We’ve experienced countless U.S. income tax code changes since I became a financial professional in 1984. 2021 has been no exception, as Congress has been considering some of the most dramatic tax proposals I’ve seen in my 37-year career.
Are you finding it dizzying to track all the possibilities? Let’s take a step back, and view the big picture.
First, it’s worth emphasizing that the current U.S. tax code is progressive, which means higher income earners pay most of the income tax. In fact, a 2013 Washington Post piece described America’s taxes as “the most progressive in the world” (although not the leader in redistributing wealth). According to the Tax Foundation, the top 50% of income earners paid 97% of total income taxes as of 2018, and the top 10% paid 71%. In contrast, the bottom half of income earners paid 3% of that total.
It’s easy to imagine the benefits of having the Federal government redistribute a reasonable supply of money from the wealthy (who seem to have plenty), to those in dire need. It’s harder to recognize the potential costs.
Here is an example: A thriving business owner has an apple. They don’t need it to survive, so the government reallocates it to someone who is hungry. End of story? Maybe not. What might have happened instead, had our savvy executive (whose wealth demonstrates a talent for effectively deploying resources) used that apple’s seeds to plant more trees? Maybe apples would proliferate, prices would drop, and many others would benefit instead of only one.
Maybe not. My point is, when tax policies move money from successful private income earners to government programs, we should at least admit that tradeoffs exist, even if it’s hard to quantify their costs. It’s possible the reallocation could dull the economy, decrease job opportunities, and stifle innovations. It also could leave room for other countries with less progressive tax policies to step into the vacuum.
Please understand, I don’t know if that’s what will happen. I’m simply asking readers to consider both sides of the equation.
One thing I do know: If the current tax proposals before Congress are enacted, they will make our tax code much more progressive then it already is. Maybe that’s ok. Maybe it’s not. You be the judge.