The Economist states it just right.  Big corporations are avoiding their tax obligation. They have no sense of duty or obligation towards the peoples government which created corporations and the condition in which they have flourished.  Increasingly, government is a gadfly to corporate profit making as citizens insist, through their government, that we breath clean air, drink pure water and eat healthy foods.  Corporations are so large and powerful today that the only checks on their power is big government… hence the sustained attacks they are waging on big government.  But when governments no longer have the power or ability to collect taxes from the elite or the largest corporations, they are close to colapsing.  That is the message I take away from this latest report.  I encourage everyone to go there and read more.

Taxing for some

America’s corporation-tax receipts falter even as company profits soar

THE pressure on tax-avoiders is mounting. In the latest episode Tim Cook, Apple’s boss, was called before a Senate subcommittee to explain why the tech giant had paid no tax on $74 billion of its profits over the past four years—though it has done nothing illegal. This comes at a time when America’s corporate profits are at a record high, thanks to the swift sacking of workers at the start of the recession, lower interest expenses, and the fact that cheap labour in emerging markets has eroded union power, allowing firms to move production offshore and defy demands for pay rises. Meanwhile corporation tax, which makes up 10% of the taxman’s total haul (down from about a third in the 1950s) has plummeted. An increase in businesses structuring themselves as partnerships and “S” corporations, which subject profits to individual rather than corporate income tax, is in part to blame. But tax havens are also culprits, as they lower their tax levels to lure in bigger firms. 

Does Philanthropy End Up Hurting the Poor and Vulnerable?

What follows is my response to an open discussion about the role and social value of philanthropic  foundations.  It is my response to the lead article by Dr. Rob Reich, which can be read in its entirity at the URL below.

BOSTON REVIEW

http://www.bostonreview.net/BR38.2/ndf_rob_reich_foundations_philanthropy_democracy.php#c5t_form

MARCH/APRIL 2013

Lead Essay:
What Are Foundations For?

Rob Reich

This article leads off our debate on philanthropy, with responses from Stanley Katz, Diane Ravitch, Larry Kramer, and others.

Graham Smith

Judge Richard Posner, one of the foremost American jurists outside the Supreme Court, once observed, “A perpetual charitable foundation . . . is a completely irresponsible institution, answerable to nobody. It competes neither in capital markets nor in product markets . . . and, unlike a hereditary monarch whom such a foundation otherwise resembles, it is subject to no political controls either.” Why, he wondered, don’t we think of these foundations as “total scandals”?

If foundations are total scandals, then we have a massive problem on our hands. We are now living through the second golden age of American philanthropy. What Andrew Carnegie and John D. Rockefeller were to the early twentieth century, Bill Gates and Warren Buffett are to the early twenty-first century.

The last decade of the twentieth century witnessed the creation of unprecedentedly large foundations, such as Gates’s. The assets of the Gates Foundation and a separate Gates Trust, which holds wealth donated by the Gates family and Buffett, together total more than $65 Billion. If the combined entities were a nation, it would be 65th on the world GDP list. And it’s not just billionaires and their mega-foundations that command attention. Record wealth inequalities might be a foe to civic comity, but they are good for philanthropy. The boom in millionaires has fueled unprecedented growth in the number and assets of small foundations as well.

So foundations have seen explosive growth. But why are they a scandal?  Read the Full Article.  http://www.bostonreview.net/BR38.2/ndf_rob_reich_foundations_philanthropy_democracy.php#c5t_form

My Comments:

In setting up his essay on philanthropic foundation in this “second golden age”, Reich offered the following:  “Let us dismiss quickly one common and intuitive thought: that foundations exist because they are remedial or redistributive, responsive to the needs of the poor or disadvantaged.”

He goes on to identify public goods this way: “It has long been understood that the commercial marketplace does not do well at providing what economists call public goods. These are goods that, like a well-lit harbor, are available to everyone if they are available to anyone; and that, like clean air, do not cost more when they are consumed by more people. “

After three decades in the field of child welfare, this was a startling and insightful dismissal.  In debating whether America’s philanthropic foundations are worthy of the tax exempt status conferred on them in 1937, Reich excludes consideration of their value relative to public services that reduce human misery but carry a cost per use.  In other words Reich’s definition of public goods includes only passive public services, like street lights, but not active public services, including child welfare.  This certainly explains why foundational giving for public needs is so small a percentage of their activity.  Yet we are asked to judge whether their social contribution is worth their $53 billion in tax exemptions each year?  How much good could that revenue do to support and strengthen our most vulnerable citizens?  Don’t ask!

