By Donella Meadows
–August 14, 1986–
It takes political courage to reform a tax system. The deepest, most difficult questions of democracy get raised. What is government really for? How much should we pay for it? Who should pay? What is fair?
During this year of tax reform, I have been holding back my questions, because of something Jay Forrester at MIT taught me long ago. He said it doesn’t matter how tax law is written. Whatever the law says, people will amend and evade it in the most imaginative ways, until the tax burden is distributed as unfairly as society will tolerate. The tax system is determined not by law, but by our collective sense of justice.
So I have been telling myself I don’t have to keep an eye on Washington. Reform or no reform, the taxes will come out pretty much the same.
But I have some questions that just won’t go away.
In 1980 the top income bracket was taxed at 70%. After the first Reagan cut, the top tax rate was 50%. Now, depending on how the conference committee decides, it will be somewhere between 27% and 32%.
Congress’s Joint Economic Committee says that in 1983 the top 1% of the families in this nation held 42% of the wealth, an inequality that has not been so great since 1929. So why cut the taxes of the rich?
This year’s deficit is $220 billion and the government is borrowing $600 million a day. Why then are such pains being taken to make this reform “revenue-neutral?” Don’t we need, rather urgently, to raise a lot more money?
Of course Congress tries to answer these questions every time it reveals a new piece of the tax plan. But for me the answers just bring up more questions. For instance:
Answer: This reform is taking away so many tax shelters for the rich that they’ll end up paying more taxes, not less.
I would so much like to believe that. But I know Washington is still full of lobbyists, and I hear rumors that special privileges are creeping back into the law. Could you please explain the new law to me — all of it, not just the parts you want me to hear — in language I can understand? And if tax shelters have truly been removed, what kind of vigilance will I have to maintain to ensure that they will stay removed?
Answer: High tax rates destroy incentive and erode peoples’ ability to invest in the economy. Reducing taxes will produce greater economic growth for us all.
Then why does Japan, with a steeply progressive income tax, the highest bracket at 70%, have a better economic record than we do? How do the European economies survive and grow with high taxes on the richest people? Why did the U.S., during its long period of 70% tax on the highest incomes, have more consistent economic growth than it has had since that top rate was cut? It is often said that high taxes destroy the urge for the rich to get richer. Is there any real evidence for that?
Answer: The new tax law shifts the tax burden from all individuals, rich and poor, to corporations, some of which have been amassing profits and avoiding taxes for years.
Who really pays corporate taxes? Do companies take taxes out of the dividends of stockholders? The salaries of managers? The wages of workers? Or are corporate taxes passed on to consumers through higher prices?
Does anyone understand the real distributive consequences of corporate taxes? Aren’t they just a way to tax people indirectly, when you haven’t got the nerve to tax them directly? What if we had no corporate tax and instead taxed all income of all individuals (including dividends, capital gains, stock options, and benefit packages)? If the people could see and feel all their taxes directly, wouldn’t that be a more politically responsible system?
Answer: Americans have shown clearly in recent elections that they won’t tolerate higher taxes. They want every day to be July 4th, not April 15th. Taxes cannot be raised; expenses must be cut. This reform must be revenue-neutral.
But we have not been cutting expenses; we have been running a deficit instead. Sometime in the future the Reagan debt will have to be paid, with interest. Who will pay it? The deficit has been used as an excuse to shift government spending away from domestic programs and toward military ones. Who is most hurt by that shift, the rich, the middle class, or the poor? Who benefits?
Has anyone ever asked the American people about their willingness to pay a fair tax, one that asks families with the same income to pay the same amount and the rich to pay more than the poor? A simple tax that doesn’t take days to figure out? An efficient tax spent frugally by the government for the real welfare of the nation? Maybe votes against taxes are not so much against taxes as against inequity and complication and senseless government spending.
The tax system certainly needs reforming. But the current reform, as far as I can understand it, shifts the burden of tax-paying even more away from the rich, onto the middle class and the poor, and onto the future. Does that shift reflect a change in our national sense of fairness? Or are we just not asking enough questions?
Copyright Sustainability Institute 1986