Solving Income Tax Inequality

For many years the middle class has been hit hard with taxes, while the rich continue to receive tax breaks. The rich slide by financially unscathed, while the middle class suffers the biggest blow. The United States government needs to increase the income tax for the rich.


     When you receive your paycheck, what is one of the first things you look at? Of course you look at what you earned, but then what? Most people tend to look at what came out of their paycheck from taxes, and we all tell ourselves “We’ll get it back in the end anyway.” Conversely, while some of us may get it all back in the end, many will never see any of that money ever again – 99% of Americans find this all too familiar. The contents of the United States Tax Code are to blame. However, the United States Tax Code is not the simplest document to break down, considering the length of it. In fact, as of 2013 the United States Tax Code reached 73,954 pages. If that was not already enough, when a United States citizen sits down to file their taxes he or she must comply with all 73,954 pages of our complicated and extensive tax code. In order to create a more fair and just income tax system for all individuals, tax reform is necessary. 

     

     One major problem with income taxes is the limited number of income tax brackets. As you can see, the last bracket has a very broad range of income. An individual that makes millions each year would pay the same flat rate, not counting deductions, as an individual who makes $400,000 in a year. It would be a very smart move for income tax reformers to expand the last income bracket into more specific individual income brackets. The tax code has not been reformed in over 30 years. Therefore, the tax code is clearly outdated, and tax reform is long overdue. The wealthiest should have to pay much more taxes on annual income than a person who makes a fraction of the annual income of a person from the top 1%, rather than being able to pay the same amount in taxes and often less.

     According to a recent study, the rich pay the most in taxes. It may seem like that on paper, but it in reality it is much different. The wealthiest Americans do, in fact, have the highest set tax rate. On the contrary, the wealthy do not carry the heaviest financial burden on taxes like one would think. The top 25% of taxpayers, not the wealthiest, account for the majority of money paid to the government in taxes. The top 1%, after numerous tax deductions, pay much less than their designated rate suggests. The wealthy will continue to take advantage of the loopholes, unless something is done to get rid of them, or limit their use. Tax reform is the only way to do anything about the use of loopholes, because without limitations, the rich will use them as much as they can. Limitations on the use of tax deductions would be a valuable component of a proposed tax reform.

     
     Opponents of income tax reform tend to be in the highest income bracket. Although the wealthiest Americans, known as the top 1%, have the highest tax rate in the United States, they often pay substantially lower than that rate because of tax breaks. The problem with theses tax breaks is that they favor high income individuals. There are not just a few that favor the wealthiest Americans, there are a handful. In 2011, while the rate was still 35% for the wealthiest American people, the average tax rate paid by these high-income households was 23.5%. That is less than the flat rate of those who make $35,351 to $85,650 in a year. These wealthy people make nearly $400,000 more each year at the very least, yet they paid less in taxes than less fortunate Americans who make that same amount of money in as much as 10 years. Although 35% is a high percentage to be paid, very few people in that bracket have ever paid the full percentage, and many of them never will. The United States Tax Code is to thank for this huge discrepancy. It is easily possible for the rich to find loopholes that only apply to wealthy people through this extensive document. This is the root of income tax inequality in the United States.

    
     Many argue that trillions of dollars in tax deductions do not favor the rich. Nevertheless, common loopholes are utilized by the top 1% that are not available for the middle and lower class citizens, one of which is through investments. This loophole works so well because the capital gains tax rate, which the wealthy take advantage of, is only 15%. While a rate that low is supposedly used to encourage investing, it is mainly there to help the rich get richer by being able to pay less to the government than the average person. Raising the capital gains rate even slightly would still help to evenly distribute the tax burden. Another common loophole utilized by the rich is the deduction for charitable donations, which counted for 20.4% of deductions used by the rich in 2011 alone. These deductions that favor the rich are the main culprit for the low tax percentage that the rich end up paying. Although other individuals have deductions, none of the other deductions favor a particular group of people like these specific tax deductions do. These are only a few of the many tax deductions favoring the wealthy. Limiting or eliminating the deductions that favor the rich would help to more evenly distribute the tax burden through all portions of the tax bracket. Tax reform would also help to decrease the ever-increasing wealth gap in the United States. Furthermore, if the rich pay a larger share of taxes on their income, then the United States Federal deficit would also benefit. If the rich can afford to pay more to the government than the middle and lower classes, then there is no reason they should not pay more.

     

     Why have no tax reforms taken place in the last 30 years? Actually, President Obama has very recently proposed a tax reform that would no longer favor the wealthiest Americans, among many other things. This extensive reform targets many of the tactics the rich use to avoid paying their fair share. However, the people that are responsible for making the decision to reform the tax code are the same people finding the loopholes. Most politicians are filthy rich, and they enjoy the tax breaks they receive. The current income tax system favors the same people that are able to make the decision to change it. The rich do not want to pay more in taxes so they will never favor a fair and just tax reform.