To characterize social services as remedial “or redistributive” of wealth, is offensive to me.  When used to characterize government spending on the general welfare, “redistribution” is a code word to frame partisan arguments in our muffled debate over distributive justice.  Taxing the more successful citizens to promote the general welfare, except for military spending, is considered an unfair redistribution of wealth, yet any discussion on  the fair distribution of profits between workers and business owners is considered out of bounds.

The context for this discussion on foundations is the social value of philanthropy at a time when wealth disparity has never been greater.  When a growing number of wealthy foundations are extracting ever more revenue from an already dwindling federal revenue stream,  excluding consideration of their impact on public services makes this discussion itself a plutocratic exercise.

The pros and cons of whether foundations generate valuable diversity and innovation were well explored by the forum’s other contributors, but none of their essays addressed underlying assumptions.  Foundations actually do play an outsized and often deterious  role in how community social services are structured, funded and distributed. None of the contributors picked the scab off  this wound to consider the broader picture.  Financially speaking, foundations are in direct competition with public social services and the vulnerable populations served. I was disappointed.

Time to Cap the Debate on Social Security and Medicare

Social Security and Medicare are in serious financial trouble in the future because they have been under attack for so long that how we thing of them has been changed by those who wish to kill these programs.  Regardless of whose figures you believe when discussing the financial health of these programs, it could all be fixed by scraping the income cut off cap for contributions.  Right now income payroll deduction collect a fixed percent of incomes up to around the first $107,000.  This was just raised to this amount this year.  All income over that amount is not considered.

I am a reluctant proponent of eliminating the Social Security and Medicare income contribution caps.  In the short run this improve the income projects for both programs for some time to come, but it would also plant the seeds of distruction for these programs.  It is helpful to understand why there are these caps to understanding my point.

Social Security and Medicare are government run insurance programs.  Payroll deductions are really premiums to pay for them.  Only those who pay their premiums over the years will be eligible for benefits in the future.  These premiums, collected though payroll deductions, are not income taxes in the sense that they do not fund the federal budget. These programs are not the cause of our federal spending deficits or our national debt (two terms often tossed about as if they meant the same thing).  Both Medicare and Social Security are currently solvent.  They are collecting enough in premiums to cover current expenses.
Because Social Security and Medicare are insurance programs, the premiums have a cap so that the revenues collected are just enough to pay expenses for current recipients.  There is no massive bank account where your money is held until you retire. What we pay in annual premiums, in other words, pays for the benefits received by current recipients.  The cap on income contributions is the means to adjust annual collections to meet current needs.  It is like the volume control, or the valve of a faucet or a dial on a dimmer switch.  The actual percentage of our income that we pay in premiums is fixed.  It is not indexed to inflation.  So even if there weren’t more seniors collecting benefits, the income cap would need to be periodically raised to adjust for inflation.  Raising the cap is how we increase premium revenues without having to change the percentage of money taken out of our salaries.  It is designed to raise the “volume” of cash flow by collecting a little more from just the wealthiest  group of contributors.
But these government insurance programs have always had their critics who, over the years, have attacked these social programs and changed the language used to describe these social insurance programs.  They alter the language in order to frame their debate and change how we think about the programs.  Premiums became” taxes,” “wage garnishment” or “big government spending.”  Benefits became “entitlements,” or “government handouts” and so forth.  As a result, increasing the income cap is, “a big government tax increase,” on the “successful” who are “job creators,” the “makers,” so that our out of control government can give even more money to the “takers”.  We all know the rhetoric on the right.
It is true that premium revenue needs to be raised and it is always true that we need to find more efficiencies in delivering services.  But the opponents of these programs scare the hell out of everyone by conflating current debt and deficits with the potential of future insolvency for these programs if income caps are not adjusted.  So we should either raise the income cap to increase revenue as originally intended or we scrap the cap and make everyone pay a flat percentage of their salary.  This method would still require periodic adjustsments for future inflation and shifting service needs, but raising premium rates would be a much harder thing to do politically since it would affect everyone and not just a handful of people who are well off and won’t hardly notice the change.

