David Goodfriend: Let’s Be Honest — We Need to Reform Our Tax Code

Here’s David Goodfriend’s rant on reforming our tax code — let him know what you think!  You can find him on Twitter @DavidGoodfriend.

“Without a doubt, we need to reform our awful tax code.  And the best way to solve this problem is to start by being honest about what’s going on.  I’m sick of conservative politicians groveling to the wealthiest among us, saying that the top 1% are over-taxed.  The conservative think tank Heritage Foundation recently said that the top 1% of income earners pay 38% of income taxes, while the bottom 50% pays a mere 3% of income taxes.  So trying to make the top 1% pay more income tax is just wrong, they said.

Now, I don’t dispute the Heritage Foundation’s figures.  And some of my best friends are conservative!  I just wish those guys would give you the whole truth.

You see, income taxes are only a part of all federal revenues.  About 42%, to be precise.  And yes, because we have a progressive income tax system in which the more you earn, the higher rate you pay, people who make the most income pay the most income taxes.

But don’t stop there!  Income taxes are just part of what funds the government.  What about the rest of federal revenues?

It just so happens that payroll taxes generate about the same revenue for Uncle Sam as income taxes.  40% of federal revenues are payroll taxes, taken right out of your paycheck, to pay for Social Security and Medicare, two of the most popular programs in American history.

Who pays payroll taxes?  People who earn a salary.  So we’re not talking about hedge fund managers who take a percentage of their investment gains, or small investors who make capital gains on good trades.  We’re talking about wage earners.  Cops, teachers, doctors, pilots, all earn wages and all pay payroll taxes.

There’s more:  the federal payroll tax applies up to about $110,000 per year.  So any dollars you earn over that amount get a payroll tax rate of ZERO.

So here’s the whole truth about taxes:

A teacher or cop making $80,000 a year pays a much higher proportion of their income in payroll taxes than does a lawyer making $1 million a year.  The cop contributes payroll taxes on 100% of her income, while the lawyer pays on about 10% of his income.

Going back to the conservatives’ claim about the tax burden on the wealthy, if you count income and payroll taxes combined, the wealthiest 1% pay about 20% of total revenues, which is about their share of total income.

So the system is unfair, yes, but not because working people pay too little.  It’s because our system is actually quite REGRESSIVE in the way it taxes.  If you earn a middle-income salary, you get taxed at a much higher percentage than if you have a high income.  That’s not how our PROGRESSIVE tax system is supposed to work.

With the Bush tax cuts scheduled to end in December, there will be calls for overhauling the tax code.  And we should.  But please.  Let’s at least start with the whole truth about taxes.”

Want to learn more about our take on taxes? Here are three of our favorite posts on the topic…
America’s Tax Code: A Rigged System Written By a Bought Government (That You Get To Pay For)
Five Questions on Taxes with David Cay Johnston
David Cay Johnston: The Tax & Deficit Debate is Absurd