by Madeleine Kando
We have all heard the
expression ‘In this world nothing can be said to be certain, except death and
taxes’, but even though they are both certain, we don’t spend weeks on end agonizing
over death every time April comes around. It is taxes that gives us heart
palpitations, high blood pressure and other physical ailments. Death actually
has the advantage over taxes of being non-negotiable. We cannot fudge the books
or take any deductions on death.
You cannot hide in an off-shore account, death will find you, trust me.
But what death mostly has
going for it is that it’s a lot less complicated than taxes. I found that out
the moment I started doing research for this article. So, rather than pretend
that I know what I am talking about, I will admit up front that this essay resembles
a piece of Swiss cheese with more holes than cheese.
Let me start with the 47%. Was
Romney right about the 47%? Yes. There is a large proportion of Americans that
do not owe money to the government because they either don’t earn enough, they
have too many expenses or because they have a lot of deductions.
Was Romney wrong about the
47%? Yes. The 47% pays payroll tax, state, local and sales tax, gas and
property tax. Not only do they pay all these taxes they pay a larger share of
their income towards these taxes than the rich. It’s called a ‘regressive tax’.
Progressive or Regressive?
If 47% of Americans don’t
pay income tax, then where does the income tax come from? You guessed it, it comes
from the 53% that makes more than the 47%. In other words, America has a much narrower income tax base
than most other Western countries. In Holland, for example, tax liability
extends across the board. They tax the poor more. It may sound
counter-intuitive, but America’s tax system is more progressive than the Dutch
one. It gets even worse if you take into account that European welfare states
rely on consumption tax
more than on income tax to fill their coffers. A poor person pays the same amount
of tax as a rich person when they consume bread. It just takes a much bigger
bite out of their income. Consumption tax is regressive.
Taxing the Poor to Pay the Poor
One has to look at what the
taxes are spent on to determine if the whole system ends up being ‘progressive’.
In Holland, almost all of the taxes go toward Social Security and Health Care,
two items that benefit everyone. The
Robin Hood of Social Welfare might take from the poor as well as from the
rich, but he gives it all back to the poor in the form of child subsidy, health
care, education and retirement.
Taxing the Middle Class to Pay for the Middle Class
Not only is the top tax rate
in Holland a whopping 52% (compared to the 35% in the US), but it starts to
kick in when someone is making a measly $72,000. Compare that to the American
Fat Cats that can get away with making $388,349 before they qualify for the 35%
bracket.
Dutch income tax brackets
Tax income
|
Tax bracket
|
$ 0 - $ $24,066
|
1.95 %
|
$ 24,066- $43,016
|
10.80 %
|
$43,016-
$71,755
|
42 %
|
$71,755
|
52 %
|
Tax income
|
Tax bracket
|
$0 – $17,400
|
10% Bracket
|
$17,400 – $70,700
|
15% Bracket
|
$70,700 – $142,700
|
25% Bracket
|
$142,700 – $217,450
|
28% Bracket
|
$217,450 – $388,350
|
33% Bracket
|
Over $388,350
|
35% Bracket
|
The surprising conclusion is that the taxation system of a country like Holland is more ‘regressive’ in its collection, but more ‘progressive in its reallocation. It is more ‘47% friendly’. It gives the government more revenue without taking away from people’s ability to be productive. So should we expand our tax base, rely more on consumption tax and redistribute more progressively? I doubt any politician would want to go there, but it’s worth looking into…
Income Inequality
Income inequality is the highest in the US of all Western nations. There is an instinctive revulsion in the Social Democracies of Europe to let income inequality get too large. So, in essence, even though taxation on income might not be as progressive, income itself is not that unequal to begin with. In Holland, the poorest 5% of the population is twice as affluent as in the US. On the Genie index (a measure of income equality worldwide), Holland is at the very top, the US at the very bottom. **
The Sheriff of Nottingham Effect
Did America make the mistake of asking too much of the few? European social democracies use efficient consumption taxes to pay for their programs and they ask a lot more from the average earner. On top of it, if you get taxed on your savings and on capital income, you start resenting paying taxes all together and you don’t see the benefits of redistributing money. The trick is to find the right formula: Once people see the benefits of redistribution, what’s there not to like? leave comment here
** A major source for this piece of Swiss cheese can be found in an article in The Economist: ‘Democracy in America’