Online Sales Tax Not So Simple or Wonderful

In the New Jersey Star Ledgers editorial, “A Level Field,” it is argued that it is time for online sellers to collect state sales tax.  The principle concern is that New Jersey is losing out on tax revenue.  But the issue is not that simple. There is the little matter of the interstate commerce clause in the US Constitution. In the case of Complete Auto Transit vs. Brady, U.S. Supreme Court said that collecting taxes on out-of-state sales is constitutional when:

1.  The activity taxed has a substantial nexus with the taxing state

2.  The tax is fairly apportioned

3.  The tax does not discriminate against interstate commerce, and

4.  The tax is fairly related to services the state provides the taxpayer

With this in mind, consider the example of a couple in New Jersey who goes online to the website of a California firm to buy a product made and shipped from New York State. Where is the point of sale? Which state can claim to have the most substantial nexus?  In which state are the most taxpayer supported services provided as related to this sales ransaction?

These are questions for those drafting the Market Place Fairness Act to consider.  If raising state revenue was the primary consideration, each state might decide to impose their own sales tax in the above example.  This situation would discriminate against interstate commerce.  More importantly, if raising state revenues is the issue then the obvious places to start would be the elimination of tax loop holes and sweetheart deals for businesses, elimination of the ridiculous tax loopholes for wealthy individuals, and maybe raising taxes on those who  financially benefit the most in New Jersey.  Sales taxes are already far too regressive and burdensome to the poor.

Corporations Open New Push for Even More Favorable Tax Laws

Beware America! The push is on for yet another round of self-serving corporate tax reform.  A press release from the Business Roundtable announced the release of a new report touting the economic benefits of “revenue neutral” corporate and individual tax reforms.  Below is a summary of the findings from the press release and a link to the report.  But before you read it, consider what the real trend is in corporate tax revenues compared with what individuals contribute.

HERE IS THE TRUTH! Corporate tax rates do not reflect what  corporations actually pay in income taxes, and the effective corporate tax rates, as well as the percentage of tax revenues they contribute have been in decline for decades.

Decline in Corporate Tax Burden Over 40 Years

corp vs ind taxes

The table above (in millions of dollars) is based on statistics from the Office of Management and the Budget in the White House [www.whitehouse.gov/omb/budget/Historicals/].

The shift in the percentage of total taxes paid by individuals has grown substantially over the years.  Individual income taxes raised 41% of the total income tax revenue in 1943 compared to 79% of total revenues today.  And the shift in tax receipts from corporations to individuals cannot be explained by a shift away from C corporations (who pay the corporate income tax) to S corporations (who don’t). An analysis of that shift in corporation type is an insignificant contributor to the overall shift in the tax burden. [http://rdwolff.com/content/massive-shift-tax-burden-corporations-individuals-statistical-mirage ]

Shifting the tax burden from corporations to individuals over the past 40 years is yet another factor contributing to the current decline in domestic consumer spending.  Wage suppression, the shifting of the tax burden from the rich to the middle class, coupled with the decline in the tax burden on corporations are all that is needed to explain the decline of America’s middle class, the rise in poverty and the growth of government spending in social support programs.  The people are going broke, the government is going broke trying to prop us up and the rich are becoming richer and more powerful each year.

