Many argue that our $16 trillion federal debt was caused by two unfunded wars, the bailout of a corrupt and poorly managed banking system, avoiding a depression and general government overspending. However, unfair changes made to the tax code starting around 1980 must be examined to help explain our current economic woes.
The chief criterion of a fair tax is the effect it has on the taxpayer. Does it treat people fairly, is it equitable, and how does it affect taxpayers' economic capacity?
If you tax someone who makes $10 million a year at the same rate as someone who makes $30,000 a year, say, at 30 percent, are you treating them fairly? One individual pays $3 million in taxes - the equivalent of 10 feet on his 85-foot yacht or the value of his vacation home - and still has $7 million to spend. The other individual pays $9,000 in taxes, leaving $21,000 and forcing him to forgo medical care or his children's tuition or possibly his mortgage.
To get around this inequity, our forefathers set up a progressive tax system where high-income taxpayers pay a higher percentage of their wages in taxes.
Until the 1980s, the United States used "equal sacrifice" for determining a fair tax system. This has been based on the idea that for taxes it is much less sacrifice to deprive a high-income person of a wine cellar than to deprive a lower-income person of milk for her infant. With the flat tax, the middle- and lower-income taxpayer feels a significant amount of pain before the wealthy taxpayer feels even the slightest bit. This is why a progressive tax system has always been a major component of the American dream - all Americans participate in the prosperity of this great nation.
Some argue that progressive taxes restrain the profit motive, resulting in less incentive to take the risk to create a new or expand an existing business.
Flat tax proponents say that that when we cut taxes on the wealthy and corporations, it leaves the money in the hands of those most likely to increase product supply. They believe the demand that this supply creates expands gross domestic product, increases employment and brings up the salaries of the middle and working class, ultimately increasing tax revenues.
In practice, the result of such changes has been a massive growth in the wealth of a relatively small segment of American society. It's resulted in anemic economic growth, sluggish tax revenues and deficits. Most economists no longer believe in this theory.
Consumer spending is the only thing that creates jobs, stimulates the economy and increases tax revenues, and to do that, consumers have to have money to spend. As Henry Ford said, "we cannot sell our products without decent incomes." You cannot concentrate money in so few hands and expect to be a prosperous and strong nation.
A consumption or sales tax such as the one under consideration by the N.C. General Assembly is even more unfair than a flat tax. It requires middle- and lower-income taxpayers to pay a higher percentage of their earnings in taxes than the wealthy. Simply, this occurs because the wealthy spend a much smaller percentage of their earnings than do middle and lower income earners, thus are taxed on a smaller percentage of their income.
Take sales tax on a car. If a $10 million income earner purchases an $80,000 car, he pays sales tax on a purchase less than 1 percent of his income. If a $30,000 income earner buys an $8,000 car, he pays sales tax on a purchase that is more than 26 percent of his income.
Thirty years ago top executives received about 40 times the typical American workers' salary; today top executives make 300 times the typical American worker's pay. Many of these same executives, who make more in a day than their employees make in a year, were explaining to their employees that they could not afford to give them a cost-of-living increase.
Over the past 40 years, the marginal tax on the highest-income tax bracket was cut from 70 percent to 35 percent, and federal tax money has decreased to 16 percent of GDP from 22 percent. For example, the Tax Act of 1986 resulted in a 47 percent decrease in taxes on families who earned $300,000 or more and an 18 percent increase in taxes for all others.
Americans paid an average tax rate of 35 percent in the 1960s and 26 percent in the 1990s. Today Americans pay only about 17 percent, the lowest among the group of seven industrialized nations.
After only three decades of Reaganomics and economic oligarchy, we are faltering on the American dream.
America would be wise to roll back some of the tax decreases on the highest income earners and allow the middle and working class to participate in the prosperity of this great nation.
William Cunningham, eminent scholar emeritus at Old Dominion University, taught educational administration courses there and coordinated a Navy masters program for training officers.