How to Get the Rich to Pay Taxes | Opinion

Closing Tax Loopholes Is Preferred Policy to Increasing Income Taxes

Link to the Original Editorial

For quite some time, there has been a fair bit of racket among liberals regarding the rich and their lack of paying taxes. Naturally, the response to this is one that proposes legislation to make the rich pay more in taxes than they currently do. But is the way we are speaking about this problem effective in solving it?

So far, the general proposal is to raise taxes on the rich. This proposal is intrinsically problematic for various reasons. The primary reason being that raising taxes on the rich does not solve the problem of people not paying their fair share in taxes.

This might sound perplexing. After all, if their taxes are raised, won't the 1 percent have to pay more in taxes? Before answering that question, we need to take an itinerary of what the current tax system of the United States even looks like. According to the IRS, the top income tax rate is 37 percent. Insofar as the richest among us are paying taxes, they pay an income tax rate of 37 percent. On top of this, the top 1 percent pay an average federal tax rate of 32 percent. It is estimated that the 10 percent of the tax bracket pays roughly 71 percent of federal income taxes.

What this means is that the rich are already paying taxes—and quite a substantial amount. If this is the case, then how is it that there seem to be billions of dollars missing from tax revenue on a yearly basis? And the salient question here is, will raising taxes on the rich actually fix this problem?

There is little reason to believe that it would fix this problem. Say we raised the income tax on the 1 percent from 21 percent to 40 percent. All this would do is increase the amount of taxes that are paid by people who are already paying taxes and in doing so, they would still be bringing in the vast majority of the U.S.' tax revenue. How is that fair? It isn't. Instead, we need to address the true culprit of billions of dollars of missing tax revenue: tax loopholes.

In the United States, there is a shocking abundance of strategies that one can use to get out of paying taxes. Investment income taxes are generally taxed less than income.

When very rich individuals make the majority of their income from investments, they also get away with having to pay much in the way of income taxes. It has been estimated that in the course of 10 years, $1.3 trillion is lost because of this tax loophole. Another example includes charitable organizations: any money put into a charity is effectively not taxable. This may sound benign on the surface, but it becomes sinister when one points out that, under this tax law, the definition of "charity" is very flexible. Children's hospital donations are surely charitable and they ought to be considered so on the law. Conservative think tanks on the other hand—think tanks who have lobbyists that prevent tax loopholes from being abolished—are also considered under law a charity. If one pays an organization that effectively prevents tax-loopholes from being abolished, this is considered "charity" and thereby renders such a "donation" untaxable.

The list of comparable tax loopholes which the rich use routinely to get out of paying taxes is too long to outline in any great detail. As economic inequality has deepened in the United States, trillions of dollars in counting have been lost to tax loopholes like tax havens, evading the estate tax through inheritance and other means.

Liberals should not focus their attention on raising taxes. It is frankly delusional in terms of the place where such tax raises come from: namely, from the perspective of fairness. It is absolutely unfair that there are people who get away with not paying taxes—especially when this costs the United States trillions of dollars, which could have otherwise been spent improving the well-being of citizens. It is not fair to raise taxes on people who are already paying the vast majority of taxes—which is what raising taxes will only serve to do. Rather, closing up loopholes that prevent people from paying taxes is the path forward. Such a strategy will not only raise revenue for the United States, but it will also be fairer than simply raising taxes on those who already pay taxes. It will raise money without punishing people for no reason.

How can this be done? It will not be easy. Nor is it obvious that it will have the intended positive consequences that liberals hope for. The wealthy do pay the majority of the taxes in the U.S. The collateral damage to those in the same tax bracket as rich folks who use tax loopholes could put U.S. businesses and the U.S. job market in jeopardy. We do not want to drive out the honest rich folk, who do not use loopholes, and who do pay their taxes. They'll take their businesses with them.

Until our government is better capable of budgeting and spending tax revenue appropriately, not even eradicating tax loopholes will have much of an effect. The first true step toward ending economic inequality is re-evaluating how we budget our money. Only 6 percent of the U.S. budget is spent on education. Might this be part of why we have such poor educational outcomes? Educational attainment and economic attainment are highly correlated. We should be using the money we have now (which is a lot!) to improve this situation.

None of this is an easy fix. Lamenting about raising the taxes on the rich is going to do nothing but further divide us. If you are going to lament, lament about how poorly we budget in the United States and the bad tax loopholes. Raising taxes is a good slogan, but it is not a good policy. If we simply get everyone to pay all of their taxes according to the current tax rates, such slogans would be exposed in their patent meaninglessness.