PRESS RELEASE

BUSINESS ROUNDTABLE RELEASES ECONOMIC CASE FOR CORPORATE TAX REFORM

Comprehensive Data Analysis Shows Tax Reform Would Ensure U.S. Competitiveness and Lead to U.S. Economic Growth

Corporate Tax Reform – The Time Is Now

http://usahomecourt.org/resources/business-roundtable-releases-economic-case-corporate-tax-reform

Key components of the Roundtable’s analysis include: [also known as “talking points”]

  • U.S. Companies’ Fiercest Competitors Enjoy Lower Home-Country Tax Rates: It is well known that the U.S. combined (federal and state) statutory tax rate is the highest of any developed nation, averaging 39.1 percent. As the analysis points out in detail, American companies now find that their closest foreign competitors are based in countries with lower corporate tax rates and international tax systems more favorable to their global operations than the U.S. rules. Since 2000, 30 of the 34 Organisation for Economic Co-operation and Development (OECD) countries have reduced their corporate tax rate.
  • High Rates are a Drag on the U.S. Economy: Researchers at Cornell and the University of London report that a one-percentage-point decrease in the average corporate tax rate would result in an increase in real U.S. GDP of between 0.4 to 0.6 percent within one year of the tax cut.
  • Double Tax on Foreign Earned Income Hurts American Companies and U.S. Competitiveness: Within the OECD, of companies headquartered outside the United States, 93 percent of the world’s top 500 companies (based on Fortune’s 2012 list) are headquartered in countries that use “territorial” tax systems, where income earned abroad is not taxed again when earnings are repatriated, unlike under the current U.S. system. This is up from only 27 percent of the same countries utilizing territorial systems in 1995 – signaling a significant trend towards the more competitive method of taxation.
  • Under current law, foreign earnings are effectively “locked out” of the United States: An estimated $1.7 trillion in accumulated foreign earnings was held by the foreign subsidiaries of American companies in 2011. If only half of that amount came back to the United States in response to enactment of a market-based territorial tax system, the funds freed up for use at home would exceed the increased government spending and tax relief provided under the 2009 American Recovery and Reinvestment Act.
  • Effective U.S. Corporate Tax Rate 12+ Percentage Points Higher than OECD Countries: Data in the new document disproves claims of low “effective” rates (amount of tax paid after deductions) paid by U.S. corporations, citing a new World Bank study of corporate income taxes in 185 countries for 2013 that finds that tax payments are higher for companies operating in the United States as a percentage of income than the average of other OECD and non-OECD countries. In fact, the U.S. effective tax rate (ETR) of 27.6 percent is more than 12 percentage points higher than the average of other OECD countries and 11 percentage points higher than the average of non-OECD countries. The analysis also explains why using the ratio of corporate income tax to GDP is an improper measure of effective rates.
  • U.S. Workers Bear the Burden of the Outdated U.S. Corporate Tax System:  Corporate Tax Reform – The Time Is Now also analyzes a number of recent studies that find that workers bear between half and three-quarters of the burden of the corporate income tax. These findings suggest reducing the corporate income tax rate would provide benefits to workers through higher wages.

GAO – $450 Billion Gap in Taxes Owed Per Year

The following excerpt is taken directly from a GAO report called  “HIGH-RISK SERIES An Update,” which highlights the difficulties in collecting revenue legally owed to our federal government. You will note from the steps recommended that significant collection efforts are to be focused on corporations and other business practices.  The $450 billion in annual lost revenue does not take into account other shady tax loopholes used by the wealthy hide their income.  It also isn’t clear if this total includes taxes lost in  the underground cash and barter economies, which costs us billions in lost revenue.  Unpaid taxes are an affront to a fair and balanced tax system.  Lost revenue must be made up out of the pockets of law abiding citizens.  Any changes to tax laws to make them fairer must include provisions to make collection more uniform.

Enforcement of Tax Laws

The Internal Revenue Service (IRS) recently estimated that the gross tax gap—the difference between taxes owed and taxes paid on time—was $450 billion for tax year 2006. For a portion of the gap, IRS is able to identify the responsible taxpayers. IRS estimated that it would collect $65 billion from these taxpayers through enforcement actions and late payments, leaving a net tax gap of $385 billion. The tax gap has been a persistent problem in spite of a myriad of congressional and IRS efforts to reduce it, as the rate at which taxpayers voluntarily comply with U.S. tax laws has changed little over the past three decades. Given that the tax gap has been persistent and dispersed across different types of taxes and taxpayers, coupled with tax code complexity and a globalizing economy, reducing the tax gap will require applying multiple strategies over a sustained period of time.

