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Opinion

Column: If you don’t understand America’s tax code, you don’t understand America

PATT MORRISON ASKS

Tax time is Goldilocks guesswork time — are you paying too little in taxes, too much or just right? And, there’s always someone who’s hiding porridge profits under the bed. The ides of April have to be the least pleasant day on the national calendar, and our longest-running joke material. The actual tax code is not a joking matter; it actually runs only into a very few thousand pages, not the hundreds of thousands of comedy and legend — but within those pages is a revealing and sometimes contradictory character sketch of what the government encourages us to do, what it rewards and what it doesn’t.

Anne Alstott is a Yale professor whose expertise is tax and social policy, and she is co-author of the forthcoming book “The Public Option.” She studies just how all those carrots and sticks work together.


Can it be said that if you understand the American tax code, you understand what America values and what it doesn't value?

Absolutely. The tax code can seem dry, but in fact, once you realize what's in there, you see that it's very much a statement of what we value.

Our country began in part because of a rebellion against taxes by the British crown — the cry of taxation without representation. But now we have taxation with representation and people don't seem any happier.

Well, I think there are a couple of reasons. One is, it's just human nature that you're not going to like taxes. Maybe our higher selves understand that it's the price we pay for civilization as [Supreme Court] Justice [Oliver Wendell] Holmes said. But at the everyday level, it's not a lot of fun to see your hard-earned money going out the door.

I think, too, that politicians to some large degree have demonized the tax system, and often unfairly. It’s an easy target. It's something that a lot of people don't understand and maybe are afraid of.

And yet it really does reflect our values in a lot of important ways, not always good. But often it really implements important public policy.

What, on the whole, does our tax system value and reward?

Our tax system at the moment basically does two big things: It supports the Social Security and Medicare systems. When you make that connection and say, “Hey, you know what? Taxes fund Social Security.” That makes people feel better about it, because people love Social Security. They love it.

The second thing that it does is, it funds the rest of our government. And the values that are implicit in that are contributions in proportion to your income. We can debate how progressive the tax system ought to be — there's some interesting proposals right now to make it more progressive — but right now we do have an income tax that is progressive, that protects the lowest-income people and that asks the richest people to pay more.

Go back to the origins of the income tax more than 100 years ago. Who carried the tax burden a hundred or so years ago, and how has that changed?

There's just been an absolute revolution in the role of the federal government over that time. In 1913, when the federal income tax was introduced, it was a very small tax. It was 1% of income only on very rich people. And it wasn't intended to raise a lot of revenue because the federal government really wasn't very big. It didn't do very much.

But it was a Progressive Era move to express values, to say, if you're doing really, really well, then we want you to disclose to the government that you're doing well and to contribute something.

It wasn't actually until World War II and the years after World War II that most people became taxpayers. From 1913 through the ’20s, through the ’30s, it was a tax only on the very rich.

But after World War II — and not coincidentally that's when the role of the federal government started to get really big with the G.I. bill, financing the war of course, but also postwar social programs — it became a thing that ordinary workers paid.

I was just looking this morning at historical top marginal tax rates.

That is the money that you earn above a certain level that gets taxed differently, is that right?

Exactly right. The Congress sets some income level and above that level you pay the highest progressive tax rate.

Right now, the highest rate that anybody pays to the federal government on their income is 37%. And as you know, [Rep.] Alexandria Ocasio-Cortez (D-N.Y.) has proposed to really increase that top rate to 70%, but it would apply only to people with annual incomes over $10 million.

When you first hear 70%, that might really sound outrageous, but in fact, historically we've had a 70% or more [marginal] tax rate for decades, absolutely decades.

If you look back in the teens, in the ’20s, ’30s, we had a top rate as high as 94%. If you look at the Eisenhower era, the Republican ’50s, it’s peacetime, it’s growth time, and through the 1950s until 1963, the top tax rate is 91%.

And society just lived peacefully with that the idea that the very richest people would give back some of what they've gotten from society by paying those high taxes.

But now with it at 37% — that's what some middle-class earners pay, isn’t it?

Well, the 37% kicks in roughly at $500,000. More middle-class people certainly do pay tax rates in the low 30s.

What's happened is that the tax rate schedule has gotten less progressive. A middle-class family might pay 28% or 31%, whereas the super-rich are going to pay 37%. There's not that big spread anymore that there once was.

And I think what's really tough about that is it's happening at the same time that most ordinary people are really struggling to pay the ordinary costs of life.

We hear, for example, about a marriage penalty. What kind of society is our tax system meant to reward?

That's the darker side to it, right? Sometimes the values that are expressed are good values, they're transparent values, values that I think most people would endorse.

The marriage penalty is an interesting one. We actually have much less of a marriage penalty than we once had. The Trump tax legislation in 2017 reduced the marriage penalty. But there's a hidden kick to that, which is that the 2017 legislation also increased the tax bonus to one-earner couples.

And that's a way of life: a one-earner couple, a stay-at-home mom. Sure, some people still do that. And it's certainly a choice that people make. But it's no longer the way of life that most people pursue. Most mothers are in the workforce now, most women are in the workforce.

And so the idea that the tax code would reward that particular choice is just an odd one. And at the same time, it does very little for single parents, who are really among the most hard-pressed. They are the only earner in their household and they get relatively little tax relief. I think there’s still an old message, a conservative message, that a stay-at-home mom, a traditional family, is better than the working family.

What about tax credits for daycare?

The child care tax credit right now maxes out at much less than the actual cost of daycare. The top credit is roughly $1,000, so you might get $1,000 off on your taxes.

