SEVEN STEPS TO TRULY REFORM THE TAX CODE AND ENGENDER SOCIO-ECONOMIC MOBILITY.

Author:Faizer, Mohamed Akram
 
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  1. INTRODUCTION

    As a relatively young law professor, I often head to my local YMCA during lunchbreaks, which is one of the few places where all segments of Knoxville society gather and socialize. While there recently, I had a lengthy discussion with a friend who, notwithstanding the fact he is one of the wealthiest people in all of eastern Tennessee, maintains a punishing work schedule. I asked him why he continued to work so hard, especially since he could never possibly spend his accumulated earnings. His response was that he does so because his compensation is extremely high and beyond anything his children or grandchildren could possibly ever earn. As such, his plan was to continue working in order to accumulate an even larger estate that would not only ensure his own financial security, but that of his children and grandchildren. Shortly after this discussion at the YMCA, my wife and I filed our nanny taxes with the IRS. The amount was startlingly high and was a significant factor in our decision to shift to daycare, i.e. though the decision to shift to daycare was based on many factors, including our desire to socialize our daughter, I cannot dispute that avoiding payroll reporting and tax obligations was a significant factor in our decision. These two very personal examples are sobering in that they encapsulate why so many Americans suffer from socio-economic immobility.

    My friend's decision to remain in the labor force was motivated largely by a benevolent desire to support his family. The fact that he does so, however, means that his organization is spending an inordinate amount of money on his salary, which means that it is deprived of resources to provide more generous pay packages to other workers or hire new employees. His decision is in his own family's material interest, but in conflict with that of either his organization or the broader east Tennessee community. It is, in the end, facilitated by the U.S.'s low income and estate tax paradigm, first ushered in during the Reagan Revolution. (15) Similarly, my decision to send our daughter to daycare is partly attributable to a payroll tax paradigm that punishes low income earners and their employers. (16) These examples illustrate that the tax code, which is ostensibly designed to incentivize economic growth, employment and socio-economic progress, was inadvertently encouraging the well positioned to push for ever-larger pay packages in a manner destructive to the economy's overall health and harming the ability of less skilled workers to find or retain work. (17) At the very least, the tax code hampers employment and socio-economic advancement. (18)

    President Trump's appeal is largely to white voters who feel the effects of socio-economic stagnation and an inability to accumulate wealth. (19) As such, one might have expected the President to have proposed a legislative agenda focused on remediating the overall trends toward wealth concentration, income inequality and an overall lowering of socio-economic mobility. Instead, the President's focus on repealing the Patient Protection and Affordable Care Act, and his recently enacted Tax Cuts and Jobs Act of 2017 evidences a chief executive whose policy priorities have been hijacked by Congressional Republicans and belie both his campaign themes and his voting base's economic interests. The Act's corporate and income tax cuts will result in massive increases in take home pay for the most highly remunerated Americans which, in turn, means that those best positioned to negotiate high compensation packages in their favor will have a stronger incentive to do so. (20) This will, of course, exacerbate income inequality. The Trump tax cuts' additional failure to raise the inheritance tax furthers this problem in view of the fact that more than half of the wealth held in the U.S. is inherited, and this inequality depresses overall economic growth and productivity. (21) In short, the best evidence demonstrates that wealth concentration depresses a nation's overall economic performance and engenders socio-economic immobility. (22)

    To illustrate the extent of the problem, the wealth and income gaps between the top one percent and the rest of the population are at an historic high, such that the top one percent of the nation's income earners have seen their income grow by more than 200 percent in the last generation as compared to a mere 40 percent for the bottom 20 percent of the nation's income earners. (23) The most comprehensive measure of a society's income inequality, the Gini Coefficient, evidences that the U.S. has, by far, the highest level of income and wealth inequality among mature democracies. (24) Much of the fault for this lies with the U.S. tax code, which is a direct consequence of a political system that facilitates rent seeking by the wealthy and well-positioned. This was evidenced during the Reagan and second Bush Administrations, which saw massive reductions in income and estate tax rates in conjunction with an increase in payroll taxes. (25) The result was a massive increase in public indebtedness and an apparently inexorable increase in income and wealth inequality. (26)