IRS enforcement of the tax laws is vital for financing the U.S. government. Through enforcement, IRS collects revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share. GAO designated the enforcement of tax laws as a high-risk area in 1990.IRS and Congress have shown a commitment to addressing the tax gap. Importantly, IRS continues to research the extent and causes of taxpayer noncompliance and is using the results to revise its examination programs. While still in the early planning stages, IRS has met with key stakeholders to develop options for expanding compliance checks before issuing refunds to taxpayers. IRS is also extending a program to encourage taxpayers to voluntarily report their previously undisclosed foreign accounts and assets, which has resulted in billions of dollars in collections. IRS, as well as Congress, has taken other innovative actions aimed at further improving tax compliance, often directly based on GAO’s work, including the following:

• Since 2012, brokers have been required to report their clients’ basis for securities sales.

• Since 2011, banks and other third parties have been required to report businesses’ credit card and similar receipts.

• Starting in 2014, U.S. financial institutions and other entities are required to withhold a portion of certain payments made to foreign financial institutions that have not entered into an agreement with IRS to report details on U.S. account holders to IRS

• Starting with tax year 2010, IRS is requiring businesses to report on their tax returns uncertain tax positions—those for which a business reported a reserve amount in its financial statements to account for the possibility that IRS does not sustain the position upon examination or that the position may be litigated.

• IRS is continuing its multiyear effort to replace the systems it uses to process individual tax returns and receive electronically filed tax returns.

The impact of these initiatives on taxpayer compliance and the tax gap may not be known for years and will depend, in part, on how IRS implements them. Using the new information from financial institutions could require IRS to develop new business processes and uses of information technology. Implementation will also be influenced by IRS’s ability to provide quality taxpayer services, such as telephone, correspondence, and online assistance. GAO found that some services

have experienced performance declines in recent years and IRS’s website could offer additional interactivity for taxpayers.

Another initiative IRS undertook in 2010 was to begin implementing new requirements for paid tax return preparers, such as competency testing, with the goals of leveraging relationships with paid preparers and improving the accuracy of the tax returns they prepare. Given that they prepare approximately 60 percent of all tax returns filed, paid preparers have an enormous impact on IRS’s ability to administer tax laws effectively. In January 2013, the U.S. District Court for the District of Columbia enjoined IRS from enforcing the new requirements for paid preparers. IRS has filed a motion to suspend the injunction and intends to appeal the District Court’s decision. 

Further refining of direct revenue return-on-investment measures of its enforcement programs could improve how IRS allocates resources across its programs. Better use of such measures, subject to other considerations of tax administration, such as minimizing compliance costs and ensuring equitable treatment across different groups of taxpayers, could help maximize income tax collections. Resource allocation will become increasingly important as IRS is tasked with broader responsibilities, such as those in the Patient Protection and Affordable Care Act, in a time of tight budgets.

Additionally, targeted legislative action may be needed to address some compliance issues. IRS has statutory authority — called math error authority—to correct certain errors, such as calculation mistakes or omitted or inconsistent entries, during tax return processing. Expanding such math error authority could help IRS correct additional errors before interest is owed by taxpayers and avoid burdensome audits. Additional types of information reporting could also help improve compliance.

Taxpayers are much more likely to report their income accurately when the income is also reported to IRS by a third party. By matching information received from third-party payers with what payees report on their tax returns, IRS can detect income underreporting, including the failure to file a tax return. Currently, businesses must report to IRS payments for services they make to unincorporated persons or businesses, but payments to corporations generally do not have to be reported.

Taxpayers who rent out real estate are required to report to IRS expense payments for certain services, such as payments for property repairs, only if their rental activity is considered a trade or business. Expanding information reporting in these areas could increase payee reporting compliance. In 2010, the Joint Committee on Taxation estimated revenue increases for a 10-year period from third-party reporting of (1) rental real estate service payments to be $2.5 billion and (2) service payments to corporations to be $3.4 billion.

