Can We Please Have a Serious Discussion About Tax Policy?

I get very frustrated with debates in the political arena, because too often it is about the “fluff” that doesn’t really make any difference in the lives of real people.  To the extent that I have participated in the fluff in the past, be assured that I am much more conscious of what I spend my time on now.  I don’t watch the cable news networks at all anymore, because they’re all about the fluff.    What I know about what is said on MSNBC, CNN and Fox News is second-hand from people I know who do follow it, and some people make their whole existence politically about those echo chambers.  That is not me.  What I have always wanted is a real debate about the path we should be taking and how to get there based on facts and reality, not rumor and innuendo, but we spend so much time talking about the fluff that we never get there.

Someone threw the  ”redistribution of wealth” argument about tax policy into a debate about healthcare reform and our responsibilities again this week, and it made me think it’s time to sit everyone down and have a serious adult discussion about tax policy.  I know 90% of folks aren’t really interested in policy, but for the 10% of you that are…

When you talk about tax policy, you often hear people (who often have never looked at this issue seriously themselves) talk about how much those at the higher end of the income pay in taxes, but the information they are relying on to demonstrate that is misleading (or a flat out lie).  Here’s the truth about what people in different income brackets pay in federal taxes:

Overall:  18.2%

Lowest 1/5th of earners:  -0.9%

Second Lowest 1/5th of earners: 6.6%

Middle 1/5th of earners: 13.4%

Second highest 1/5th of earners: 17.2%

Top 1/5th of earners: 22.9%

Why the big difference, from the numbers the Tax Foundation (the folks who push Tax Freedom Day every year) puts out?  a) There are serious issues with their methodology (which we can debate, and I would be happy to discuss), and b) the media has often misinterpreted the data from the Tax Foundation to mean something it doesn’t.

 So where is the huge “re-distribution” people are so often talking about these days?  It seems to me that there isn’t a huge anything in these numbers, there is a slightly elevated curve from the lowest of the lowest income earners to the highest of the high, and none of these percentages are unreasonable, given our responsibilities.  But, please feel free to tell me where I’m wrong in the comments.

Oh, our responsibilities, let’s not forget about those.  We, as a country through our elected leaders, have made certain commitments to our citizens and to the world that form the basis of the federal budget.  Before you can talk about changing tax policy you need to talk about changing spending policy.  So, what does the money we pay in federal taxes (e.g. FICA, Medicare and income) go to fund?

21% of what the federal government spends goes to the national defense and national security, I don’t often hear about people having issues with spending in these areas, so let’s chalk that up as money people are willing to spend and contribute their taxes toward (even the libertarians in the crowd).  Next we have social security, which is another 21% of the budget.  Now, President Bush tried to “reform” social security, but that effort was shot down.  There is no doubt we have to do something about the long-term cost of social security, but whatever the solution is, the government will still have a substantial role to play.  So that’s almost 50% of the budget in two areas that we can’t do much about, even if there was the political will to do it.

What’s next?  Another 20 percent for Medicare, Medicaid and SCHIP, the insurance programs that cover the elderly, poor, disabled and the most vulnerable children.  Now, this is the area of the budget where there is much concern, both in the near term and the long term, but the reality from a policy standpoint is that it will continue to be a significant part of our expenditures at a federal level.  So, now we’re at over 60% of the budget where even if you wanted to do something to adjust, you would have a hard time doing it (not that it can’t be done, and again, please feel free to comment on how you propose we stop spending on national defense, social security, medicare and medicaid tomorrow).

Social safety net programs take up another 11% and interest on the debt is 8%, which puts us over three quarters of the budget.  Scientific research is another 3%, followed by 3% for transportation and infrastructure (which is only going to become a bigger need in coming years), 2% for education (almost all of which ends up in local school districts or colleges and universities) and 1% for international aid.  Which leaves us with 5% for EVERYTHING else (like the USDA, FDA, FTC, the Federal Reserve and LOTS of other important services).

So…where do we cut folks?  What should government not be doing and where is the political will to make that happen?  Because if government is going to do these things, the only way to fund them is through taxes.  So, from now on, when I hear people talking about “redistribution of wealth” or “government spending being out of control”, I’m going to refer them politely and respectively back to this post, these facts and two questions:

1.  Where is the redistribution?  The facts are that not much is being “taken” from any one group, out of proportion with another, and that what we get back ultimately benefits everyone, not just select groups.

2.  What are we spending (only figures in the billions to trillions are going to make any real impact) that you don’t think we should be and how are you going to convince your fellow citizens that we shouldn’t?

Because you can bark about Obama and the Democrats all you want, but when the Republicans were in charge, we had the exact same lack of will to do anything about curbing spending.  Making these hard decisions is not about one party or the other.  No one has yet been able to make the case to the American people that the government should do less, because we can’t agree on where it should do less.  Nor has anyone been able to make the argument that we should pay more or who should pay more.  So, we are at an impasse.  As others have noted, even if healthcare reform is successful in curbing costs in the long term, there will still be a 5% of GDP gap that needs to be filled (now imagine for a second if it healthcare reform fails).  Where do we cut or where do we raise taxes?

Each state is facing similar distress and I am working toward a similar analysis of what is going on in Alabama and the difficult choices we face here…stay tuned…

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