Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, April 20, 1995 TAG: 9504200106
SECTION: EDITORIAL PAGE: A-13 EDITION: METRO
SOURCE: RAY L. GARLAND
DATELINE: LENGTH: Long
Let's begin with some general observations. First, taxes in America are by no means the highest in the industrialized world. In fact, they are among the lowest.
Second, the collection of taxes in the United States has remained remarkably consistent irrespective of rates that are roughly 30 percent of our total economy.
Third, tax compliance in this country is apparently eroding. In 1992, the Internal Revenue Service estimated that $127 billion in taxes legally owed the federal government weren't paid. It is probably more than that. The "cash economy" was recently pegged at $750 billion a year and rising.
Bashing the IRS may have replaced baseball as the national pastime. In a recent report to Congress, the General Accounting Office slammed the service for "serious and pervasive" problems. But when the IRS announced it was expanding its secret data base to catch more tax cheats, the outcry was so loud it promptly backed off. Now, there's talk in Congress of making the IRS's job even more difficult by switching the burden of proof from taxpayers to tax collectors.
Now, when a person with an expensive lifestyle reporting a paltry income is confronted by a tax examiner, he must provide documentation to show how he did it legally. If you turn this around, it would be up to the IRS to prove the income that wasn't reported, a task altogether more daunting. This would not be in the public interest.
There's also serious talk of reducing the IRS to a nub by enacting a flat tax on income after a generous offset to compensate for the loss of existing deductions, or even replacing the income tax with a national sales tax in the range of 20 percent with various credits for those with low incomes. Paying taxes only on what you spend and not what you save might improve our notoriously low savings rate. But auditing retailers for honest compliance on a federal, state and local sales tax exceeding 25 percent in some places would be a nightmare.
In fact, our savings rate isn't so low when you consider that present wage-earners, supposedly, are prepaying for health and pension benefits in their retirement years. The catch is, of course, all the money is being spent now.
I know the IRS can go off the deep end. But I also know it can put things right again. The problem is the sheer complexity of the tax code and the magnitude of both taxpayers and transactions it must now attempt to track.
Imagine accurately encoding data from 125 million returns and matching these with billions of transactions reported by employers, banks, brokerage houses and government agencies! While supercomputers, when up and running, should help a lot, the task is larger than any agency of a democratic government can ever perform satisfactorily.
Americans are ambivalent on the subject of tax rates. But a consensus seems to be emerging that existing rates are approximately correct and spending should be cut to reduce the federal deficit. The ease with which Gov. George Allen's recent modest proposals to cut taxes were defeated might suggest that Virginians are satisfied with state and local taxes that take only a little more than 10 percent of personal income.
A married couple with $60,000 in taxable income in Virginia will pay $11,867 in federal income tax and about $3,000 in state income tax. Assuming all income is salaried and equally divided, they will also pay more than $5,000 in Social Security taxes, which will be matched by their employers. While this will vary tremendously based on where they live, and in what style, they might expect to pay roughly $1,800 in local real and personal property taxes and perhaps $1,000 in sales taxes.
All of the above works out to a tax rate of 37 percent on adjusted income, higher if you include the employer's Social Security/Medicare contribution, which most economists (but few taxpayers) would argue is really the worker's money and should be counted as his tax.
Now, let's go to the other extreme, a single taxpayer with a taxable income of $300,000. His or her federal income tax is $96,439 plus $16,992 to Virginia. Because Social Security wages are capped below $60,000, this taxpayer would pay a bit less than our couple, or roughly $4,200. But the Medicare tax of 1.45 percent is imposed on all wages. Assuming most of this income is salaried would mean a Medicare tax of $3,500.
A $250,000 home and a $50,000 car in a typical Virginia county or city would mean local taxes of about $4,000. Because a single taxpayer in this bracket wouldn't likely spend a large portion of his income on items subject to the sales tax, this might add no more than $3,000.
In this example, our affluent single would pay $128,331 in taxes or 43 percent of taxable income. Comparing this to the 37 percent paid by our couple might lend credence to the liberal argument that tax rates are already too flat. In Virginia, they certainly are, a problem that Allen was trying to ease. In high-tax regions of the country, our affluent single would easily pay more than 50 percent of his income in federal, state and local taxes.
Highway-user taxes have been omitted from these equations. And no attempt has been made to estimate corporate taxes embedded in the cost of everything we buy. In fact, the U.S. rate on corporate profits is among the highest in the world, with dividends taxed at both the corporate and personal level. The maximum rate of taxation on the profits of a Virginia corporation paid as dividends to a Virginia citizen exceeds 66 percent!
Balancing the federal budget without using the Social Security surplus to cover current costs would require an increase of about 25 percent in federal taxes. That would be not only politically impossible, it would be bad policy. The law of diminishing returns from rates set too high has been proved too many times for anyone to believe we could ever tax our way to a balanced budget.
by CNB