By Donella Meadows

–February 25, 1988–

Remember how the Great 1986 Tax Reform was going to make taxes more simple and more fair? That’s what the President and Congress told us, as they held press conferences to congratulate themselves for the wonder they had wrought.

Now the 1987 IRS forms have arrived and we can see exactly how all this simplicity and fairness works out.

You’ve probably wrestled with the forms enough by now to have given up hope for simplicity. The only simplification I can see is that we can’t deduct charitable contributions any more unless they exceed $2540 — maybe that’s simpler, but it doesn’t strike me as good news, either for my taxes or for the charities I give to.

As for fairness, I judge that by watching how the tax system affects my friends of different incomes, like Fred and Denise and Walter. They all file as single taxpayers with no dependents and no mortgage payments. I’ll round their incomes off here and assume those incomes were constant over the past 2 years. Aside from these changes, the numbers below are real.

Fred is a self-employed carpenter. He works like a beaver, lives frugally, and gets by on net earnings of $7000 a year. He is accumulating no pension and can’t afford health insurance. His taxes look like this:

1986 1987 taxable income $5920 $4460 income tax $425 $599 social security $861 $861 total tax $1286 $1460 % of income 18.4% 20.8% From Fred’s point of view, the 1986 Tax Reform is not only unfair but punitive. There are no luxuries in his life to cut back on. Paying $1450 to the IRS hits him at the level of food and rent and parts for his creaking old car.

Denise works part-time as an editor for a salary of $17,500 and part-time as a free-lance writer for which she nets $10,500. She puts aside a $2000 IRA every year for her retirement, and she buys her own health insurance. Her taxes are:

1986 1987 taxable income $24,920 $23,460 income tax $4328 $4313 social security $2376 $2376 total tax $6704 $6689 % of income 25.8% 25.7% For Denise the tax reform is hardly noticeable.

Walter is a college professor and a consultant. His university salary amounts to $45,000 plus a pension and health insurance. His consulting fees bring in another $30,000. Here is what his tax bite looks like:

1986 1987 taxable income $73,920 $72,460 income tax $24,228 $21,861 social security $2940 $2940 total tax $27,168 $24,801 % of income 36.2% 33.1% The 1986 Tax Act made Walter better off by more than $2000.

“Fairness” is one of those slippery concepts that depend on the eye of the beholder. Walter doesn’t think it’s fair to have to shell out $24,000 to the government on April 15. But I can’t imagine anyone thinking it fair to raise Fred’s taxes while lowering Walter’s.

The least fair part of the picture is the tax the politicians didn’t reform and would rather not mention — the social-security tax, well known as the most regressive tax in America.

Because he is self-employed, Fred pays 12.3% social security tax on top of income tax on all his earnings. Denise pays that rate on her free-lance earnings, but only 7.51% on her salary. The same goes for Walter on his salary. He pays nothing on his $30,000 of consulting income, because social security is levied only on the first $45,000 one earns. Walter’s total social security payment is only slightly higher than Denise’s, though his income is three times higher. If they were both to retire next year, his benefits would be higher than hers, and very much higher than Fred’s, who will have no other means of retirement support.

I wonder why they held no self-congratulatory press conference this January when they raised the social security tax rate (that will add another $50 to Fred’s tax next year).

I wonder why social security tax is assessed at a flat rate (below $45,000), though a principle of our society is, or at least used to be, that the rich should be taxed at a higher rate than the poor. Why is social security different from any other expense of government in that respect?

I wonder if governments ever make things more simple.

I wonder how anyone can justify raising the taxes of people like Fred.

I wonder why, when the folks down in Washington tell us what a great favor they’ve just done for us, we ever believe them.

You know, it’s really a terrific idea to make the tax system more simple and fair. It shouldn’t be too hard to do, if we ever put our minds to it.

Copyright Sustainability Institute 1988