GalesburgPlanet.com

As the pres­i­dential campaigns rev up, taxes are emerging as the defining issue of the election. Unfor­tu­nately, a lot of misin­for­mation and myths about taxes are spreading as candi­dates and commen­tators look to push their different economic agendas.

To start the election season off, here is a breakdown of the five biggest tax whoppers being told by the candi­dates and commen­tators alike.

1) Myth: 47 Percent of Amer­icans Do Not Pay Taxes

Fact: All Amer­icans Pay Taxes

Pundits and politi­cians will continue to rile up audi­ences this election season by claiming that half of Amer­icans in the U.S. do not pay any taxes. This talking point is used to deflect ques­tions about why the rich should pay their fair share.

The basis of this claim is data showing that 47 percent of Amer­icans did not owe federal income taxes in 2009, which the recession was at it’s peak. The claim ignores the much more regressive federal payroll taxes or state and local sales, income, and property taxes that all Amer­icans pay. The reality is that three-quarters of American house­holds actually pay more in payroll taxes than federal income taxes.

Adding to this, the very reason many low income Amer­icans do not pay federal income taxes is because they benefit from highly effective tax credits like the earned income tax credit (EITC), which incen­tivize work while providing much needed support to working low and middle class family budgets.

2) Myth: The American People and Corpo­ra­tions Pay High Taxes

Fact: The US Has the Third Lowest Taxes of Any Developed Country in the World

Total US taxes are actually at the lowest level they’ve been since 1958. The US has the third lowest level of total taxes of the Organ­i­sation for Economic Co-operation and Devel­opment (OECD) coun­tries, with the exception of only Chile and Mexico. Pres­ident Obama, who is often falsely accused of raising taxes, actually cut taxes for 98 percent of the country on top of temporarily extending the entirety of the Bush tax cuts.

A related claim is that the US has the second highest corporate tax rate in the world. This is misleading because it’s based on the on-paper (statutory) corporate rate rather than the actual (effective) rate that corpo­ra­tions pay. Because of the plethora of corporate tax breaks and loop­holes, the US actually has the second lowest coporate taxes as a share of GDP in the OECD. In fact, 30 major corpo­ra­tions, including Verizon, Boeing and General Electric, paid nothing in corporate taxes over the last 3 years. Rather than cutting corporate taxes, the sensible solution is to pass revenue-positive corporate tax reform.

3) Myth: Cutting Taxes Creates Jobs and Raises Revenue

Fact: Tax Cuts Reduce Revenue And Are Not Asso­ciated with Economic Growth

Since the rise of supply-side economics, tax cuts for the rich have been regarded as a magic elixir that could unleash economic growth, while simul­ta­ne­ously increasing government revenue.

The reality is that the tax cuts that have been tried for over 30 years have proven to be a stunning failure in all regards. In fact, history has shown that the tax rate on the wealthy simply has nothing to do with economic growth. Just consider the strong growth that occurred after Pres­ident Clinton increased taxes versus the dismal growth following the Bush tax cuts.

Not surpris­ingly, tax cuts have been defi­nitely proven to reduce revenue. Even Pres­ident Bush’s own Treasury Department concluded that tax cuts do not create enough economic growth to to come close to offsetting their costs or raising revenue. The Bush tax cuts cost $2.5 trillion in their first decade and the Reagan tax cuts cost $582 billion.
4) Myth: The US tax system is very progressive because wealthy indi­viduals already pay a dispro­por­tionate amount of taxes.

Fact: At a Time of Growing Income Inequality, the US Tax System is Basi­cally Flat.

Conser­v­ative commen­tators and politi­cians claim that it would be unfair to raise taxes on wealthy indi­viduals because they already pay a dispro­por­tionate amount of taxes, usually citing the fact that the top one percent of income earners pay 38 percent of federal income taxes. Once again, such claims ignore the fact that the federal income tax is just one of many taxes that indi­viduals pay.

When you take into account all of the taxes that indi­viduals pay, the truth is that our tax system is rela­tively flat. The top one percent of income earners receives 20.3 percent of total income while paying 21.5 percent of total taxes and the lowest 20 percent of income earners receive 3.5 percent of total income while still paying out two percent of total taxes.

In other words, wealthy indi­viduals pay a high percentage of taxes because they earn a highly dispro­por­tionate amount of income. This is, of course, a conse­quence of growing income inequality in the United States, which is at a level not seen since before the Great Depression. 

Whether it’s Steve Forbes promoting his flat tax proposal in 1996 and 2000 or Rick Perry and Newt Gingrich in the 2012 pres­i­dential race today, the idea to sweep away our current tax system and replace it with a single rate, flat income or national sales tax (called the “Fair Tax”) has become a perennial campaign issue for Repub­lican pres­i­dential candidates.

The simplicity of these proposals has much appeal for many Amer­icans, who believe they would make filing taxes less complex and, at the same time, stop wealthy indi­viduals from being able to game the tax system.

A deeper look, however, reveals that both the “fair” and flat tax are very regressive compared to our current system. One recent analysis of a typical flat tax proposal from last year shows that it would result in an average tax increase of $2,887 for the bottom 95 percent of Amer­icans, while those in the top one percent would receive an average tax cut of over $209,562. Furthermore, the Institute on Taxation and Economic Policy’s analysis of the Fair Tax points out the under this system, the sales tax rate would have to be set at a polit­i­cally and admin­is­tra­tively unfea­sible rate of at least 45 percent, and, the result would be the bottom 80 percent of American’s paying an average of 51 percent more in taxes compared to our current system.

It’s also important to note that “complexity in the tax code,” which a flat tax system purports to fix, is not caused by our progressive rate structure; rather, it’s the multitude of loop­holes and tax breaks, all of which could easily be elim­i­nated while keeping a progressive tax rate structure in place.