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We Can Change Our Wicked Problems!

Taxes and Debt

The U.S. probably has the most massive, byzantine, complex and corrupt taxation system on Earth, and its governments and most of its citizens are inundated under crushing financial debt, with few savings. 

U.S. federal, state and local tax codes fill books that fill stacks of shelves in legal libraries.  The U.S. tax code is more than 10 million words,[1] about 75,000 pages, that would fill 3-hundred 250-page books, growing at a rate of 144,500 words a year since 1955, not including a gynormous body of case law. [2]  There are more than 100 pages of instructions for the basic 1040 individual tax form alone.[3]  Then, there are many hundreds of volumes of rules for state and local income, sales and other taxes and fees.  Is this most complex tax code ever our great work, like ancient civilizations had great stone temples?

People in the U.S. spend about 9 billion hours a year working on taxes, which at $10 an hour would be worth $90 billion dollars (8% of FADS, what the federal government spends on transportation annually), and $30 billion on tax software, services, supplies and other filing expenses (3% of FADS), every year.[4]  Individual tax returns can be more than a hundred pages.  A whole industry just helps people file taxes. It’s incented to have tax system complexity, because that creates needs for it, and revenues and profits.  90% in the U.S. pay for software or specialists to do their taxes, and 72% are troubled by tax difficulty.[5]

We basically have two tax systems:  one for normal wage earners, and another for wealthy people and businesses who can afford expensive and specialized legal and tax services.  The very wealthy “literally pay millions of dollars for these services, and they save in the tens or hundreds of millions in taxes.” [6]  

Tax laws driven by the wealthy provide loopholes and advantages to the wealthy, such that many pay no or only very low taxes.[7]  And many of those opportunities are crafted so that only those in positions of wealth can take advantage of them, or can afford the specialized legal and tax expertise to realize them.  They lower taxes with all kinds of deductions, credits, incentives, manipulations, deferrals and games.[8] 

The wealthy and powerful conduct relentless government lobbying efforts over decades to continually create advantages for the wealthy in tax rules.  For example, taxes on income from capital gains from financial speculations are taxed at lower rates (20%) than income from real labor (maybe 40%).  Rules allow the rich to pass on wealth to their inheritors with minimal taxes and play games to avoid taxes.[9]  Rules exist that allow companies to shield income from taxes through artificial off-shore tax shelters.[10] 

Hedge-fund managers often pay no taxes, leaving their money, called "carried interest," in hedge funds, only paying taxes when they cash out, maybe decades later, borrowing at low interest against that carried interest for spending money, and deducting much of what they spend to reduce future taxes.[11]  For 2018, Amazon, led by the world’s richest man, paid no federal taxes on profits of $11 billion.[12]  Netflix, Chevron, Eli Lilly, Delta Airlines, General Motors, IBM and Goodyear also paid no federal taxes.[13]

The U.S. tax system is supposedly progressive, so people with higher incomes pay taxes at higher rates, to redistribute wealth, balance out unfairness and associated problems they create.  In 1995, the 400 highest-earning U.S. taxpayers paid a 30% effective tax rate.[14]  (From 2001 to 2009, the IRS report on the top 400 taxpayers was a state secret.)[15]  By 2012, they paid 17%, a little higher than a family making $100,000 annually, including payroll taxes. [16]  A top 400 earner took home, on average, $336 million.  

That means, in 2012, the U.S. collected about $103 billion (9% of FADS) less from these 400 highest income folks than it would have at 1995 rates, about what the federal government spends on education.  If they had been taxed like working people are for wages, those taxes could have been twice as much.  At the top of income distributions, effective tax rates often go down, opposite what the U.S. progressive income tax system is intended to do.[17]  The U.S. audits its poor at the same rates it audits its top 1%.[18]

For 1.4 million people who made up the top 1% of taxpayers, the effective federal income tax rate went from 29% in 1995 to 23% in 2008.[19]  In 2012, this 1% earned over 19% of the U.S. household income, their biggest share since 1928, the year before the stock market crash.[20]  In 2017, they paid 21.7%.[21]