    This inequality and socio-economic immobility explains the authoritarianism and illiberalism that bedevils the developed world. (27) Indeed, the rich world's overall recalcitrant response to the plight of economic migrants and refugees, (28) demonstrates how the world's most advanced democracies, including the U.S., are teetering and risk losing their democratic norms of pluralism and openness because of this stagnation, which, in turn has led the public to lose confidence in both elites and civil nationalism. (29) This loss in confidence reflects what the journalist and public intellectual, George Packer, has named the "Unwinding" in that institutions are increasingly incapable of addressing its people's problems and concerns, such as access to living wage jobs, quality public schools, affordable higher education and health insurance. (30) The public's election of the authoritarian and illiberal Trump Administration, its indifference towards Syrian and other refugees fleeing civil war and failed states, and its apparent willingness to reconsider the U.S.'s

    traditional leadership role within in a multilateral international community, are all symptoms of this problem. (31)

    My proposal adumbrates a bipartisan solution to this unravelling by actually reforming the nation's tax code to provide the federal government with sufficient fiscal resources to progressively address the public's needs in a manner that not only addresses its skepticism toward the federal government, but actually reduces income and wealth inequality and incentivizes wage growth, employment and conservation. The proposal would eliminate the payroll tax that regressively raises $1 trillion each year to pay for Social Security, Medicare, and federal unemployment to incentivize employment and raise take home pay. (32) However, rather than stop there or simply eliminate or cut either Social Security or Medicare, my proposal would strengthen them both by altering their funding source to incentivize socio-economic mobility and conservation by means of a restructured tax code. My proposal leaves the entitlement programs in place because both Social Security and Medicare are a vital component of the U.S.'s threadbare safety net. (33) Indeed, both are especially important in view of the scarcity of defined benefit pension plans and how stagnant wages make it difficult for workers to save for retirement via individual retirement accounts. (34) My proposal is to alterSocial Security and Medicare's funding scheme by replacing the payroll tax, which generates more than $1 trillion in annual revenue, or 6% of U.S. income, (35) with a fairer and more advantageous means of revenue collection and deal with the public's institutional distrust of the federal government by means of triggers to assure the public that the new exactions will generate no more revenue than necessary to replace the regressive payroll tax. (36) This will, over time, greatly enhance American living standards in a manner consistent with the country's values.

    1. Social Security, Medicare and Payroll Taxes

      The history of Social Security and Medicare date back to the New Deal and Great Society eras, respectively. (37) Social Security, which provides public income security for seniors and disability insurance for all covered workers, imposes a 12.4% tax on all American workers up to the first $128,400 in earned income. (38) Although this tax obligation is shared with employers, for a growing percentage of American workers who aredesignated as self-employed, , the full 12.4% must be paid directly by them to the government. (39) Medicare, which is the public provision of health insurance to the elderly, is funded based on an additional 2.9% payroll tax on all earned income with a .9% surcharge imposed on high-income households as part of the Affordable Care Act. (40) Like with Social Security, the payroll component of the Medicare tax is shared with employers, but is fully paid by workers who are designated as self-employed. (41) On top of this, employers must pay a Federal Unemployment Tax of .6% on employee incomes up to $7,000, while the self-employed are not eligible for unemployment benefits. (42) In all, payroll taxes are highly regressive in that they impose far greater tax burdens on the poor than the wealthy because they are imposed on the first dollar of earned income with no exemption amount. (43)

      The payroll tax also imposes regulatory payroll burdens on employers who must remit 7.65% of employee wages directly to the IRS. (44) To illustrate the payroll tax's regressivity, low- and moderate-income taxpayers pay more of their incomes in payroll tax than high-income earners because high-income earners see their payroll tax obligations dramatically reduced on all incomes above...

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