11 Apr The Most Taxing Time of Year
When the Mega Millions lottery jackpot topped a billion dollars earlier this year, Instagrammers quickly claimed that the winner would owe $850 million in income taxes. “Congrats, IRS, for winning the jackpot,” the sarcastic posts read. Quickly debunking those rumors, tax experts pointed out that the winner more likely would pay “only” $135 million in taxes, due in part to any lump-sum payout option being far smaller than the advertised billion-dollar jackpot.
The point remains that Americans commonly complain about our country’s high taxes—the unfairness, the complexity, and the government’s use or “waste” of our tax money.
While taxes indeed may be inevitable, do paycheck deductions, filing returns, squaring up with the IRS, and watching the tax revenue being spent have to be as painful as they are? Most of us do not win the lottery, after all, and our taxes matter to us.
One of the main principles we cite here at Principle Based Politics is limited government—the federal government should do only what needs to be done and which others cannot do. This is another way of saying Congress and the Administration ought to spend only the money that they absolutely must.
Unnecessary spending causes (1) taxes to be higher than they should, (2) debt to be higher than it was, and (3) necessary spending to be jeopardized.
Overspending by government is a main reason your income taxes take as much from your paycheck as they do, and why you may well owe an additional payment to Uncle Sam a week from today. Unfortunately, federal politicians of both parties have been unable or unwilling to control their spending habits, and the United States keeps handing out money to individuals and corporations, either through spending bills or special tax reductions. As a result, today our country is more than $31 trillion in debt.
When you file your Form 1040 this year, look at the “Total tax” line and then divide that number by 365. Every day your tax money is being spent, but is it being spent with good stewardship? Republicans who threaten not to approve the national debt ceiling again—thereby leaving the country unable to pay its ongoing debt commitments—are not totally wrong to do whatever they can to call attention to federal overspending and waste.
In addition to individual tax rates being onerous, our taxes are unduly complicated to calculate. Why so?
First, your annual tax bill is not based on how much money you have, it is based on how much income you earned in a particular year. This income-based structure and every other facet of the federal tax system was designed for political reasons. This includes politicians just plain socking high earners because they can win votes by doing so, but there are other political angles, as well. It is those angles that create complications in determining your annual income.
For example, Congress creates tax exemptions as incentives and accommodations. Incentives include special deductions for interest on home mortgages, which encourages Americans to buy homes. Charitable deductions, some exceptions for investment income, and so-called “green” initiatives similarly complicate the tax forms in attempts to influence behavior. Accommodations, in turn, are made for families, those with large medical expenses, students, people with certain disabilities, surviving spouses, and veterans. All of the above interests have lobbyists wanting the special rules to continue. Politicians tend to agree. Hence, the complicated forms and worksheets needed to determine your qualification for and extent of such benefits.
An argument has been made that our federal deficits are not caused by overspending but by failing to impose enough federal taxes on “the rich.” Joe Biden and many other Democrats make this point. In his recent budget outline for the next fiscal year, President Biden proposes raising the tax rate on “capital gains” from 21 percent to 28 percent for everyone, raising the top tax rate for ordinary income to 39.6 percent from 37 percent, and charging that same new 39.6 percent rate on capital gains realized by those making over $1 million in a single tax year. What is not mentioned in these proposals is how such large capital gains tax rates could influence investor behavior. It is hard to know exactly what would happen, but it is safe to say that investor behavior would change, dramatically.
All told, the Biden proposal claims it would raise $4.5 trillion in new tax revenue in the next ten years, almost all of it from large corporations and affluent people. This would include a “wealth tax” on anyone with over $100 million in net worth, regardless of how much income the person had in the year. We can only imagine the pages of regulations that would be needed to calculate one’s “net worth” for tax purposes.
Where the Money Goes
As this blog pointed out recently in Tough Issue #6: Social Security Reform / Entitlements (April 5, 2023), Social Security and Medicare entitlement payments comprise the bulk of federal outlays, followed by the defense budget. President Biden recently released his proposal for FY 2024.
Republicans to date have not released a 2024 tax and spending plan. Of course, any reductions they propose will be criticized as “not caring about _____” and even “declaring war on _____.” That’s how it goes with politics. And that’s partly why taxes are high.
Written by Quentin R. Wittrock, founder of Principle Based Politics.
Look for his posts each week, as this blog will explore and promote the idea of principle in politics, both as to individual elected leaders and our federal government as an institution.