Famous arguments that tax cuts to the wealthy “trickle down” to lower tiers of the economy as jobs and higher wages have been clearly demonstrated false from Reagan and Bush era tax cuts.  Yet, in 2018, another $1.5 trillion tax cut was again justified that way, which will add $2 trillion to our debt.[22] 

 

People at all income levels get something, initially, but the wealthier get more, absolutely and proportionally.  Households making $500,000 to $1 million get a proportional gain 4 times bigger than the average after-tax benefit for a family making $40,000.  The top 1% gets 21% of the benefits in 2018, 83% in 2027.[23]

Later, most families’ tax benefits disappear, but not the wealthiest, because they’ll still benefit from lower corporate tax rates,[24] reduced from 35% to 21%, and specialized benefits for “pass-through” corporate entities, which don’t expire, benefits of a one-time “repatriation holiday,” which allows companies to bring back at low tax rates earnings they’ve hidden abroad, and increased ownership benefits of corporate stock buybacks, which are happening far more than increased wages.  It’s estimated that 4-14% of tax cut benefits are going to employees, but 56% to shareholders.[25]

The richest 1% already owns 40% of the country’s wealth, and the richest 10% owns 80% of all publicly traded stock, while more than half of people in the U.S. don’t have $1 in retirement savings, part of a big income and wealth inequality problem, and the rich will get even more as a result of this tax cut.[26]  After this tax cut, Warren Buffet has lower tax rates than his secretary.[27]  Give the wealthy more?

Surprise, after this 2017 tax cut, in October 2018, it was announced the federal budget deficit increased to $779 billion in fiscal 2018, up 17% from the year before.  It’s expected to hit $1 trillion in 2019.[28] [29]  That is not going to help the U.S. pay off its massive and relentlessly growing debt.  The U.S. has spent more than its revenues 45 of last 50 years.  U.S. net debt is 80% of GDP, the highest level since WW2.[30]

In 2018, the U.S. government had $21 trillion in debt (1,823% of FADS), $172,000 per household.  If it spent all of Federal Annual Discretionary Spending to pay that off, it would take 18 years, if interest rates stay at current historically low levels, near 0% in 2015, to stimulate the Great Recession economy.  After 4 interest rate hikes in 2018, FED rates were 2.4%, half the historical average of 4.8% since 1954.[31]  What are the odds interest rates will not increase and further raise U.S. debt interest to be paid?

But wait, there’s more!  In addition to all that, it owes $9 trillion in Agency/GSE debt (767% of FADS), $299 billion in Other Borrowing (26% of FADS), $31 trillion in Social Security benefits (2,662% of FADS), which it hasn’t funded as it should, and $35 trillion in unfunded Medicare benefits (2,991% of FADS), bringing total U.S. government debt to $96 trillion, $758,000 per 126 million households in the U.S. (8,269% of FADS).  It would take 83 years to pay that off using every penny of FADS.  Gadzooks!

That’s about 99% of the combined net worth of all U.S. households and nonprofit organizations, including all assets in savings, real estate, stocks, private businesses and durable goods, like cars.  Already in 2013, 70% of people in the U.S. said it’s “essential for the president and Congress to pass major legislation to reduce the federal budget deficit.”  That hasn’t happened.

In 2017, interest on the national debt was $456 billion.  That’s 12% of all federal revenues, 39% of FADS, 1.1 times annual federal corporate income tax revenues and 4 times federal education spending.  That $456 billion in debt interest plus $780 billion in deficit spending equals $1.2 trillion (107% of FADS).  That’s more than FADS.  The amount the U.S. is spending on interest plus the amount it’s borrowing are more than it has discretion on how to spend in a year.  That’s like you borrowing the amount of money you have left after taxes, and spending all you have left after taxes, and all you borrowed, and doing this year after year.  Clearly, that is not sustainable.  There is no plan for how to bring it under control.

