Reverse the Great Tax Shift

When talking taxes, we quickly depart from the reality of facts and reason.  But underlying most people’s anger about taxes is the legitimate recognition that wealthy individuals and global corporations have stopped paying their fair share.

At the local level, most of our communities are facing severe cuts in schools and elder services, along with library closings and monster potholes. Yet our local property taxes and fees are going up.

Each year as Tax Day approaches, we have a national mud fight about taxes and the proper role of government.  Some argue that the middle class is overtaxed and that we don’t get what we used to for our tax dollars.  Others point to the practical necessity of raising revenue to reduce our national debt and make long overdue investments in upgrading our aging public infrastructure.  Both sides of this debate are correct.

Middle class households are overtaxed.   According to our new report, Shifting Responsibility, the wealthy have received massive tax cuts –not just under President George W. Bush, but for decades.  For half a century the obligation for taxes has shifted off the very wealthy onto the middle class, off of global corporations onto small business, and off the federal government and onto state and local budgets.  By adding to our national debt, we’re shifting taxes off of today’s taxpayers onto tomorrow’s workers who will pay interest for decades to come.

This is the Great Tax Shift.  It’s occurred in slow motion, under both Republican and Democratic administrations.   And it’s the reason why our cities and towns are strapped and our federal debt is increasing.

Since 1960, the share of household income that middle class households paid in federal taxes has increased slightly, from 15.9 to 16.1 percent. But America’s wealthiest taxpayers have seen their tax outlays, as a share of income, drop by almost half. The top 1 percent of taxpayers, those with incomes starting at $2 million, saw the share of income paid in federal taxes decline from 60 to 33.6 percent between 1960 and 2004.

During President Bush’s eight years in office, we expanded tax cuts to Americans with incomes over $250,000. We had to add another $700 billion to the national debt to cover them. Meanwhile, Congress failed to close tax loopholes for global corporations, resulting in thousands of profitable U.S. companies paying no corporate income taxes — at all — between 1998 and 2008.

When high-income individuals and corporations don’t pay their fair share, the bills get passed to the middle class and our debt grows. That’s hard to appreciate until things start to hit close to home — when we see degradation in our roads, mass transit, schools and veterans’ services — we can start to understand. Our public services have been chronically underfunded for the last 40 years and it’s status quo for states and municipalities to grapple with dire budget scenarios.

The solution is to reverse the Great Tax Shift, starting with three changes to our tax code.

First, Congress should act now to maintain the middle class tax cuts passed in 2001 that expire at the end of this year.  At the same time, they should rebalance the tax code by allowing the tax breaks for high income groups to expire.  This is supported by an association of higher income taxpayers, Wealth for the Common Good, that is circulating a petition calling on Congress and President Obama to allow their taxes to go back to 2001 levels.

Second, Congress should close the overseas tax havens that allow global corporations to pretend they’ve earned all their profits in countries like the Grand Cayman Islands and their loses in the U.S. These loopholes create an unlevel playing field where small businesses and patriotic enterprises have to compete against tax dodging companies.  If a business enjoys the privileges of doing business in our nation –including national defense, public infrastructure, and property rights protections –they should pay their fair share.

Third, we should institute a modest financial speculation tax on Wall Street transactions including the purchase and sale of exotic financial investments such as derivatives, hedge funds and speculative stock trades.  One proposal before Congress, modeled after existing laws in England and Taiwan, would place a one cent [penny] levy on every $4 in transactions while exempting retirement funds and the first $100,000 in investments.  The Wall Street financers who drove our economy off a cliff should share in the responsibility for paying for the clean-up operation.

Together, these three measures would generate over $300 billion a year in revenue without increasing taxes on the middle class.  This revenue could both reduce the federal deficit and be directed to states and localities to prevent the worst of local budget cuts.

We can rebalance the tax code and begin to take responsibility for the short-sighted policies of the past.  If we don’t act, we’ll be shortchanging today’s children and tomorrow’s taxpayers.