By Christopher Howard
TAX DAY is fast approaching. This year it falls on April 18, as International Juggler’s Day and National Velociraptor Awareness Day. It could be an ironic coincidence, depending on how you feel about taxes and the IRS.
Few Americans celebrate Tax Day, myself included. But my objections have nothing to do with the existence of taxes. They are, as the old saying goes, the price to pay for a civilized society. Instead, I think we should recognize that every day is tax day for most Americans, and we should pay more attention to how our tax system has failed to prevent the growing income and wealth inequality.
A day in April was chosen because that is when federal income tax is due. The exclusive focus on federal income tax leads some people to criticize the sharing of the tax burden. U.S. Sen. Rick Scott, R–Fla., recently made headlines by insisting that everyone should pay income taxes.
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Currently, most Americans with below-average incomes do not have to pay federal income tax because of the standard deduction and earned income tax credit. Scott’s plan, if adopted, would raise taxes for the working poor and many others. In Virginia, more than a third of residents would pay higher taxes.
However, federal income taxes are only part of the story. In 2020, the US government raised $1.6 trillion in personal income taxes and just over $200 billion in corporate taxes.
That same year, it collected $1.3 trillion in payroll taxes for social insurance programs like Social Security and Medicare. Payroll taxes are an essential source of revenue.
Workers with below-average incomes know all about payroll taxes, which are deducted from every paycheck. Unlike federal income tax, payroll taxes are regressive: people earning $20,000 or $30,000 a year pay a higher tax rate than those earning $200,000 or $300,000.
This is because wages and salaries subject to payroll taxes are generally capped (medicare is an exception). This year, Social Security taxes do not apply to earned income over $147,000.
We must also remember that state and local taxes are regressive in most parts of the country. According to the nonpartisan Institute on Taxation and Economic Policy, the effective tax rate for the poorest one-fifth of Americans was 11.4% in 2018. The richest 1% of Americans paid just $7 .4% of their income in state and local taxes. The gap between rich and poor was a bit smaller in Virginia, but the trend was the same.
Then there are capital gains taxes, which are levied on investment wealth. Naturally, wealthier Americans hold more of these investments. But capital gains are taxed at a much lower rate than earned income, which is how most Americans make their money.
Obviously, we all pay taxes to fund our national, state and local governments. But is the distribution of tax burdens fair? The answer depends in part on the ability to pay.
One of the reasons the government exempts many Americans from income tax is because there are so many wealthy people in this country. In 2020, the richest 5% of the population controlled 23% of total income. The top fifth had more than half the income. No one should be surprised that those with the most income pay the bulk of federal income tax.
In contrast, the poorest fifth of Americans had only 3% of total income. You can’t expect a lot of income tax from them.
As Tax Day approaches, President Joe Biden is pushing for higher taxes on multi-millionaires and billionaires. Some people will just see it as a tax debate, but it’s also about income and wealth.
Income inequality is worse today than when Ronald Reagan was president. Wealth inequality is even greater than income and it too has increased. In 2021, during the COVID-19 pandemic, the number of individuals worth at least $25 million increased by almost 20%.
With many Americans struggling to afford basics like housing and food, it’s time to start reversing that trend. Decades of tax cuts and tax loopholes for the wealthy have meant that many at the top pay a lower share of their income in taxes than ordinary Americans. If members of Congress don’t support a plan to change that, then maybe we should rename Tax Day Inequality Preservation Day.
Christopher Howard is the Pamela C. Harriman Professor of Government and Public Policy at the College of William & Mary and a member of the Scholars Strategy Network. Contact him at: [email protected]