But wait, there’s more!  For most of our history, Federal debt was held mostly by U.S. individuals and institutions.  Foreign U.S. debt holdings began to really grow in the 1970s and now represent almost half of all publicly held debt.  Of that, China owns 19% and Japan 17%.  That gives them, and other countries if they join together, a tool they can use to initiate financial panic, a big quick depreciation of the dollar, a big and quick increase in U.S. interest rates, a stock market crash and/or a recession, provided they’re willing to just quickly sell their U.S. debt.[32]  That is an enormous strategic vulnerability.

But wait, there’s more!  State Governments owe about $1.2 trillion (103% of FADS), $10,000/household, and Local Governments owe about $1.9 trillion in debt (161% of FADS), $15,000/household.[33]

But wait, there’s more!  U.S. citizens have $13 trillion of combined household debt (1,110% of FADS), $8.7 trillion in mortgages, $1.4 trillion in student loans (by 40 million people), $1.2 trillion for car loans, $1 trillion on credit cards (at average interest APR of 15.6%), and $452 billion for home equity loans.[34]  The average U.S. household owes $182,000 for a home, $50,000 in student loans, $30,000 in car loans, $17,000 in credit card bills and $3,600 for home equity loans.  Meanwhile, household income levels grew 28% in the past 13 years, while cost of living increased by 30%.[35] 

But wait, there’s more!  People in the U.S. have failed to save $4.3 trillion in order to be on track to be able to retire (372% of FADS), a way of borrowing from the future, at about $35,000 per household.[36]  The U.S. average savings rate is 5.6%, about half what’s needed to accrue enough for retirement. [37]

This is overwhelming.  Let’s put it in a chart, knowing many of these numbers are wrong, like most numbers are, and wiggle some around to make them fit, and see how big this is, all added together.

Aayaya, that’s a lot.  Consolidated all together, as a nation we’d have to write a check for $116.6 trillion to all be totally debt free.  That’s 10,000% of FADS, almost six times Gross Domestic Product.  It would take 100 years of saving every penny the U.S. government has discretion over how to spend to be able to write that check.  That works out to about $950,000 per U.S. household.  Yowch!  Well, we’ve been at war at least 17 years without pause.  We have to pay for that, and all the other stuff we spend money on somehow, even if we don’t talk about it.  We’ve been using credit.  Are we ready to pay these bills now?

78% of people in the U.S. live paycheck to paycheck, and 70% are in debt.[38]  Half have less than $500 saved for emergencies.  More than three quarters of U.S. workers say we struggle to make ends meet, fearful of any hiccup that may cause our financial house of cards to fall, leaving us broke and homeless.  The median net worth for someone ages 35-44 is $14,000; for ages 55-64, it’s $45,000.  Although the average U.S. household savings balance is $34,000, the median is just $5,000.  That big skew is because of extreme U.S. income and wealth inequality, where the rich have so much more.  29% of households 55 and over have no retirement savings or pension.[39]  At the same time, a retired couple’s medical costs are estimated to be about $200,000.[40]

At least we aren’t doing nothing about this problem.  In 2018, the U.S. passed a law doubling the amount of wealth the very wealthy can hand off to their family members without paying any taxes on it, from $11 to $22 million for a married couple.  And for the fewer than 2,000 super wealthy families with net-worths higher than that, there are, as always, a bunch of estate planning and other professional games that allow us to avoid paying taxes on money providing unfair advantages to their children. 

For example, The Dynasty Trust, which must be set up in one of the few states, like South Dakota or Delaware, that allow trusts without expiration dates, but we don’t have to live there to create one. They’re funded with cash, stocks or other assets, and structured to pay each generation of heirs managed amounts of trust proceeds, while the rest of the money grows, free of estate and gift taxes.  Capital gains for private business stakes aren’t owed until those businesses are sold, if ever.[41]

Apparently, the current U.S. President got rich through a variety of tax cheats in passing money to him from his parents.[42]  Tax cheating costs the U.S. $600 billion a year (52% of FADS).[43]

The U.S. tax system is a gargantuan monument to brokenness; the U.S. government and its citizens are extremely buried in debt; and it just doesn’t make sense as a human being trying to figure out how we make it all work together in the long run.  It is completely unsustainable, and it creates bad feelings.  Unfortunately, government is part of the problems, not the solutions.  No matter.  We can still Change! 

