Timothy Wood
american notes
New York April 16 is the most important day in the United States calendar. At no other time is the nation as united in its purpose as when tax returns are to be filed.
President George Bush has a deft appreciation for the populist possibilities surrounding April 16, specifically tax cuts. So it was hardly surprising that he won overwhelming public support for his budget speech, which included this gem: “The American people have been overcharged and I’m here asking for a refund.”
He was referring to the budget surpluses that have accumulated in recent years and which he believes should be returned to taxpayers before politicians squander them, as they are wont to do. It should be a straightforward slam-dunk to pass the required legislation. At least one would think so given that all politicians live on money borrowed from their constituents.
Not quite so easy. Taxation animates much that is America and lest we forget, the phrase “taxation without representation” resulted in a revolution here and occupies an amendment to the Constitution. What once split Britain from its western colony has been transplanted into national politics as a neat fault line between the two dominant parties.
Democrats, known not so affectionately as the tax-and-spend party, argue that tax cuts favour the wealthy. So they should since the wealthy pay most of the tax already. However, the determination to cast a tax cut as immoral illustrates how infectious class warfare has become.
It is not enough that the American social contract makes provision for a lopsided fiscus where the few pay for the most. Bush, somewhat antithetically to much Republican sentiment, has not only endorsed that contract but is deepening it.
Under his plan nearly six-million “low”-income Americans will be removed from the tax rolls entirely. They will pay no federal income taxes although the regressive payroll tax will still eat away at their wages. To put that in some local perspective, low income means someone who earns less than R150 000 a year the level where South Africa’s top marginal rate begins to apply.
The Tax Foundation in Washington reports that the average employee will lose at least 34% of his income to the government in federal and state taxes alone. Once sales and property taxes are added, there’s not much left.
While the truly rich will derive an effective 43% of the proposed $1,6-trillion tax reduction, they will continue to carry a disproportionate share of the burden at a time when taxes are already at a peace-time high. The top 1% pay one-third of all income taxes, the top 5% more than half, the top 10% nearly two-thirds and the top 25% more than 80%. It almost goes without saying that the bottom 10 % scoop up nearly 80% of federal disbursements.
With that weight burdening successful endeavour, America is just Sweden with private alcohol.
Yet those drunk with power continue to charge that tax relief is anti-social. In fairness, it’s not only politicians. A variety of dubious media polls have concluded that the man in the street doesn’t want a tax cut. That’s easily refuted by the hundreds of thousands of middle- and low-income families that patronise the ubiquitous tax preparation companies whose only sales pitch is the size of the tax refund they can secure.
Another much-hated tax is the estate tax which is particularly destructive to small businesses and farmers who are typically worth between $3-million and $6-million. In order to pay the estate tax on their deaths, effectively the third time the income is taxed, heirs are forced to dismember the businesses or sell them entirely.
Bush would like to abolish the estate tax that was introduced after the “Robber Baron” era. The fear was not accumulation by the few, but hoarding to deprive the state of its patrimony. That proved unfounded with the likes of Carnegie, Ford, DuPont, Mellon and Rockefeller giving more to the public in real terms than anyone before or since.
The tax stayed and has some unlikely modern backers billionaires. A clutch of them, including Bill Gates’s father, George Soros and the “Oracle of Omaha”, Warren Buffett, took an advert in The New York Times protesting a repeal of the estate tax.
Gates and company fret that without an estate tax, charitable donations will decline. Buffett has an even more obtuse position. He fears that large and numerous inheritances will turn the country into a plutocracy: “[Repealing the estate tax will be like] choosing the 2020 Olympic team by picking the eldest sons of the gold medal winners in the 2000 Olympics.”
That is utter nonsense and Joe Citizen knows it. Buffett has lined up his son to succeed him as the boss of Berkshire Hathaway, well-primed with a large trust. That hypocrisy aside, trusts are the real problem. The truly wealthy pay very little in tax compared with their income, leaving the middle class to pick up the tab. The billionaires’ assets are secreted away in foreign tax havens or exempt foundations, free for use by succeeding generations.
No wonder the mega wealthy support the estate tax. It secures their elite status against self-starters who might accumulate enough to found a competing dynasty. If Buffett and friends were in the least bit sincere they would turn over their profits to charity and the state. They don’t, instead playing the avoidance game just like the great unwashed, but with better resources and results.
The net result of all the wrangling is growing support for wholesale tax reform. There are strong calls for the abolition of the payroll tax, to be replaced by a 2% sales tax. Likewise, there is agitation for simplified (no deductions) and more inclusive (no company loopholes) taxation that limits what anyone can be taxed to 28%.
To understand America, just follow the money, especially where it is filled in on an IRS tax return.