Here we are again approaching the deadline for filing income tax returns. I’ve just finished an all-day session with my tax software and miscellaneous 1099s, receipts, cancelled checks and the like. Now I ask myself whether I paid my fair share.
To borrow from a former President, it depends on what the meaning of “fair” is. Like most people, I suppose, I believe it begins with paying more than filers with lower incomes. Like most, but not all people. We mustn’t forget the flat tax folks, who’d consider our tax system fair if everybody paid the same share of his/her income.
I’m pretty sure I paid more than people with considerably lower incomes, but I doubt that translates into my fair share. I’ll tell you some of the reasons why because they speak to what seem to me dubious preferences built into the federal tax code.
First off, I paid a lower percent of my income than people who earned the same amount by working. That’s because I benefited from the preferential rate for both capital gains on assets held for more than a year and qualified dividends, i.e., those that meet specific criteria, as most paid to shareholders in U.S. corporations do.
Defenders of the rate claim, among other things, that it’s an incentive to invest — thus grows our economy, creates jobs, etc. This seems to me pretty lame. What would I do with the money instead? Spend it all, which itself would grow the economy? Put it under my mattress? In a savings account, where it would lose purchasing power because the interest rate is usually lower than the inflation rate?
Defenders also claim the money has already been taxed, either as corporate profits or as income earned by working. For me, the latter isn’t altogether true — at least, not in the sense that I would be taxed twice. I have as much investment income as I do because I was a beneficiary of trusts established by my grandmother and younger sister.
I sold some of the stocks I inherited last year and others in earlier years. I didn’t pay taxes on anything close to the difference between purchase and sale prices — the usual basis for capital gains. Instead, I paid only the market value the stocks had gained since the trusts passed them along to me.
So the total profit was far greater than the taxed amount because the value of the stocks was “stepped up” to the dates when my grandmother and sister died. Nobody paid taxes on the value gained before then. I can’t see what’s fair about that.
But it’s not exactly a loophole, as President Obama has termed it. It’s a feature, not a bug in the estate tax — and ardently defended.
What then about the income taxes I pay to the District of Columbia? The District has a fairly progressive income tax structure. But the tax itself is based on the federal, both adjusted gross income and itemized deductions.
So the break for capital gains and dividends carries over. Likewise, the hidden capital gains break due to the stepped-up basis. I thus benefit twice over.
I’m a fairly ordinary middle-class person, born to middle-class parents, one of whom had a parent who actually bootstrapped his way off the streets of New York. Wouldn’t have those trust assets without him.
I understand that the tax code can’t be rejiggered to compensate for the advantages I’ve had because I chose my parents wisely. But that doesn’t mean it should pass those advantages along by preferential rates and the like.
The tax code, after all, is how our federal, state and local governments raise revenues for all the programs and services that compensate for disadvantages — from pre-birth through adulthood — that make it so difficult for people born poor and near-poor to live in reasonable comfort and security.
The Institute on Tax and Economic Policy says that a “fair tax system is one that asks citizens to contribute to the cost of government services based on their ability to pay.” I’m inclined to go further because so many critical services don’t cost enough now.
All but 14 of more than 150 federal programs that are supposed to serve the needs of low-income people — and in some cases, others too — have less in real dollars this year than they had in 2010. About a third have effectively been cut by at least 15%.
This argues for an end to sequestration, i.e., the spending caps Congress passed as a fallback, thinking (wrongly) that the members appointed to the so-called supercommittee would come up with a more sensible deficit reduction plan.
Such a plan would surely include measures to raise more revenues from individuals who have the ability to pay, as well as corporations that now have — and exercise — the ability to pay less than nothing.
If you think the tax code is unfair now, as I do, just imagine how more unfair it might be. And how much more unfair our country would be, since the Rubio-Lee plan would cause the deficit to skyrocket.
We know what would happen to programs for low-income people then. We need only look around our communities to see what’s happened already.