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M.D. Harmon: Tax Freedom

taxes
We have just experienced Tax Day on April 15 – in this year that marks the 100th anniversary of the federal income tax – but on average, Americans didn’t reach national Tax Freedom Day until April 18, according to figures compiled by the Tax Foundation, a nonpartisan organization that researches tax rates.

Tax Freedom Day is the date on which we stopped working for government (federal, state and local) and started working for ourselves. Up to this point each year, every dollar Americans earned went to government; from now on out, every dollar goes into our own piggy banks.

Last year’s date was five days earlier, on April 13. The difference is attributed to increases in payroll and income tax rates in last year’s budget deal, plus added investment and excise taxes under the Affordable Care Act – also known as Obamacare, whose full impact is yet to be felt.

But that’s the national average. Because state taxes vary widely, each state’s Tax Freedom Day is different. For example, the earliest date it falls on is March 29, for people who live in Mississippi and Louisiana.

The latest date is in Connecticut, where hard-pressed Nutmeg State taxpayers don’t start working for themselves until May 13. New Yorkers will work for the taxman until May 6, and New Jerseyites until May 4.

However, Mainers have been working for themselves for more than a week, as April 8 was our day of liberation.

HOW ABOUT NEIGHBORING New Hampshire, where residents boast of not having sales taxes or a broad-based income tax? (Interest and dividend income is taxed there, however.)

Granite Staters, you might be surprised to learn, don’t earn their way out of tax debtor status this year until April 15, nearly two weeks later than Maine. Why the difference?

Partly, it’s because per capita real estate taxes are about $700 higher in New Hampshire than here. But even with that, it still ranks below Maine on total state and local tax burden (Maine was 9th highest in 2010; New Hampshire was 44th).

But the full answer to the reason for New Hampshire’s later Tax Freedom Day, sadly, won’t be a comfort to Mainers. According to Tax Foundation figures, New Hampshire residents earn much higher average incomes than Mainers, and thus pay more in income taxes to the IRS.

The population of the two states is very close, nearly 1.4 million each, and yet New Hampshire in FY 2012 paid a total of $8.4 billion in federal income taxes, while Mainers paid $5.5 billion.

Why the difference? New Hampshire’s residents’ 2012 per capita incomes are $47,100, compared to $39,500 for Mainers. If you’re better off, you pay more federal taxes, even if your state taxes are lower. The difference is nothing to gloat over.

Indeed, neither is the “progressive” income tax, a century-old levy that started off small (at 7 percent of income over $500,000!) and has grown to be the furthest thing from fairness.

That’s because it taxes the most productive more heavily, penalizing them for success under the Marxist principle of “from each according to his ability, to each according to his need” — with government defining both “ability” and “need” according to its own political priorities.

AS PAUL KENGOR, PROFESSOR of political science at Grove City College in Pennsylvania, wrote in Investors Business Daily on April 12, in 2012 “the wealthiest Americans – the top 10 percent of which already pay more than 70 percent of federal tax revenue – will be paying more in taxes this year than any time in the last 30 years.”

And yet, there is not enough money among the wealthiest of us, even at confiscatory rates, to pay our current bills. It will not be long before the taxman’s reach extends further and further down the income tables, ending up deep into the pockets of the middle class.

As a sign of that, President Obama’s new budget, released last week, reportedly contains more than $1 trillion in new tax increases over the coming decade.

According to Patrick Brennan, writing April 12 on National Review Online, stories that cited a figure of around $580 billion in new taxes in the next 10 years don’t count other revenues the budget says are coming from problematic “health savings ” under Obamacare or supposed “revenue-generating” projects that are by no means assured of success.

In fact, Brennan writes, “The Congressional Budget Office’s baseline from February of 2013 … predicts that the federal government will raise $40.241 trillion in revenue through 2023. Under the president’s plan, that number is $41.231 trillion,” which is $990 billion higher than Senate Democrats proposed.

While most of the decade’s new revenue comes from projected economic growth, the gap between those CBO projections and the president’s budget is still above $1 trillion.

THAT HAS LED SOME to call for new thinking on the topic of taxation. While I favor a flat income tax with few exemptions that could reduce tax forms to a single page, and others favor a “fair tax” on sales that taxes expenditures, not income (a good idea in the abstract, but incredibly complex in execution, in my opinion), one man has an intermediate idea.

John H. Cochrane, a finance professor at the University of Chicago and a fellow at the Hoover Institution, writing in the Wall Street Journal April 14, says in his essay, “America Needs an Alternative Minimum Tax,” that tax-and-spenders “keep coming back, like the villains of a good zombie movie, chanting ‘more taxes, more taxes.’”

He harks back to the Alternative Minimum Tax, originally passed to keep top earners from escaping some tax responsibility, but because until this year it was not adjusted for inflation, it eventually raised the taxes of millions.

Now that the AMT’s flaws have been fixed, Cochrane says, we need to “start a national conversation” on the question, “How much is the most anyone should have to pay?”

At what point, he asks, do taxes indisputably start to harm the economy and produce less revenue — “when government takes 50 percent of people’s income? Sixty percent? Seventy?”

He comes down right at the midpoint: “I like half, but the principle matters more than the number.”

What’s the principle? Confiscatory levels of taxation harm the nation as a whole by taking money out of producers’ pockets so governments can spend it for political, not economic, reasons. Plus, they kill the incentives that make people work hard and build businesses that hire workers who expand the economic pie and can pay taxes on their own.

So putting a cap on the percentage of income that must go to the government is a damage-control measure that will ensure that our economy, now considered by progressives to be a cow with infinite amounts of milk to give, continues to grow.

The “AltMaxTax” would be “most important for the backstop promise it makes to young people and entrepreneurs,” Cochrane writes. “Yes, start a company, go to school, work hard, invest, hire people. We guarantee you that no matter what happens, no matter how loud the zombies chant, no matter what clever ‘revenue enhances’ they come up with, you will get to keep some reasonable fraction of what you earn. Go for it.”

Thus, next April 15, he wants us to add up all the taxes we have paid, divide our total incomes in two and get refunds for everything we paid that exceeds that final number.

The actual formula, because it needs to take other types of taxation into account, would be more complicated than that. But the result would not.

And besides, don’t the progressives who thought up the idea of an Alternative Minimum Tax deserve to have the tables turned on them with an AltMaxTax as well?

M.D. Harmon, a retired journalist and military officer, is a free-lance writer and speaker. He can be contacted at: mdharmoncol@yahoo.com

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