Taxpayer Fairness

WM Oversight: Taxpayer Fairness Across the IRS, May 18, 2022

WM Oversight Taxpayer Fairness, October 13, 2020

WM Oversight: IRS Commissioner, November 20, 2020

To start, we must distinguish between fairness and justice. Fairness is having your say. Justice is getting or paying what is due to or for you.

Lower income taxpayers depend on the fairness of the system, rather than individual fairness. It is costly to make one’s case to the IRS when disputes arise. To an extent, they must pay and obey. As long as they can provide information when it is lacking or work out payment arrangements when they do not have funds available, the system is fair. Generally, they do, although currently the unopened mail resulting from the pandemic stretches that fairness, as Chairman Neal noted in August.

Higher income taxpayers have more room to argue, as well as more to argue about. Sometimes their attempts to hide income are too clever by half. If they succeed in beating the system, the result for all of us is both less fair and unjust. A wealth tax, because the elements are both debatable and gameable, compound the problems inherent in current capital gains taxation.

The tax rate on capital gains is seen as unfair because it is lower than the rate for labor. This is technically true, however it is only the richest taxpayers who face a marginal rate problem. For most households, the marginal rate for wages is less than that for capital gains. Higher income workers are, as the saying goes, crying all the way to the bank.

The injustice in the system is baked in by the maldistribution of income in the economy at large. Prior to the Kennedy-Johnson tax cuts, high marginal rates prevented the extraction of economic rent from workers. Any labor cost savings went to the government, so gains in the economy were shared by all. In 1981, the problem got worse and in 1986, higher marginal rates were traded for reduced tax benefits, with corporations taking the hit. The class warfare which began in 1965 with the end of 91% rates was over twenty years later. Labor lost, both organized and otherwise.

Recently, tax rates for corporations and pass-through income were reduced, generally, to capital gains and capital income levels. This is only fair and may or may not be just. The field of battle has narrowed between the parties. The current marginal and capital rates are seeking a center point, as most as if the recent tax law was based on negotiations, even as arguments flared publicly. Of course, that would never happen in Washington. Never, ever.

Compromise on rates makes compromise on form possible. If the Pease and Affordable Care Act provisions are repealed, a rate of 26% is a good stopping point for pass-through, corporate, capital gains and capital income. A single rate also makes conversion from self-reporting to automatic collection through an asset value added tax levied at point of sale or distribution possible. This would be both just and fair, although absolute fairness is absolute unfairness, because there would be little room to argue about what is due and when. 

Ending the machinery of self-reporting also puts an end to the Quixotic campaign to enact a wealth tax. Out of fairness, if the revenue committees do give its proponents and opportunity to testify, it must hear from me as well. It would only be fair. 

Build Back Better Comments from March Testimony.

2020 Only:

Please see our attachment on collecting wealth taxes.

Resolving the issue of capital income collection with an asset VAT also allows a shift to a credit-invoice VAT for general revenue and an employer-paid subtraction for distribution of social benefits, such as the child tax credit, health insurance or care, retirement and education. The object of subtraction VAT systems is to, in general, collect no money while assuring a more just distribution of income to households than the current maze of subsidies and tax credits. 

Higher tier SVAT payments for higher salaries could also be instituted so that only the highest income individuals would file individual returns. Pergovian rates could also be instituted so that higher wage levels are simply not paid outside of the professional sports and entertainment industries. 

The highest salary levels could still be subject to direct filing, provided that a pre-payment option is established. Such an option would essentially be a bond with no return and no repayment at maturation. Annual adjustments would be baked in for changes in expected income. This would be only fair.

As always, more detail on our tax reform plan is provided in an attachment. Some response from committee staff and a possible remote conversation would also be fair.

This raises the final question of generational fairness. Much is made about our ever-increasing national debt. Even though the biggest contributor to the crisis is the rolling over of interest payments into new principle, entitlement spending gets all of the attention. This is most unfair. 

An analysis of who pays and owes the debt and who receives benefits from the debt is included in a second attachment. A wider distribution of this information could end the debate on the debt. It would also result in higher book sales for the detailed analysis, which would also be fair, at least to me. This analysis also ends the debate on who is in what class, at least as far as income and tax payments are concerned.

These analyses rely on the recently released Federal Reserve Survey of Consumer Finance for 2019. Once the IRS data book containing tax year 2018 income is released, our study will be reissued, although not much should change regarding our final results. In the interim, our existing analysis is available and will be provided to the Committee upon request, free of charge, which is more than fair.

IRS Commissioner preface: While it is necessary to get the Commissioner testify, he is no expert on tax policy. The only response he can give is that Congress makes the rules on tax fairness. Published reports indicate that his entire purpose in serving is to obstruct justice regarding the President’s tax returns. The only interesting information he could give is to name names as to who ordered him to not comply with Chairman Neal’s request. In this case, he should be Mirandized before his testimony starts, as he would have to invoke his Fifth Amendment rights in not answering the question.

Attachment - Taxing Absolute Income or Wealth (2020 only)

Attachment- Tax Reform Video links included.

Attachment - Debt Ownership as Class Warfare (2020 only)