Tell others about these problems and advocate for social change to fix them!  Organize and protest!  Write letters to government and news agencies, even if you think it doesn’t matter, for your integrity!  Don’t spend money with organizations that evade paying taxes, tell them what you’re doing, and why!

 

Live modestly and well below your means, save as much as possible, and share with others!  Pay your fair share of taxes, at work and home, so we as a society can pay for shared infrastructure, systems and services we need for all of us to be healthy as a society, like transportation systems, other infrastructure, education, public safety, a healthy population, and assistance for those who need extra help!

 

Pay off any debt as quickly as possible, starting with credit card debt!  Never use debt for consumption!  Borrow only for things that will pay back more than the total costs of borrowing!  Understand finance!  Anything you do to change will empower you to make more changes, and we need lots of change.

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Endnotes

 

[1] “Federal Tax Laws and Regulations are Now Over 10 Million Words Long”, October 8, 2015, Tax Foundation, https://taxfoundation.org/federal-tax-laws-and-regulations-are-now-over-10-million-words-long/

[2] “Look at how many pages are in the federal tax code”, Jason Russell, April 15, 2016, The Washington Examiner, http://www.washingtonexaminer.com/look-at-how-many-pages-are-in-the-federal-tax-code/article/2563032

[3] “1040 Instructions 2016”, IRS, https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

[4] “3 Crazy Tax Facts You Have to Read to Believe”, April 11, 2017, Information Station, https://informationstation.org/kitchen_table_econ/3-crazy-tax-facts-you-have-to-read-to-believe/?utm_source=google&utm_medium=cpc&utm_term=google_grant&utm_content=kitchen_table_tax_facts&gclid=CJHrycK07dMCFQ94fgodLFgPAA

[5] “Federal Tax Laws and Regulations are Now Over 10 Million Words Long”, October 8, 2015, Tax Foundation, https://taxfoundation.org/federal-tax-laws-and-regulations-are-now-over-10-million-words-long/

[6] “For the Wealthiest, a Private Tax System That Saves Them Billions”, Noam Scheiber, Patricia Cohen, December 29, 2015, The New York Times, https://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html

[7] “7 ways a very rich person (and you) might pay no income tax”, Kay Bell, October 11, 2016, Bankrate, http://www.bankrate.com/finance/taxes/how-to-pay-zero-taxes-1.aspx#slide=8

[8] “9 Things the Rich Don’t Want You To Know About Taxes”, Davind Cay Johnston, April 12, 2011, Willamette Week, http://www.wweek.com/portland/article-17350-9-things-the-rich-dont-want-you-to-know-about-taxes.html

[9] “How to Pay No Taxes: 10 Strategies Used by the Rich”, Jesse Drucker, April 17, 2012, Bloomberg, https://www.bloomberg.com/news/articles/2012-04-17/how-to-pay-no-taxes-10-strategies-used-by-the-rich

[10] “For the Wealthiest, a Private Tax System That Saves Them Billions”, Noam Scheiber, Patricia Cohen, December 29, 2015, The New York Times, https://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html

[11] “9 Things the Rich Don’t Want You To Know About Taxes”, David Cay Johnston, April 12, 2011, Willamette Week, http://www.wweek.com/portland/article-17350-9-things-the-rich-dont-want-you-to-know-about-taxes.html

[12] “Amazon paid no federal taxes on $11.2 billion in profits last year”, Christopher Ingraham, The Washington Post, February 16, 2019, https://www.washingtonpost.com/us-policy/2019/02/16/amazon-paid-no-federal-taxes-billion-profits-last-year/?noredirect=on&utm_term=.a2403f8ab15a

[13] “60 Top Corporations Paid $0 Federal Taxes Under Trump Tax Law: Amazon, Chevron, Netflix, Eli Lilly, IBM and General Motors are reaping tax cut benefits and paying nothing.”, Mary Papenfuss, Huffington Post, April 12, 2019, https://www.huffpost.com/entry/60-biggest-companies-paid-no-taxes_n_5cb01f75e4b0ffefe3ae2626

