In 2017, the U.S. Government raised nearly half of its revenue through income taxes. Benjamin Franklin once promised that nothing is certain except death and taxes. That still holds true for most of us today, with the notable exception of the super-wealthy, who are often able to avoid paying any income tax at all.
On this website, we will teach you how our current tax system works (or rather, how it doesn’t work for many of us) and about our proposal on how to create a better and fairer system through a progressive spending tax.
As you learn, it is important to remember that all of the government’s revenue must come from somewhere, i.e., if one person can skip out on paying taxes, someone else will have to end up paying more to make up for the lost revenue. Furthermore, when the government can’t collect enough tax revenue to cover the bill, it is forced to resort to debt spending (which just means that future taxpayers are going to have to service the cost plus interest at a later point in time). This is what the Republican legislature decided to do when Trump’s promised tax cuts severely limited the revenue the government would raise; they approved extraordinary debt spending.
We started by explaining to you Tax Planning 101: Buy, Borrow, Die. This reveals just how easy it is for those born wealthy to literally never pay taxes.
In order to understand how the full system works and eventually how to solve this, the first thing you should understand is the role that wealth plays within our tax system. Generally, there are two ways to tax wealth; the government can tax wealth when it is acquired or when it is expended.
Secondly, we need to understand what things the government taxes, known as the tax base. The income tax, which constitutes about half of all tax revenue, focuses on taxing people’s income and thus taxes the acquisition of wealth. The payroll tax taxes wages to pay for social security and medicaid programs and raises about a third of all tax revenue. Lastly, the excise tax focuses on how people spend their wealth.
Meanwhile, it is also important to discuss what does not get taxed, known as exemptions. Certain forms of wealth, like retirement savings, are congressionally exempt from taxes because as a society, we want to encourage people to save enough money for retirement so that they do not unnecessarily burden our social programs.
The third important thing to understand is the tax rate, which is the proportion at which a base is taxed. The tax rate dictates what percentage of a tax base is charged by the government. Taxes can either be charged at a flat rate (the rate stays even no matter how much of something is taxed), a progressive rate (the rate increases as more of something is being taxed), or a regressive rate (the rate decreases as more of something is taxed).
It is also important to understand that different household makeups represent distinct taxable units and are taxed differently. This is the reason your tax form will ask whether you are single or married. As you will see, the current treatment of taxable units encourages marriage among the wealthy - and discourages it among people living in poverty.
Another important tax construct is timing, or when you pay a tax. During one earning and spending cycle, prepaid consumption taxes are deducted when wealth is initially earned and postpaid consumption taxes are charged when that wealth is subsequently spent. The vast majority of a person’s tax contributions will be paid during their working years, however they reap the societal benefits throughout the course of their life (starting with subsidized kindergartens and ending with social security and medicare).
After considering all of the basic constructs, we will spend some time looking at what this system means for those living paycheck to paycheck or those saving for retirement.
We will then consider how those wealthy at birth exploit this system to avoid paying any taxes (the preferred option) or, if impossible to avoid paying them entirely, how to delay paying their taxes for the foreseeable future (the second best option; more money in the present). We will argue that when the rich avoid paying their fair share of taxes, they are not being smart (as posited by Donald Trump) but merely unfair by pushing the burden onto the current and future working class and middle class taxpayers.
Finally, we will conclude by presenting a simpler and fairer system in the form of a progressive spending tax. Our proposal would tax based on how much an individual spent, instead of earned, within the prior tax year and would thus serve the same goals as the current tax system without providing the same loopholes currently being exploited by the rich.
If this topic intrigues you, we recommend reading Fair not Flat for further discussion on Ed McCaffrey's proposal for a fairer tax system,Taxing Women for more insight how the tax system affects different people differently, or his tax supplement Income Tax Law for a more legal perspective on how the system works or does not work.
Next: Read What Can Be Taxed?