Taxes by Another Name
What happens when the wealthy don’t pay a fair share?
The existence of substantial wealth and income inequality in the United States is well-known. We see it referenced almost daily in the press and it is generally acknowledged to have become steadily more pronounced over the past 35 years, beginning with the conservative politics of the Reagan years and the tax cuts for the higher income earners begun by the Tax Reform Act of 1986. What may be less obvious is that the current federal system of taxation accounts for a large part of this inequality. The wealthy have become more wealthy by avoiding payment of what most would consider to be a fair share of taxes, while, as hotel magnate Leona Helmsley once famously said, “only the little people pay taxes.”
A trove of IRS tax records recently obtained by ProPublica reveal that the top 25 richest Americans paid, on average, a tax rate of only 3.4% on an increase of over $400 billion in their wealth during a recent 5-year span. Another recent analysis by White House Council of Economic Advisers and the Office of Management and Budget, disclosed that the top 400 billionaire families in the U.S. paid an average of just 8.2 percent of their income in Federal individual income taxes between 2010 and 2018—a rate significantly lower than that paid by many ordinary Americans.
There are other direct and significant consequences to “little people” as a result of the wealthy failing to pay their fair share (“Little people,” as used here, encompasses middle and lower income families which, according to the Pew Research Center represent 81% of the country).
What are those consequences? I’ll explain. Much of the cost of government is either necessary or untethered to available funds from revenues. So, if tax revenues shrink as a consequence of the failure of some taxpayers to pay a fair share, the government doesn’t shrink. Indeed, studies have shown that a reduction in revenue due to tax cuts does not significantly reduce the size nor scope of government nor the expenses it normally incurs. Rather, governments experience a shortfall in revenue that must be made up from other sources. Either that, or some important benefits or services must be decreased or suspended entirely. The revenue shortfall that occurs at the federal level is felt by state and local governments as well, due to their heavy reliance on a variety of federal subsidies and various forms of direct federal financial participation in the administration of state and local governments.
So despite this shortfall, the military continues to exist; roads and bridges continue to crumble and need maintenance; parks must continue to manage visitors; public schools and universities continue to educate students; the challenges of climate change do not magically disappear; the list is, of course, endless. When non-payment of taxes reduces federal revenue, government entities everywhere begin to cast about for other sources of revenue. Here are some examples of such alternative sources—a list that is by no means exhaustive:
-- tuition and fees at public universities;
-- national and state park fees
-- city and state sales taxes
-- fines for traffic violations and other misdemeanor infractions
-- fees for driver’s license renewals and automobile registration
-- building permit fees that drive up the cost of housing
-- parking meter fees and fines
-- court filing and related fees for access to the judicial system
-- municipal transit fares
-- gasoline tax (increases are currently under consideration)
-- bridge and highway tolls
Of course, these payments are simply Taxes by Another Name and this alternative revenue stream on which governments rely is financed by a tax burden shifted to the “little people.”
Georgetown, Louisiana is an example. As recently reported by the publication Governing, over 92% of Georgetown’s general revenues in 2018 came from fines and fees. Similar results were found in 15 other small towns located across Louisiana, Georgia, Oklahoma and Texas, all of which funded their general budget by over a 70% reliance on fines and fees. A national analysis of such revenues, also conducted by Governing, found that, “. . . in hundreds of jurisdictions throughout the country, fines are used to fund a significant portion of the budget. They account for more than 10 percent of general fund revenues in nearly 600 U.S. jurisdictions. In at least 284 of those governments, it’s more than 20 percent.”
Many of you readers have doubtless noticed, as I have, relentless increases in most of the routine fees, fares, permit charges, and local taxes such as those listed above over the past few decades. Are these increases simply due to inflation? Perhaps, but they have occurred virtually in tandem with the reduced tax rates for the wealthy at the federal level.
Are there any reliable studies that connect the rise in these “taxes by another name” to federal tax cuts for the wealthy? Or, for that matter, to the billions of unpaid federal taxes attributable to tax avoidance schemes of the ultra-wealthy? None of which I’m aware. Maybe the connection is more tenuous and is simply the consequence of a general culture of income tax avoidance, an activity at which the wealthy excel? Or is the connection just an example of my confirmation bias? . . . Whatever the answer, I would suggest that it is no coincidence that the lower tax rates for the wealthy, beginning with those of the Tax Reform Act of 1986, have been accompanied by a 35 year ballooning of wealth inequality and a concomitant increase in governmental reliance on these alternative sources of revenue.
To summarize then, when the wealthy pay less, the “little people” pay more—indeed, often significantly more, and most certainly, with a higher percentage of their available income. For the most part, such alternative taxes are regressive—with ordinary Americans spending a larger percentage of their income on them than the wealthy. Income inequality is thus compounded.
Additional Notes:
* This work is licensed under CC BY-SA 4.0
Thanks : Clear concise and infuriating!
Excellent article David, and shockingly illustrated by today’s NYT article about traffic stops motivated by the need to impose fines, sometimes with tragic consequences.