CTJ's Tax Justice Digest, April 13, 2007

Answers to Your Tax Day Questions

Q: So I finally finished my taxes. Where is all my money going, anyway?

A: There are two new resources to help you understand where your tax dollars are going. One is a new paper from the Center on Budget and Policy Priorities, the other is an online calculator that asks you what city you live in and tells you how tax dollars from your area are spent and how they could be spent on different priorities.

The two resources use different measurements and therefore provide two different perspectives on America's taxes and finances, both of which are helpful.

Q: How can I encourage Congress to pursue different priorities with our tax dollars?

A: For a start, you can send them a letter telling them to stop increasing the national debt by giving wealthy people tax breaks we can't pay for.

Majorities in the House and Senate have taken courageous stands by passing budget resolutions that refuse to allow new deficit-financed tax breaks. Now they need to pass a final budget plan that includes this rule, known as "pay-as-you-go." It only takes a second to send this email that encourages your members to follow the "pay-as-you-go" rule.

Q: How can I encourage other people to support vital public services and the taxes that pay for them?

A: The New-York based non-profit, Demos, has been doing some interesting work on this subject and is trying to understand better how people think and talk about government. The Institute on Taxation and Economic Policy recently interviewed Demos' Patrick Bresette and here's what he had to say.

Q: Some people say they're paying too much in taxes. Are we overtaxed?

A: A new report shows that taxes are the lowest they've been in decades. But people are starting to be angry because the wealthiest among us have received the most massive tax breaks over the past six years.

A recent paper from the Center on Budget and Policy Priorities reviews new data from the Congressional Budget Office covering 1979 through 2004, which finds that most income groups, including middle-income people, paid their lowest taxes of that period in 2004.

While this might sound like good news to some people, the alarming part of the story is just how much taxes have been slashed for the very wealthiest households in the last few years. Citizens for Tax Justice estimates that for tax year 2006 (the year we are filing for now) the richest one percent of households get over $51,700, on average, from the Bush tax cuts, while the middle 20 percent of households get $668 on average. By 2010, more than half of the Bush tax breaks will go to the richest 5 percent of households. (If the Alternative Minimum Tax is not reformed, more than half of the tax breaks will actually go to the richest 1 percent of households in 2010.)

Q: Can our taxes be made simpler?

A: Yes, but not with a "flat tax" scheme or a "national sales tax" scheme.

Every year on Tax Day, right-wing politicians propose schemes that would involve massive tax hikes for lower- and middle-income people and huge tax cuts for the rich, all in the name of "simplification." One such scheme is a "flat tax," which Senator Richard Shelby (R-AL) advocates. These plans usually involve taxing everyone at a rate above what low-income people pay now and below what high-income people pay now. To point out the obvious, this means tax hikes for the poor and tax breaks for the rich. Alternatively, flat tax advocates will propose a flat rate that looks fairly low, and implicitly propose defunding public services dramatically.

What these flat tax advocates fail to mention is that none of the complexity and confusion people face on tax day comes from the progressive rates that would be flattened under these plans. Under the current system, once taxable income is calculated, most of us can just go to the tax tables that tell us exactly what our tax liability is for the year. The complexity comes before you've calculated taxable income, when you're working your way through the maze of deductions and credits that Congress has created. Real tax reform just means getting rid of the loopholes that are not serving a valid purpose. That would particularly help middle-income wage-earners, since some of the biggest loopholes essentially result in a system that taxes investment income at lower rates than wages.

Schemes that involve replacing all federal taxes with a "national sales tax" are even more absurd. Sales taxes are inherently more regressive because poor people spend most of their money on consumption since there's not much left for savings and investment after they pay for the basics, like food, shelter, medical expenses and clothes. A CTJ analysis from a couple years back found that in order to make up the revenue from other federal taxes, such a sales tax would have to be as high as 45 to 53 percent!

Q: Why can't we raise the funds to pay for health care and schools and the things we need? Why are American politicians so opposed to raising taxes to fund these important services, compared to leaders in other developed countries?

A: Great question. We're not sure anyone really knows.

It also seems that politicians who support tax cuts for the wealthy are sent to Congress from states where there are not that many wealthy people who benefit. So we might say aversion to taxes is not entirely linked to rational self-interest. A new book recently brought to our attention argues that our unusual attitudes about taxes all started with slaveholders. They were afraid that if taxes could be levied on them as the result of votes by non-slaveholding majorities then their "peculiar institution" might be taxed out of existence, so they managed to convince a lot of other Americans that taxes and big government were bad. Maybe this sentiment was passed down to us. Perhaps this is the reason, or perhaps this is one of several reasons for the taxaphobia of some American political leaders.

Q: What can we do to make state tax systems more just?

A: There are a lot of things you could demand from your state legislators but we'll focus on just two. A state's individual income tax can be improved by introducing a state Earned Income Tax Credit (EITC) and a state's tax system as a whole can be improved by cracking down on corporate tax avoidance with "combined reporting" requirements.

The EITC helps lower taxes for poor working families and sometimes allows for negative tax liability (meaning money received from the state), which does a lot to counter the regressive impact of other types of state taxes that hit the poor harder than the wealthy. The State EITC Online Resource Center has information explaining which states have an EITC in place, which ones are refundable and which states might adopt an EITC.

Combined reporting of corporate income for state tax purposes, usually referred to as "combined reporting," is a necessary reform to deal with large companies that aren't paying their fair share. Without this rule in place, large corporations can shift earnings and expenses — on paper, through accounting devices — between subsidiaries in different states in order to pay as little as possible. Here's a list of the states that don't have combined reporting and those that are considering it. Budget analysts have addressed this issue recently in several states (including Iowa, New Mexico, and others).

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