The Cheerful Taxpayer

Income Tax Day, for many years March 15th, is now in April.  It would have fallen on the 15th except that Emancipation Day was a legal holiday in the nation’s capital, so tax filing was deferred to Easter Monday, which isn’t a holiday in very many places.

Many years ago, I was team teaching an introductory economics class with my dean, with whom I coauthored a principles textbook.  In the first class I asked them what words came to mind that they associated with economics.  One of them said, taxes. My co-author immediately responded with “taxation is theft”—a classic libertarian response.  I quoted Oliver Wendell Holmes:  “Taxes are the price we pay for a civilized society.” In a later reprise of this incident  with another conservative colleague,  he said, “The price is too high,” I responded “…or perhaps, the amount of civilization we get is too low.” Most of us may share the sentiments of  a less noted philosopher, the late Senator Russell Long, who is famous for observing that most people’s idea of a good tax system is “Don’t tax you. Don’t tax me. Tax that man there under the tree.”

So, what is a fair way to tax people?  Historically, there are three ways to tax. The government can tax what we earn, what we spend, or what we own.  These three are known as income taxes, sales and use taxes, and property or wealth taxes.   It’s a good idea to have more than one way to tax, because it’s not hard to evade one but very difficult to evade all three. FYI, tax evasion is illegal. That’s how Al Capone wound up in jail. )Tax avoidance, however,  is perfectly legal—another quote from Oliver Wendell Holmes, “There is nothing illegal in a man (sic} so arranging his affairs in order to minimize his taxes.” There is also a gray area that might be described in Brooklyn speech as tax “avoision.” More damaging to the revenue system than evasion, avoidance, or avoision ,is aversion, which is a resistance to paying taxes in order to fund government services.  The result is underfunding of the Social Security system and looming and accumulating budget deficits that become an excuse for reducing public services.

When I used to teach taxation in undergraduate classes, I reminded them of Scrooge McDuck (a reference that would be lost on most contemporary students). He spent nothing, did not have a job, and simply held an enormous amount of wealth. If he invested it he would at least, so he paid no sales taxes or social security taxes. Perhaps he had to pay income taxes on his investment earnings—it was never clear in the comic strip how he became so rich. Current proposals suggest a billionaires’ tax aimed at what people own rather than just what they earn.  Scrooge McDuck would be in trouble.

 There’s also a fourth source of government revenue, fees for public services, from admission to parks and highway tolls to tuition at public colleges and city water and sewer services. These fees have become increasingly popular as an alternative because people feel they have some control over consumption, but they also tend to be very regressive (= take a larger share of income from those at the bottom of the scale).

Since April is the month for income tax, let’s concentrate on that kind of tax for the rest of this post. The federal government required a constitutional amendment (the 16th) to institute an income tax in 1916. The rates became steeply progressive during World War II and gradually cruised back down with a series of tax legislation that widened brackets and reduced rates.  The most recent such bill was Trump’s highly touted tax cut that was heavily slanted toward the wealthy.

The average American paid 13.3 percent of adjusted gross income n federal income taxes in 2019.  A second important tax on income for those who are working is the Social Security Tax, which is 6.2 percent of earnings each for employer and employee, or 12.4 percent for a self-employed person.  Unlike the income tax, there is a cap on the amount of one’s earned income that is subject to Social Security tax, earnings of up to $147,000. For poorer households that have limited income derived entirely from wage earnings, the Social Security tax is clearly regressive.  

Only 19 percent of Americans, including many entry-level workers and retirees, paid neither type of income or wage  tax. As we have reduced reliance on the income tax (but not the Social Security tax), the tax system as a whole–federal, state, and local—has become increasingly regressive. At the same time, in part because of the tax system, the distribution of income and wealth has become increasingly unequal.

If we want a civilized society, one that provides a safety net for those going through difficult times and a certain basic amount of security from disasters, misfortunes, and other hazards of human life, we have to be willing to pay or fair share without demonizing those who turn to the government to see them through those difficult times. So ,pay your taxes with as much cheer as you can muster and be grateful to live in a country that tries to respond to the needs of its citizens, or at least its voters. We are all in this together.  Or for a final quote from a famous American, Ben Franklin, “We must all hang together or we will all hang separately.”

And Now for Something Completely Practical

My inner economist tends to kick in at the end of calendar and fiscal years with useful tax thoughts.  Back when the standard deduction was lower, some people shifted their itemized deductions, especially charitable contributions and sometimes medical expenses, into one year for which they itemized, and then took the standard deduction the year after.  Now that the standard deduction has been greatly increased, there is a reported 11 percent drop in charitable giving. The standard deduction is $12,000 for singles, $24,000 for joint returns with an extra $1,600 for unmarried filers and $1,300 each on a joint return.  So you might take a look at your itemizable deductions and see how close they are to that figure.  If your total contributions are substantial enough—maybe a big mortgage interest deduction, and/or the maximum $10,000 in state and local income and property taxes, plus charitable deductions—then continue to itemize.

But if your deductions are right on the cusp, you might want to consider bunching deductibles in one year and itemizing the next year.  The easiest ones to move around are charitable contributions. So for 2018 I prepaid my church pledge the end of 2017, focused my contributions in 2018 to nondeductible causes (mostly people running for office), and plan to take the standard deduction.  Most of my favorite deductible charities, an average of about $9,000 a year, can count on two years’ of contributions in 2019, one at the beginning, one at the end, and I will itemize.

As an economist, I view the deductible contribution as a 22 percent federal and seven percent state income tax match to my support of everything from colleges to hunger programs and disaster relief to the arts. As Justice Oliver Wendell Holmes once said, there is nothing wrong with a man (sic) so arranging his affairs as to minimize his taxes. We can have our charitable cake and “eat” the matching federal share by a simple and perfectly legal strategy of moving some of the check writing from one year into another.