Tax Freedom day in Canada is June 6; in the United States it is April 12. In the United States, 50% of wage earners pay only 3% of the total income taxes. Do you see a problem?
In a post earlier today, I mentioned that VAT/GST/HST is unfairly excluded from the Foreign Tax Credit because it is not an income tax. This creates the possibility that US persons in Canada and Europe, are subject to double taxation, especially those with unearned income who live off of interest and dividends.
But don’t get me wrong. As unpopular as the GST/HST is, I am all in favor of it. It means that everyone who consumes products has to pay some taxes, though I do wish that the total tax burden in Canada was less. In the United States, there is no GST or VAT. That is part of the problem.
Tax Freedom Day is June 6 in Canada, and I wish it were in February. In the United States, Tax Freedom day is April 12. The IRS is coming after us Canadians to pay taxes, when the vast majority of Americans don’t pay as much as we do.
This problem is related to democracy. In order to get votes, if you are US congressman, you never raise taxes on the majority of your voters. The Bush tax cuts, for example, contrary to the constant rhetoric coming from the media, relieved those under the average income of virtually all federal income taxes (not payroll Social security, etc.). Consider this chart:
- The top 1 percent: Americans who earned an adjusted gross income of $410,096 or more accounted for 22.8 percent of all wages. But they paid 40.4 percent of total reported income taxes, an increase from 39.9 percent in 2006, according to the IRS.
- The top 5 percent: Americans who earned $160,041 or more accounted for 37.4 percent of all wages in 2007. But they paid 60.6 percent of the country’s total reported income taxes, up from 60.1 percent a year earlier.
- The top 10 percent: Americans who earned at least $113,018 paid 71.2 percent of the nation’s income taxes, up from 70.8 percent a year earlier.
- The top 25 percent: Americans who earned at least $66,532 paid 86.6 percent of the nation’s income taxes, up from 86.3 percent a year earlier.
- The top 50 percent: Americans who earned at least $32,879 paid 97.1 percent of the nation’s income taxes, up from 97 percent a year earlier.
- The bottom 50 percent: Americans who earned less than $32,879 paid 2.9 percent of the nation’s income taxes, down from 3 percent a year earlier.
This should make those of us in Canada extremely, outrageously angry. The IRS is coming after us for taxes. And yet we pay, we pay and we pay. But the 50 per cent of wage earners who are under the media income in the United States are paying only 3 per cent of the total income taxes in the United States (and no VAT or GST).
During Occupy Wall Street, we heard about the 1%, yet the 1% pay 40% of all income taxes in the United States. Seems to me that they are paying their fair share. When too much of the tax burden falls on the high income earners, they are tempted to expatriate their wealth, their businesses and the jobs they provide. The rich go away, and they hide their money in tax havens, and the IRS has to go after them with a great big club that whacks a bunch of innocent US persons living overseas instead. Such a solution is no solution but rather demagoguery.
Does this make you angry?
I suspect that in all countries that use a system of progressive income taxation that most of the “income tax” burden is borne by a small percentage of people. When it comes to taxation: the question is NOT “what is fair taxation”? The question is “what is the least unfair method of taxation”?
The starting point should be: why does taxation exist? What is it for? Some would say “taxes are the price we pay for civilization”. This means that tax revenues are used to provide a variety of public services.
Two points about public services:
1. They are used by the people who reside in the country. This is why countries (U.S. excepted) tax residents and not citizens. Citizenship-based taxation should not exist.
2. They are used disproportionately by those who are NOT rich. After all, the rich (whoever they may be), presumably have greater choice. They can send their children to private schools, They can afford private security. They can afford private health care, etc.
Therefore, it is logical and just, that everybody pay tax. This includes those who are not rich and those who are rich.
When it comes to income tax: I favor a consistent percentage. Everybody should pay the same percentage of tax on their income. Furthermore, to keep it fair, there should be no deductions. After all, the deductions favor those who can afford the expense. So, lower percentage of tax, everybody pays the same percent, on a broader (no deductions) base of income.
Next, consumption taxes are important because some people don’t have income (they spend other peoples money). This is a way of ensuring that the actual people who live in the country and consume goods and services in the country pay taxes. After all, everybody has police protection and the fire department.
The U.S. needs a broad based value added tax. The same thing that exists in the rest of the world.
After all, it is unfair if not everybody contributes.
I don’t think the problem is democracy. After all, other democracies have these things. The problem is:
U.S. politics is extremely partisan. It is based on winning elections and not on public service. The political parties are nothing more than private clubs. Furthermore, democracy – U.S. style – is really an exercise in using the political process to get somebody else to pay your bills.
I agree. The US has enjoyed on thing different than all the other democratic nations: the world’s reserve currency. I will post on this thought later. Thanks.
@petros But the fact that the US has a reserve currency (still major, but waning?) allows it to finance its irresponsible spending and debt, and this pushes US persons abroad into higher tax brackets despite not having the purchasing power in their home countries correspondant with the higher tax brackets. Again, we may add “unfair” to the power of N to “unconstitutional”.
@ Jeff This is a major problem for countries with strong currencies like Switzerland (at least until it was pegged to the Euro). I decided to relinquish because of the HEART Act, and dollar devaluation was a major concern. Now that I am no longer a US citizen, my information on form 8854, if I ever file it, the exchange rate will be fixed on the rate of April 7, 2011.
@Petros,
Great post!
I think the “flight of the golden geese” is what the USG fears the most. If the golden geese go, too much tax revenue goes with them – a very poor business model for the USG to depend upon in the first place.
Flight of the Golden Geese:
Unfortunately, Americans abroad (who earned their money outside the US) are also perceived to be in the same category.
Spartacus
@ Sparty The animals are now trying to get more from neighbouring farm animals who used to belong to IRiS’s farm. Lazy animals are dangerous animals.
Ha ha, well said.
Pretty difficult to live on less than $32,000 if you want to eat, have shelter, wear clothes etc. Not sure how much more people in that bracket could pay in taxes…
@Peg: So let’s go after Canadians? I think everyone should pay some taxes. But going after people in other countries is called imperialism. Everyone can afford something. If people don’t pay something, then it leads to class warfare and soak the rich attitudes, eventually civil war, which is coming down the pike in the US.
But you are obviously right. I’d like to see the entire public sector shrink a little and then it would be possible to live on lower wages.
@Peg, they don’t. I knew a second generation single mexican girl 19 years old with lotsa kids. She worked for me briefly there. Her favourite time of the year was tax time because she got a HUGE refund check from the US government. She was essentially paid for popping out kids.
If my memory serves me correctly, she got back something like $5,000-$8,000. I know kids cost a lot of money, but she was also getting food stamps.
Work was too “frustrating” for her, so she quit after about 2 weeks. She didn’t want to work!
@ geeeez That’s why the US government has to look far and wide for new taxpayers, like non-compliant Canadians or Brazilians.
Pingback: The nature of the beast: feeding on expats | The Isaac Brock Society
Pingback: The Isaac Brock Society - Election Day: Get revenge, Vote