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Rosalind Gottfried
Economics
October 19, 2020

Policy

The recently published revelations regarding the status of President Trump’s tax record hardly come as a surprise.  Many of us have the vague notion that the tax structure is unfair, but how bad is it?  And, how is it structured?

It is very unfair. The burden on the wealthy versus everyone else is very little.  As stated in The Guardian, “there is one set of rules for the richest 0.1% and another for everyone else.”  President Trump exemplifies the former group.  For the 15 years between 2000 and 2015 Trump paid no taxes for ten of those years and little for the remaining years.  In 2016 and 2017 he paid $750 which he described, in a recent interview, as a filing fee.  He has carried over business losses to multiple years accruing extra tax credit for the same losses.  He has not denied that he owes more than 400 million plus in debt, due in the next four years, and he will not state whether any of this is to foreign banks or foreign governments.  The NYT articles detailing his tax status have asserted that he has failed to make any payments on the principal of a 100 million dollar loan, from 2012, to fund the Trump Tower.  They also report that Trump depends on money from businesses which represent significant conflicts of interest with the office of the Presidency.  The full picture of his tax status is still missing in action since he asserts that he is under an audit and therefore cannot supply his records though there is no prohibition against him doing so.

Individual federal taxes are structured so that theoretically the more income you have the more taxes you will pay in terms of the percentage levied on your income.  This rarely plays out, in fact, and so frequently the working and middle classes are paying more income tax than the wealthy.  In 2018, the 400 top earners paid an average federal income tax rate of 23%, rather than their theoretical level of 37%.  One wealthy banker reports paying a tax rate in the high teens.  The bottom half of earners paid an average of 24%.

Tax levels for wages and salaries are greater than those levied on investments and property taxes.  Capital gains from investments, certain dividends, and long term capital gains are capped at 23.8%.   The tax burden is supposed to be “progressive” but the wealthy pay a similar portion, or less, than the middle groups and this imposes a far smaller burden on them.  Those who can least afford to do so pay a bigger portion of their relatively low income to taxes.  This is especially true in other “regressive” taxes such as Social Security and sales taxes.  The social security tax is increased as incomes go up but only to 137,000 dollars and then there are no additional charges.  Sales taxes, for example on food and gas, are equal for all though they are more costly to a household with a lower income.  These tax differentials are adding fuel to the fire igniting the ever widening gap in wealth in the US and the stagnation of the financial picture of the working classes.  The persistent separation of the very wealthy, from everyone else, is the most dramatic it has ever been and far outpaces the situation in other advanced democracies.

Policy

Trump and Biden favor different approaches to the tax structure. Overall, Biden seeks to make it more equitable and simple to utilize.  Trump seeks to advance the interests of business and capital.  A few highlights from the Tax Cuts and Jobs Act of 2017 (TCJA) exemplify these differences.  Trump wants to maintain the theoretical tax celling of 37% whereas Biden wants to return it to the pre-2018 level of 39.6%.   He feels the affluent should pay more because they can.  Trump suggests that the 22% rate on the middle groups be lowered to 15% or the brackets be modified so that more people fall into the lower groupings.  He has advanced no specific plans.  Trump would move the investment rate down to 15%, from a ceiling of 23.8%. 15% OF WHAT?  Taxes on investments..He also suggests tying the tax rate to the inflation index.  Biden would like to see the rates be the same or similar for all types of income.

The TCJA doubles the standard deductions on annual federal taxes and limits the itemized deductions a person can claim.  This has caused most people to stop itemizing.  The rate went from 31% to 14%.WHAT RATE?  Of people who bothered to itemize…Those with large mortgages and significant charitable contributions still benefit from itemizing. BUT ABOVE YOU SAY PEOPLE HAVE STOPPED ITEMIZING/EXPLAIN  Wealthy who have the means to buy huge homes and significant contributions to charities  The Act also increased child deductions to $2000 for children under 17 and $500 for other dependents.  The Act, with regard to personal income taxes, expires in 2025.  Biden seeks to increase the deduction to $3000 for children 6-17 and $3600 for children under 6.  Trump would leave it as is.

Biden proposes increasing payments to Social Security, often referred to as the payroll tax for incomes up to $400,000 rather than the current stopping point of $137,000.  Trump has suspended social security payments for September through December.  These deferred payments would be due in 2021 unless Trump eliminates the debt with a tax holiday.  A Congressional mandate is required to make these permanent.  The deferments only accrue to those making less than $100,000.

The portion paid by corporations versus the overwhelming mass of individual taxpayers continues to plummet.  Corporate taxes, under the TCJA, are at a flat rate of 21% rather than the previous range of 15-35%. These modifications are permanent under the Act. Trump prefers a set rate of 20% though he has made no proposal yet.  Biden supports a 28% rate and a limit to how long a business can claim little to no income.  A significant portion of corporate taxes are paid by employees, shareholders, and consumers rather than by the company.

Suggestions for improving the tax structure include:  that the tax subsidies for failing businesses be limited to six years; preferential treatment for investment income should end; a 10% sur tax should be placed on incomes over two million dollars regardless of its source; and large charitable donations should not have repercussions which accrue to the personal lives of their donors outside of the tax deduction.  It is estimated that the current set of rules results in 574 billion dollars of lost revenue annually and the wealthy comprise 70% of the noncompliant.  Can we afford this?

References: Learn More

https://www.theguardian.com/commentisfree/2020/oct/02/donald-trump-federal-income-taxes-legal

https://www.accountingtoday.com/opinion/trump-vs-biden-whose-tax-plan-makes-for-good-tax-law

https://www.cnn.com/2020/10/16/politics/trump-tax-returns-nbc-town-hall-savannah-guthrie/index.html

https://www.bbc.com/news/business-54364904

Resources

https://joebiden.com/  Biden campaign website

https://americansfortaxfairness.org/national-organizations-working-families/  Organizations seeking to change the federal tax structures

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