There is a constant debate between the Democrats and Republicans about Federal taxes and programs such as Social Security, Medicare and Medicaid. Recently at a private fundraising event, a secretly taped video highlighted Mr. Romney’s views about taxes, entitlements and redistribution of income. He stated that 47% of the Americans who do not pay federal income taxes and do receive entitlements would vote for President Obama because of their dependency on government. This remark seems to imply that there is a massive transfer of income from taxpayers to non-taxpayers and entitlement receivers in Obama presidency. However, we find that even before Obama’s presidency, despite growth in entitlements which represent redistribution of income, income inequality has increased over a period of time.
Before I propose my tax reform plan, let me first point out that Mr. Romney is confusing Social Security and Medicare with entitlements like Medicaid and food stamps. Mr. Romney should know that Social Security (SS) and Medicare are supported by taxes and hence are not like other entitlements, such as Medicaid, food stamps, housing subsidies and low interest loans to college bound students. Most Americans who do not pay federal income tax pay payroll taxes. Payroll taxes (for SS, Medicare, railroad retirement, unemployment insurance, and federal workers pensions) are the second largest source of revenue after federal income tax. Here is an outline of some of the tax provisions in my tax proposal for 2013 that would help in restoring fiscal balance.
- Implement the income tax proposal made by President Obama. According to The Wall Street Journal, June 8, 2012, President Obama’s budget for 2013 increases marginal income tax rates to39.6% for income over $388,350 from the current rate of 35%, to 36% for income bracket $217,450-$388,350 from the current rate of 33%, and keeps other marginal rates the same for lower bracketed income earners. However, contrary to President Obama’s proposal dividend and capital gains should be subject to the same tax schedule as regular income. For tax purposes no distinction should be made between labor income and income from financial capital. Tax breaks should be provided on new investments that increase capital stock and production capacity.
- Increase total Medicare tax from 2.9% to 3.5%.
- Eliminate earnings limit for Social Security tax and increase Social Security (OASDI) tax to 7.65% each on employees and employers on employees’ earnings of $350,000 or more per year. This is the same total rate of 15.3% on self-employed income.
- Reduce mortgage rate deduction from income taxes on homes valued at or above $2 million. Most borrowers in all states would fall under this limit on home value. There are other deductions, such as high priced health insurance premiums, that must also be reduced.
- Reduce corporate income tax rate to a flat rate of 12%. Currently a September 13, 2012 report by Jim Nuns for the Tax Policy Center estimates that 40% of the burden of these taxes falls on labor and on returns to capital and the rest on shareholders who are legally liable for these taxes. Moreover, corporate capital and profits are highly mobile across nations; hence there is an incentive to move investments and profits to nations with low corporate tax rates, thus defeating high tax rates at home. In addition, corporate taxes are very small proportion of GDP.
- Impose a tax on CO2 emissions of major emitters and return tax revenue in the form of income subsidies to consumers and lump-sum grants to clean businesses. Increase in prices of goods that are CO2 intensive will reduce consumption of those goods, even with income subsidies to consumers, and therefore reducing CO2 emissions. Economic analysis of consumer behavior shows that income subsidies would be spent by consumers on many other goods and not just on goods produced by CO2 emitters. Although CO2 (a green house gas) is a global problem US must take the leadership position so that other countries could emulate its policies.
- Tax on gasoline should be replaced with a tax on miles driven. This will help remedy the pollution problem from motor vehicles and reduce deficit in the highway trust fund.
Finally I would like to remind Mr. Romney and others in GOP who are tax hawks and worry about income redistribution that, according to a study by Gary Richardson in the journal The Economists’ Voice, “The Republican constituency consists of people who, on average, receive more in benefits from the federal government than they pay in taxes.” The redistribution of income benefits not only entitlement receivers but also businesses and high income earners.