A broader opportunity to address the tax gap involves simplifying the Internal Revenue Code, as complexity can cause taxpayer confusion and provide opportunities to hide willful noncompliance. Fundamental tax reform could result in a smaller tax gap if the new system has fewer tax preferences or complex tax code provisions, reducing IRS’s enforcement challenges and increasing public confidence in the fairness of the tax system. Short of fundamental reform, targeted implification opportunities exist. For example, changing tax laws to include more consistent definitions across tax provisions, such as which higher education expenses qualify for some of the savings and tax credit provisions in the tax code, could help taxpayers more easily understand and comply with their obligations.  For IRS to improve its enforcement of tax laws it must continue to:

• perform compliance research on a regular basis and use the results to identify areas of noncompliance;

• seek ways to leverage paid preparers to improve tax compliance;

• implement new (1) requirements for sources of taxpayer information and (2) technologies to enhance the effectiveness and timeliness of service and enforcement corrective measures; and

• develop return on investment measures to better allocate resources and maximize income tax collection.

In that regard, IRS should implement GAO’s open recommendations, such as those on developing measures of direct revenue return on investment.  To assist IRS in reducing the tax gap, Congress should consider expanding IRS’s math error authority to correct taxpayer calculation mistakes or omitted or inconsistent entries during tax return processing before issuing refunds. Congress should also consider requiring payers to report service payments to corporations and making rental real estate owners subject to the same payment reporting requirements regardless of whether they engaged in a trade or business under current law. In the event that IRS cannot implement its new requirements without additional statutory authority, Congress should consider whether tax compliance could be improved by regulating paid preparers. The ongoing debate about tax reform also provides opportunities to consider the effect of tax simplification on taxpayer compliance and the tax gap.

Half of All Full-time Employees Earn Less Than $19/hr.

DATA DRIVEN VIEW POINT:  There are 103.6 million full-time workers in America, half of whom make $758 per week or less before income taxes and other payroll deductions.  That means a full time worker supporting a family of 4 and making the median U.S. wage needs, and is income eligible for, supplemental food assistance (SNAP).  These employees work a minimum of 35 hours per week, but may be working more than 40 hours per week as this income includes tip, commissions and overtime. It doesn’t include employer benefits.  All self-employed persons are excluded.
If the average hours worked per week is between 40 and 50 hours, the median hourly wage would be between $15 and $19 dollars per hour (with any overtime pay included). Again, that means that almost half of all full-time employees make less than $15 to $19 dollars per hour.  By inference, this means a great many full-time employees are making close to minimum wage. Also of note is the significant wage disparity between men and woman, especially among White and Asian women.
American workers are simply not being paid enough.  Any business hiring a full-time employee and paying less than a living wage should be taxed the difference between the employees wages and the taxpayer supported supplemental services that person is entitled to receive.

Bureau of Labor Statistics
For release 10:00 a.m. (EDT) Thursday, October 18, 2012   USDL-12-2072
Technical information: (202) 691-6378  •  cpsinfo@bls.gov  •  www.bls.gov/cps
Media contact: (202) 691-5902  •  PressOffice@bls.gov

USUAL WEEKLY EARNINGS OF WAGE AND SALARY WORKERS THIRD QUARTER 2012

Median weekly earnings of the nation’s 103.6 million full-time wage and salary workers were $758 in the third quarter of 2012 (not seasonally adjusted), the U.S. Bureau of Labor Statistics reported today.

This was 0.7 percent higher than a year earlier, compared with a gain of 1.7 percent in the Consumer Price Index for All Urban Consumers (CPI-U) over the same period.

Data on usual weekly earnings are collected as part of the Current Population Survey, a nationwide sample survey of households in which respondents are asked, among other things, how much each wage and salary worker usually earns. (See the Technical Note.) Data shown in this release are not seasonally adjusted unless otherwise specified. Highlights from the third-quarter data are:

