In Which I Had a Facepalm Moment

By John Ballard

Last night's PBS News aired this segment pointing out a source of national wealth that I have never seen represented in the popular charts.

 

Watch the full episode. See more PBS NewsHour.

I'm not posting this to announce becoming a wealth-gap denier. But in the interest of reality, this guy has a valid point. In the end, as the saying goes, the rich really are different from you and I -- they have money. And plenty of it.

This video makes a good starting point for a rational discussion of how tax policy should be revised. Loopholes, targeted credits and other special treatments have proliferated to the point that few filers, even with the assistance of software programs, can properly do the necessary paperwork to itemize deductions.

About two-thirds of filers take the standard deduction. So the majority of taxpayers already are out of the loop. For that group, tweaking the standard deduction will result in huge tax revenue changes up or down. 

There is still plenty of reason to return to more progressive income tax rates, including a surcharge for the super-rich. Lost in most discussions are two items from the past that have been forgotten.

1. The Tax Reform Act of 1986 under Ronald Reagan "simplified" the rates to four (if we overlook an avalanche of exceptions, loopholes and other tax-avoidance devices under the IRS radar) but the capital gains tax and the top income tax rate were the same, 28 percent. I'm not interesting in discovering how that rate got reduced to fifteen percent. My guess is that members of both parties had a hand in it. It's time at least to put it back to the same rate put into effect in Reagan's day. 


2. Income Averaging was another feature of the tax code eliminated in 1986. The purpose of income averaging was to take a bit of the sting of income tax affecting those who suddenly find themselves pushed into a higher bracket by increased taxable income. 

In the well-known illustration of the disparity between Warrn Buffet and his secretary, a return to the day of Ronald Reagan would be a step in the right direction. As most people know by now, his income, like that of most very rich people, is from capital gains, not earnings, so under current rate he pays a lower percentage in taxes.

That still makes him and his peers exempt from the payroll taxes (for which there is no deduction, incidentally) that ordinary people pay starting with their first dollar. But that is small potatoes since the annual cap on high earners vanishes as their earnings pass a certain point. 

I was fortunate to benefit from income averaging when I got a promotion in 1982 which resulted in my income's nearly doubling. As I recall, by using income averaging I saved a significant amount that year by averating my taxable earnings together with the previous few years of near-poverty wages. I was honored to be paying more in taxes but the memory of hard times saved me from pangs of guilt for paying less in taxes than others inelligible for income averaging.

Income averating is a fair way to tax those who have become for whatever reason "temporarily rich." I'm thinking here of lottery winners, entertainers, sports stars or others with a windfall not likely to continue. Should the taxable revenue sream continue, income averaging will become a vanishing advantage. And for the first year or two a lower tax rate may often ameliorate the preceding years of personal sacrifice, debt or other price paid climbing the income ladder. 

As the video reminds us, Social Security and Medicare represent a large and important reserve of "wealth" from which most people benefit. i would add, however, that a means test for both is not an altogether crazy idea. As the video also points out, the very rich will always be able to afford the best of everything and those for whom Social Security and Medicare are the only programs standing between them and utter destitution have no other place to catch their fall.  

I, for one, would be honored to pay over a hundred thousand dollars in taxes but that is not a problem I expect to face. Likewise, I am more than willing to submit to a means test for Social Security and/or Medicare because I feel confident that in both cases the threat of  losing either or having to pay more is as remote as being assessed a hundred thousand dollars in taxes by the IRS.

Thanks for listening.