[14] “How to Pay No Taxes: 10 Strategies Used by the Rich”, Jesse Drucker, April 17, 2012, Bloomberg, https://www.bloomberg.com/news/articles/2012-04-17/how-to-pay-no-taxes-10-strategies-used-by-the-rich

[15] “9 Things the Rich Don’t Want You To Know About Taxes”, David Cay Johnston, April 12, 2011, Willamette Week, http://www.wweek.com/portland/article-17350-9-things-the-rich-dont-want-you-to-know-about-taxes.html

[16] “For the Wealthiest, a Private Tax System That Saves Them Billions”, Noam Scheiber, Patricia Cohen, December 29, 2015, The New York Times, https://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html

[17] “For the Wealthiest, a Private Tax System That Saves Them Billions”, Noam Scheiber, Patricia Cohen, December 29, 2015, The New York Times, https://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html

[18] “It’s Getting Worse: The IRS Now Audits Poor Americans at About the Same Rate as the Top 1%: As the agency’s ability to audit the rich crumbles, its scrutiny of the poor has held steady in recent years. Meanwhile, a new study shows that audits of poor taxpayers make them far less likely to claim credits they might be entitled to.”, Paul Kiel, ProPublica, May 30, 2019, https://www.propublica.org/article/irs-now-audits-poor-americans-at-about-the-same-rate-as-the-top-1-percent

[19] “How to Pay No Taxes: 10 Strategies Used by the Rich”, Jesse Drucker, April 17, 2012, Bloomberg, https://www.bloomberg.com/news/articles/2012-04-17/how-to-pay-no-taxes-10-strategies-used-by-the-rich

[20] “Richest 1% earn biggest share since Roaring '20s”, AP, CNBC, Updated September 11, 2013, https://www.cnbc.com/id/101025377

[21] “Who Pays Taxes in America in 2017?”, Institute on Taxation and Economic Policy, April 2017, https://itep.org/wp-content/uploads/taxday2017.pdf

[22] “Deficit to top $1 trillion per year by 2020, CBO says”, Jeff Stein, April 9, 2018, The Washington Post, https://www.washingtonpost.com/business/economy/deficit-to-top-1-trillion-per-year-by-2020-cbo-says/2018/04/09/93c331d4-3c0e-11e8-a7d1-e4efec6389f0_story.html?noredirect=on&utm_term=.e9bf4045055e

[23] “Fact Check: Do 83% of Trump's tax cut benefits go to the 1%?”, Holmes Lybrand, CNN, February 26, 2019, https://edition.cnn.com/2019/02/26/politics/fact-check-sanders-town-hall-tax-cuts/index.html

[24] “Clinton correct Buffett claimed to pay a lower tax rate than his secretary”, Rachel Tiede, October 18, 2016, Politifact, http://www.politifact.com/truth-o-meter/statements/2016/oct/18/hillary-clinton/clinton-correct-buffett-claimed-pay-lower-tax-rate/

[25] “What the Republican tax bill did — and didn’t — do, one year later:  The GOP tax cuts didn’t pay for themselves. They did, however, deliver a lot of stock buybacks.”, Emily Stewart, December 18, 2018, https://www.vox.com/policy-and-politics/2018/12/18/18146253/tax-cuts-and-jobs-act-stock-market-economy

[26] “Why the GOP Tax Cut Will Make Wealth Inequality So Much Worse: The richest 1 percent now own 40 percent of the country's wealth. Under this bill, they’d own more”, Derek Thompson, The Atlantic, December 19, 2017, https://www.theatlantic.com/business/archive/2017/12/gop-tax-bill-inequalilty/548726/

[27] “Clinton correct Buffett claimed to pay a lower tax rate than his secretary”, Rachel Tiede, October 18, 2016, Politifact, http://www.politifact.com/truth-o-meter/statements/2016/oct/18/hillary-clinton/clinton-correct-buffett-claimed-pay-lower-tax-rate/