  • Seasonally adjusted median weekly earnings were $765 in the third quarter of 2012, little changed from the previous quarter ($773). (See table 1.)
  • On a not seasonally adjusted basis, median weekly earnings were $758 in the third quarter of 2012. Women who usually worked full time had median weekly earnings of $685, or 82.7 percent of the $828 median for men. (See table 2.)
  • The female-to-male earnings ratio varied by race and ethnicity. White women earned 83.4 percent as much as their male counterparts, compared with black (93.2 percent), Hispanic (87.5 percent), and Asian women (73.1 percent). (See table 2.)
  • Among the major race and ethnicity groups, median weekly earnings for black men working at full-time jobs were $633 per week, or 74.1 percent of the median for white men ($854). The difference was less among women, as black women’s median earnings ($590) were 82.9 percent of those for white women ($712). Overall, median earnings of Hispanics who worked full time ($556) were lower than those of blacks ($606), whites ($780), and Asians ($915). (See table 2.)
  • Usual weekly earnings of full-time workers varied by age. Among men, those age 45 to 54 and 55 to 64 had the highest median weekly earnings, $976 and $980, respectively. Usual weekly earnings were highest for women age 35 to 64; weekly earnings were $740 for women age 35 to 44, $754 for women age 45 to 54, and $766 for women age 55 to 64. Workers age 16 to 24 had the lowest median weekly earnings, at $437. (See table 3.)
  • Among the major occupational groups, persons employed full time in management, professional, and related occupations had the highest median weekly earnings—$1,300 for men and $948 for women. Men and women employed in service jobs earned the least, $530 and $440, respectively. (See table 4.)
  • By educational attainment, full-time workers age 25 and over without a high school diploma had median weekly earnings of $464, compared with $648 for high school graduates (no college) and $1,170 for those holding at least a bachelor’s degree. Among college graduates with advanced degrees (professional or master’s degree and above), the highest earning 10 percent of male workers made $3,448 or more per week, compared with $2,311 or more for their female counterparts. (See table 5.)

Revision of Seasonally Adjusted Usual Weekly Earnings Data The Usual Weekly Earnings news release for the fourth quarter of 2012 will incorporate annual revisions to seasonally adjusted data for the number of full-time wage and salary workers and median weekly earnings in current dollars. (See table 1.) Estimates for constant (1982-84) dollar median weekly earnings also will be affected by revisions to the current dollar series.  Seasonally adjusted estimates back to the first quarter of 2008 will be subject to revision.


Go to Tables: http://www.bls.gov/news.release/pdf/wkyeng.pdf

A 99 Year History of U.S. Income Tax Rates

SPECIAL NOTE:  Our US progressive tax structure  [or whats left of it] will turn 100 years old on October 3rd. We should plan a celebration!

OUR TAX STRUCTURE USE TO BE MUCH MORE PROGRESSIVE THAN IT IS TODAY.
The Progressive Tax Code

Our progressive, or graduated income tax was signed into law by President Woodrow Wilson On October 3, 1913.  The idea was to create a system where those who did well bore a greater responsibility for funding the government.  In fact, the original intent was to only tax the wealthiest citizens.  The income tax was never meant to burden the majority of wage earners.  The new law taxed individuals making $3,000 or couples making $4,000 per year. $4,000  at that time would be equivalent to about $100,000 per year in today’s dollars.  What the law did not take into account was inflation.  Much the same as is presently the case with the minimum alternative income tax, the original income tax brackets stayed constant every year while inflation and working class wages slowly rose.  Eventually, income taxes became a burden to lower wage earners as well as the rich.    [ http://www.buzzle.com/articles/the-controversial-history-of-the-graduate-income-tax.html ]

The progressive nature of the income tax is achieved by creating multiple income tax brackets to for rising levels of income.  Each tax bracket has a slightly higher tax rate.  Between 1913 and 1918 the number of tax brackets that applied to wealthy incomes rose to 56 brackets.  By 1940 that number of brackets fell to 24 and there it more or less remained for the next 40 years.

What did rise over this time period were the marginal tax rates.  By the 1950’s the top marginal tax rate for the wealthiest earners was 90 percent.  The top marginal tax rate was gradually lowered over the next 30 years until it was at 70% in 1980.  In 1981 President Ronald Reagan collapsed the top 9 tax brackets to lowered the top marginal tax rate from 70% to 50%.  During is second term he eliminated 10 more upper tax brackets dropping the top marginal tax rate from 50% to just 28%.  He also raised the tax rates on the lowest income earners, those who were originally not expected to contribute.  At the same time, tax breaks for the wealthiest Americans combined with huge jumps in military spending resulted in huge budget deficits and a large national debt that has been with us since.