But just the average [cost] nationwide is on the order of $10,000. That’s for one infant in an ordinary child care center. So the idea that our tax credits are going to give us about $1,000? Hey, it's better than nothing, but I don't think it really expresses the value that ordinary working people should be able to put their kids in safe, decent childcare.

You've also studied the fact that people are living longer and the effect that that has on income and taxes and inheritance.

There's a stunning fact: A baby born today will on average live to be 100 years old. On average — 50% of them will live more, 50% less.

What should public policy look like, what should the tax system look like, what should Social Security look like when an average person lives to a hundred? We're not prepared for this. The tax law tends to lag.

On the other end of that lifespan, students are undertaking tremendous burdens of college loans. What does the tax code do to them, for them, with them?

Although there is a value expressed in the tax code that more people should be able to get a college education and afford it, the fact is that the code provisions are pretty small and they don't reliably cover all the people who need the assistance.

It's one of these cases where the politicians have been able to say that we do something for education, but they haven't really put the money behind the agenda.

You mention economic inequality. To what extent does the tax code ossify that, or try to break it up?

The theme of our conversation is that the tax law both contains progressive values and undermines progressive values. I think the progressive income tax itself is intended to require richer people to pay a larger share to reflect the fact that what they earn is a function of the shared cooperative economy that lets them earn that money — public colleges, public roads, infrastructure, and really the cooperation of everybody.

We don't have riots in the street. We have a very peaceable, good country in that way. And good markets, very free markets that allow some people to really, really prosper.

But there are features of the tax code that do tend to ossify economic inequality, and these tend to be hidden. It’s the rare politician, even on the right, who will stand up and say, “Hey, you know what? I’m for tax shelters for rich people. I'm for structures that really ossify the opportunity structure.”

One of the things that I try to show my students is that there's a hidden tax code, and the hidden tax code is well-known to experts, well-known to elites, and it tends to advantage people who were already rich over people who were trying to make their way.

It definitely advantages investors over working people.

Given that these advantages are in the hidden law, you basically have to have a tax lawyer to figure them out.

And who is it who's going to have tax lawyers? It’s rich people.

The tax system is really set up to allow people that make their living from investing money to pay very, very low tax rates.

Warren Buffett famously said that his secretary had a higher tax rate than he did because she works and he gets his money from investments.

How does this keep going when it looks so unfair on the face of it?

I think there are two answers. One is that politicians are clever in hiding these advantages so that their wealthy constituents who benefit will know about them. But there's a second reason I think is maybe just as powerful or more powerful: You mentioned that there's a famously anti-tax culture in the United States. It's a very libertarian culture, and I think that some politicians from the right have consistently and very successfully played on a general libertarian theme: “It's my money. Keep the government's hands off.”

And they haven't been straightforward that that kind of philosophy benefits by definition people who are the richest and yet are paying the lowest tax.

We saw that when Republicans labeled the estate tax the “death tax.” We all die, but not all of us have estates.

That's one of the greatest political victories for what was really a very falsely portrayed agenda. The estate tax only applied in living memory to the top 2% of estates.

Yet the politicians were able to kind of smear the tax, smear it as, “Oh, they’re gonna take your family home when you die, your children won't get grandma’s china, the government's going to make you sell your small business.”

And in fact those things really were not happening, but it was a very clever smear campaign.

The importance of the tax refund in many people's lives — they look upon it as an ad hoc savings account. So rather than get this money spread out over 12 months, they may get it in a lump when they file their returns and get a refund. Is that any way to do business?

A lot of economists would say, people really need the money in their paychecks, and that way they could more reliably pay their rent, maybe put less money on credit cards, pay that child care bill and stuff like that.

But people love the refund. And I think it's for exactly the reason you said, that it's forced savings, and the forced savings — the fact you didn't get your tax money throughout the year — creates this lump sum.

Because it's a lump sum, it just kind of feels like Christmas to people: “Wow, I love that moment when I have that money in my checking account.”

But the second thing is that the forced saving is functional for people. One of the most touching statistics is that for children that go to school in cold climates, when it starts to be February, starts to be March, and parents are getting their Earned Income Tax Credit refunds or just their tax refunds, the teachers notice that the kids show up in warm coats that they didn’t have before.

It's that forced savings that means you can buy that kid that nice winter coat that maybe you couldn't have afforded back in December, or buy a refrigerator — something big, something that takes some savings.

What's more troubling is the people who do rack up a lot of credit card debt and then have to use their earned income tax credit or their tax refund simply to pay off the credit card debt. That is a much bigger problem.

The whole idea of taxes is so horrible that people have to laugh at it. Comedians make jokes. Even if you say something like, remember the Tax Reform Act of 1986, people will start laughing. Do you have favorite tax jokes?

I was actually at a dinner last night with a bunch of tax professors, which sounds deadly dull, but we really had the very best time because we can make jokes that [we each] understand!

It's funny because the tax bill is so complicated, and it seems to have been, quote unquote, reformed so many times that I understand why people laugh.

Much has been made of President Trump not revealing his taxes. Why do you think he hasn’t?

I think we have to assume that there's something there, that if there were nothing there, he would abide by the long-standing norm, which is for presidents to disclose their tax return every year.

Nobody knows what it is. But I think we can speculate: real estate, his industry, is one of the industries that is absolutely rife with hidden tax breaks that allow people who are doing very well economically to look very poor for tax purposes.

And I think if that's what his returns show, you can see why this particular president would not want to take the heat for that.

Do you do your own taxes?

I hate doing my taxes. As much as I think taxes are a good thing, I really dislike the process, so I just use TurboTax.

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MORE PATT MORRISON ASKS:

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