[28] “What the Republican tax bill did — and didn’t — do, one year later:  The GOP tax cuts didn’t pay for themselves. They did, however, deliver a lot of stock buybacks.”, Emily Stewart, December 18, 2018, https://www.vox.com/policy-and-politics/2018/12/18/18146253/tax-cuts-and-jobs-act-stock-market-economy

[29] “Here's who's winning under Trump's tax law”, Zachary B. Wolf, CNN, April 13, 2019, https://edition.cnn.com/2019/04/13/politics/tax-reform-winners-and-losers/index.html

[30] “Internet Trends 2018”, Mary Meeker, Kleiner Perkins, https://www.kleinerperkins.com/perspectives/internet-trends-report-2018/

[31] “Federal Funds Rate - 62 Year Historical Chart”, accessed December 28, 2018, Macrotrends, https://www.macrotrends.net/2015/fed-funds-rate-historical-chart 

[32] “National Debt”, Just Facts, http://www.justfacts.com/nationaldebt.asp

[33] U.S. Government Spending, https://www.usgovernmentspending.com/year_download_2018USbn_20bs2n#usgs302

[34] “Total Household Debt Increases, Driven by Mortgage, Auto and Credit Card Debt”, August 15, 2017, Federal Reserve Bank of New York, https://www.newyorkfed.org/newsevents/news/research/2017/rp170815

[35] “A Foolish Take: Here's how much debt the average U.S. household owes”, Leo Sun, November 18, 2017, USA Today, https://www.usatoday.com/story/money/personalfinance/2017/11/18/a-foolish-take-heres-how-much-debt-the-average-us-household-owes/107651700/

[36] “Average Retirement Savings: Are You Normal?”, Amelia Josephson, July 27, 2017, SmartAsset, https://smartasset.com/retirement/average-retirement-savings-are-you-normal

[37] “A Foolish Take: Here's how much debt the average U.S. household owes”, Leo Sun, November 18, 2017, USA Today, https://www.usatoday.com/story/money/personalfinance/2017/11/18/a-foolish-take-heres-how-much-debt-the-average-us-household-owes/

107651700/

[38] “The government shutdown spotlights a bigger issue: 78% of US workers live paycheck to paycheck”, Emmie Martin, CNBC, January 9, 2019, https://www.cnbc.com/2019/01/09/shutdown-highlights-that-4-in-5-us-workers-live-paycheck-to-paycheck.html

[39] “Compare your finances to financial statistics for the average American household to see how you stack up”, Debt.com Education Center:  Personal Finance Statistics, https://www.debt.com/edu/personal-finance-statistics/

[40] “U.S. borrowing on pace to top $1.3 trillion this year, the highest since 2010”, Christopher Ingraham, The Washington Post, October 30, 2018, https://www.washingtonpost.com/business/2018/10/30/us-borrowing-pace-top-trillion-this-year-highest-since/?noredirect=on&utm_term=.0094887be6c6

[41] “It’s a Great Time to Be a Wealthy Heir After Trump Tax Overhaul:  New law doubles the estate-tax exemption to $22 million a couple, spurring interest in dynasty trusts”, Ben Steverman, Bloomberg, May 15, 2018, https://www.bloomberg.com/news/features/2018-05-15/trump-tax-overhaul-doubles-estate-tax-exemption-for-super-rich

[42] “Trump Engaged in Suspect Tax Schemes as He Reaped Riches From His Father”, David Barstow, Susanne Craig and Ross Buettner, The New York Times, October 2, 2018, https://www.nytimes.com/interactive/2018/10/02/us/politics/donald-trump-tax-schemes-fred-trump.html

[43] “It’s Getting Worse: The IRS Now Audits Poor Americans at About the Same Rate as the Top 1%: As the agency’s ability to audit the rich crumbles, its scrutiny of the poor has held steady in recent years. Meanwhile, a new study shows that audits of poor taxpayers make them far less likely to claim credits they might be entitled to.”, Paul Kiel May 30, 2019, https://www.propublica.org/article/irs-now-audits-poor-americans-at-about-the-same-rate-as-the-top-1-percent

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