The top marginal tax rate for wage income was eventually raised back to 35% but not before capital gains income was stripped from the progressive tax code and separately taxed at a rate of just 15%.  Capital gains income represents the major source of income for the wealthiest Americans. So the original intent of the progressive tax code, that the tax burden should only fall on the wealthiest American’s, was turned upside down.

For a glimpse of the problem with our current tax structure, see the US states map at the following URL to see how much more the bottom 20% are paying  in taxes, as a percentage of income, over the top 1%.  http://tiles.mapbox.com/occupy/map/TaxBurden 

The graph below shows the 99 year history of tax rates for four incomes levels in the US. The data are adjusted for inflation and reflect the current value of the dollar.  Tax rates for those making one-million dollars are in blue, those making $100,000 are in  pink, those making $50,000 (approx. median household income) are in brown, and those making $25,000 (half of all American make less than $26,364) are in black.  All rates are based on the married, filing jointly category.  The tax information begins in 1913 and continue through 2011.

 

  See data source here: http://taxfoundation.org/article/us-federal-individual-income-tax-rates-history-1913-2011-nominal-and-inflation-adjusted-brackets

What the graphic says to me is that for most of the last 100 years the wealthiest Americans have been paying more taxes than they are today, a lot more.  Also, there was a period from around 1932 to 1988 when tax rates were lower for the working poor than for middle Americans.

I also noticed that beginning in the early 1980’s the tax brackets for the wealthy began collapsing until 1987 when a person making a million dollars a year was paying the same tax rate as someone making $117,760 per year.  This had the effect of adding millions of tax payers into the same federal tax bracket as the ultra-wealth.  From a political perspective, they became a single voting block on the issue of taxation.  Also note that the tax rates for the two lower incomes jumped significantly in 1942-1946 and has been relatively steady since, decreasing only slightly during the Reagan administration when taxes on the wealthiest Americans began dropping sharply.  Remember that mantra in the 80’s, “It’s not what you make, it’s what you keep.”  This was never truer than for the wealthiest among us.

See Raw Data Here
http://www.taxfoundation.org/files/fed_individual_rate_history_nominal&adjusted-20110909.pdf

The Rise and Fall of the US Progressive Tax Structure

Below is a companion chart to the 99 Year History of Tax Rates in America  (Click Here to see chart).  This graph charts the number of tax brackets into which income was divided over the years.  Looking back, it is apparent that our progressive tax structure had many more tax brackets separating rich and poor for most or hour history.  There was a peek of 56 income tax brackets in 1918.  In 1924 (the Roaring 20’s) that number was compressed to just 23 tax brackets.  The number of tax brackets fluctuated over the next 62 years but maintained an average of 25 brackets until the 1980’s.

In 1981 the first of Ronald Reagan’s tax cuts was passed dropping the top tax rate from 70% to 50%.  Five years later his Tax Reform Act of 1986 dropped the top tax rate again to 28% while raising the bottom rate from 11% to 15% where it remains today.  The 1986 law also collapsed the number of tax brackets from 15 in 1984 to 5 in 1985.  While lowering the top tax rate for the rich from 70% to 28% was a huge boost for the wealthiest Americans, compressing the top 10 tax bracket helped assure that the changes would not be undone.  The reduction in tax brackets meant that the number of people in the top earners bracket went from tens of thousands of the riches voters to many millions of voters including those with much more modest incomes. By lumping together people making over $300,000 with those earning many  times that amount the change created a large voting block of voters who would oppose future tax hikes.

During these same years the Reagan administration began deregulating the banking and finance industries leading to more and more wealth building opportunities for those already blessed with riches.  Ronald Reagan was following the economic path created by the economist, Milton Friedman, who, in turn, was influenced by the Objectivism philosophy of Ayn Rand.  Ayn Rand believed that altruism and self-sacrifice for others is evil.  See more here]

http://www.aseyeseesit.blogspot.com/#!http://aseyeseesit.blogspot.com/2012/10/paul-ryans-hero-ayn-rand-w-mike-wallace.html

 

Source Material:  See Raw Data Here, and Tax Reform Act of 1986