First, I’m going to suggest major reforms. All of a person’s income should be taxed at the stated rate. (For simplicity’s sake, I will use the “head of household” category in all examples.) As the tax system operates now, someone who makes $1,000,000 annually does not pay 35% of that amount in income taxes. He/she actually pays like this:
On the first $11,950, he/she will pay the 10% rate.
On the next $33,600, he/she will pay the 15% rate.
On the next $72,101, he/she will pay the 25% rate.
On the next $72,900, he/she will pay the 28% rate.
On the next $183,100, he/she will pay the 33% rate.
At this point our hypothetical head of household has paid much less than the stated 35% rate on the $373,651 total shown above. The remainder (the difference between $1 M and $373,651, which is $626,350) is what will be taxed at the 35% rate. Our example person actually pays only 32% of his/her income on income taxes.
To be fair then, let’s look at what some heads of households actually pay:
Those making $0 to $11,950 actually pay the full stated percentage: 10%
Those making $45,550 pay 14%, not the stated 15%.
Those making $117,650 pay 21%, instead of the stated 25%.
Those making $190,550 pay 23% rather than the 28% stated amount.
Those making $373,650 pay 28% instead of the 33% given.
Those making over $373,650 don’t actually pay 35% until their income reaches approx. $10,000,000.
The examples listed do not take into account any deductions or loopholes that may be (and often are) used to lower the actual tax payments. The point is that the lowest income group is the only one that pays at the stated rate. All other stated rates are misleading to most people.
That’s Step #1—make it simple and easy for all to explain and understand.
Step #2: Take to heart the words that one of our premier founding fathers, Thomas Jefferson, said to James Madison in 1784 regarding taxes.
"Taxes should be proportioned to what may be annually spared by the individual."
--Thomas Jefferson to James Madison, 1784
When calculating the amounts that “may be annually spared” by an individual, we should really think about that. Can a family making $11,950 annually truly spare $1195 for taxes? That would leave that family with a whopping $10,755 of disposable income for an entire year.
By the same token, a family making $500,000 pays $149,317.75 in taxes (30% of total income)—by most standards, enough to annually spare—since it still leaves them with disposable income of $350,682.25.
As Warren Buffett (the third richest man in the world) has said, “I think that people at the high end, people like myself, should be paying a lot more in taxes. We have it better than we've ever had it.” He continued, "The rich are always going to say that, you know, just give us more money and we'll go out and spend more and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on."
A cadre’ of both former and current Millionaires recently wrote President Obama a letter with basically the same message: “We have done very well over the last several years. Now, during our nation’s moment of need, we are eager to do our fair share. We don’t need more tax cuts, and we understand that cutting our taxes will increase the deficit and the debt burden carried by other taxpayers. The country needs to meet its financial obligations in a just and responsible way.” The 45 individuals or families signing the letter also stated, “For the fiscal health of our nation and the well-being of our fellow citizens, we ask that you allow tax cuts on incomes over $1,000,000 to expire at the end of this year as scheduled.”
Those views reflect my vision of the true American spirit. I may be naïve since I don’t, and won’t ever, make enough to be able to make those kinds of sacrifices, but I honestly believe there’s a point at which extra income is just “fluff” and isn’t necessary to enjoy a quality life. Warren Buffett is a hero in my eyes—pledging to give a minimum of 90% of his wealth to philanthropy. Buffett and Bill Gates have initiated a pledge, and are asking other billionaires to sign on, to giving at least 50% of their wealth to philanthropy. At least 40 billionaires, including Oklahoma’s own George B. Kaiser, have agreed to do so.
Step #3 in my proposal is based on yet another Thomas Jefferson quote:
"Another means of silently lessening the inequality of property is to exempt all from taxation below a certain point, and to tax the higher portions of property in geometrical progression as they rise."
--Thomas Jefferson to James Madison, 1785.
There are some wage earners who should be exempt from all taxation, as Jefferson asserts. Our tax codes have done that in the past (1977-1986), but the current one requires all to pay at least 10%.
Trying to place things in perspective, think about the fact that persons of my age who generally began their careers in the early 1970s may (or may not) remember that the tax rate for heads of households making $20,000 to $22,000 annually in 1972 had an income tax rate of 35%. That’s the same rate now for millionaires, billionaires, and gazillionaires!
In that same year (1972), “heads of households” making $180,000 or more annually paid at a 70% rate.
But, I digress . . .
Mr. Jefferson’s statement to James Madison suggests that higher portions should be taxed “in geometrical progression as they rise” which means, to me, that we need to progressively increase taxation as incomes progress upwardly. Our current tax rate tops out at 35%, beginning with those making $373,650 and remains the same, no matter how much one makes. And, you might want to look back at the examples at the beginning of this post and realize that no one pays 35% now until they actually have income of approximately $10,000,000 because of our progressive methodology.
Remember that those of us who started our “real” jobs in approximately 1972 had that tax rate (35%) on measly $20,000 to $22,000 salaries! (That was not much more than what beginning teachers made in that time period.)
Not only do I wish I were rich, I’m happy for my friends and family who are. However, if I were “one of them,” I would happily pay more taxes. In fact, I would gladly do that now if our Congressional leaders would use that money to take care of those who are less fortunate.