Tax debates in U.S., Maine, focus on what ‘rich’ should pay

By Gordon Weil, Contributing Writer, © Maine Center for Public Interest Reporting | Aug 02, 2011

The Facts is a weekly feature that provides non-partisan and independent research, background and context on topics of interest to Maine people.

Taxes are the topic of the year.

The focus is mainly on taxing “the rich,” because both Republicans and Democrats agree that levies on low- and middle-income taxpayers should not be increased.

Changing the tax system comes under the label of tax reform, an ongoing attempt to make the system fairer. The system is now based on taxing people with higher incomes at a higher rate – called “progressive taxation.” The issue is all about how much wealthier people should pay.

The tax reform debate today has three key elements:

• What the tax rates are

• What counts as income for tax purposes

• What is the income level where the top rate clicks in.

What Maine did to cut taxes and spending

Take Maine, for example. This year, Gov. Paul LePage and the legislature agreed that, beginning in 2013, the top tax rate will be cut from 8.5 percent to 7.95 percent. This rate will apply to a married couple’s taxable income of $39,900 and above, adjusted for inflation. And what is defined as taxable income will be more closely aligned with federal tax law.

Does this mean that taxes will be cut for the wealthy? Yes and no. While the wealthy have incomes well above the amount where this top rate will apply, so do a great many middle-income people. In 2009, half of Maine families had incomes above $47,502.

Compare that with the Maine income tax in 1969, its first year. The top rate was 6 percent and it applied to incomes higher than $50,000. That would be the same as $308,000 today. Clearly, the top rate was originally intended to affect only the wealthy.

The net result of Maine’s tax reform, which includes several other changes, will be a $150 million reduction in the amount raised by the income tax. Because state government must by law have a balanced budget, that means there must be matching cuts in state spending.

Maine’s top income tax rate is among the highest in the country. Both Republicans and Democrats have been seeking to lower it, and the new tax law moves in that direction.

U.S. deficit debate: cutting spending, raising taxes or both?

The situation is different in Washington. The top tax rate is lower than it has been in many years.  From World War II through 1963, the rate was as high as 91 percent. It gradually came down to 28 percent in 1988. It is now 35 percent, set in 2003.

Top federal personal income tax rates declined over time. After hitting 28 percent, they rose when new loopholes were added. Maine rates started at 6 percent; now 8.5 percent, they are slated to decline to 7.95 percent in 2013.

To help reduce the expected shortfall in federal revenues, Pres. Barack Obama proposed increasing taxes on the wealthy by adding 3.5 percentage points on income above $250,000. That would bring taxes back to the level in the 1990s. Republicans objected, preferring to reduce the deficit by using spending cuts alone.

Obama gave up on raising the rate on the highest incomes. Instead, he proposed reducing or eliminating some tax breaks – officially known as “tax expenditures,” but often simply called loopholes – that benefit the wealthiest people and oil companies. That would not change the top rate but would increase what counted as income for the most wealthy.

That’s what happened in 1988 when rates were at their lowest. When rates were cut, many tax breaks were eliminated. When Congress started to put some back into the tax law, rates were raised. Then, the 2003 tax law cut the rates without reducing tax breaks.

Some Republicans say they would accept cuts in some tax breaks if rates were also lowered. They say that any tax reform must either produce no change in federal revenues – making it “revenue neutral” – or it must produce a tax cut to be paid for by more spending cuts.

Most Democrats insist that the result of tax reform must be an increase in money raised from the wealthy, notably investment chiefs who have recently earned big bonuses. Along with spending cuts, this money would be used to reduce the deficit.

When the deficit deal is complete, both spending and taxes will be part of the package, because both parties include both pieces in their proposals. Given the projected trillion dollar deficits ahead, major changes are inevitable.

Taxes are the fuel of government. If you believe that government should be reduced, cutting taxes not only affects citizens as taxpayers but also as consumers of government services, who must accept less.  If you believe that many government services are essential, then cutting taxes is not desirable.

Thus, to a considerable degree what is really at stake is not only tax reform but competing views on the role of government.

Gordon L. Weil is a contributing writer at the Maine Center for Public Interest Reporting (pinetreewatchdog.org).  He is an author and publisher and served as a Maine state agency head.  Weil was also a correspondent for the Washington Post and a columnist for the Financial Times. He is a former Harpswell selectman. He may be contacted at weil.gordon@gmail.com.

Top federal personal income tax rates declined over time.  After hitting 28 percent, they rose when new loopholes were added. Maine rates started at 6 percent; now 8.5 percent, they are slated to decline to 7.95 percent in 2013.
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Comments (10)
Posted by: Phil Edwards | Aug 03, 2011 12:31

I think we are discovering that in the world of foreign relations, the term "friends" is very tenuous, subject to change.  

 

While the total amount is small compared to the entire budget, it is a start. Why not gut the Department of Education? Why give money to the NEA;unless, one can see some form of beneficial artistry in covering a six foot granite penis with peanut butter.   



Posted by: Mary Beth Thomas | Aug 03, 2011 10:14

I'm afraid I got lost in all the zero's there...  Sounds like we make it very worthwhile for countries to be our "friends" abroad.  You could say that kind of foreign aid is "money in the bank", but, outside of benefit to our military-industrial complex, I fail to see how our involvement in either Iraq (which Iran will take over as soon as we are out, making a much bigger problem) or Afganistan benefits our country- Like pouring money down a rat hole in my mind.  Of course, being able to exercise/develop all our military hardware in those theatres ourselves reduces our need for Israel to do it for us by proxy...

 

Isn't the expression, "Charity begins at home"?



Posted by: Phil Edwards | Aug 03, 2011 09:11

oops!...clicked too soon....the source is Vaughn's US Foreign Aid Summary web page



Posted by: Phil Edwards | Aug 03, 2011 09:10

JM,speaking of "cut backs", here's a place to start. From 2001 to 2010,inclusive,we gave Israel $27,498,000,000 in aid. In that same period we gave Egypt $17,966,000,000 in aid. From 2001 to 2007,inclusive, we gave $19,558,000,000 to just  sixteen nations. $410,000,000 of that number went to Bosnia for reparations:what in the Hell is that all about? And,figure in all the billions of dollars we have sent to other nations around the world.



Posted by: Mary Beth Thomas | Aug 02, 2011 15:39

I am REALLY having a hard time seeing your point here, Andy.  I can't think of anyone that would choose to pay more taxes.  You seem surprised by that somehow...   It's called HUMAN NATURE.  It's also a discussion that is so far off from the current national debate as to be totally irrelevant.  The issue before us now:  Will the new legislation on the debt ceiling and Federal cutbacks make the Great Recession better or worse?   And when it comes to tax reform, which clearly should be a big piece of the solution, will the debate be just as polarizing as the debt ceiling issue considering that any change will certainly result in winners and losers?   And how much tax do you think all those wealthy folks and businesses would be paying if they didn't have the loopholes?  Talk about hypocrisy, all those that argue for free market and then do everything possible, fair or unfair, to protect/enhance their profits and shut down the competition?



Posted by: Andrew Carpenter | Aug 02, 2011 14:54

In Massachusetts where there is no shortage of wealthy blue-blood liberals, taxpayers have the choice to pay at a higher tax rate. All they have to do is check a box.

Care to guess at how many people do this?

The average is about 0.1% of taxpayers choose to pay at the higher tax rate.



Posted by: Mary Beth Thomas | Aug 02, 2011 14:36

Phil, check this out:  Military Bases.  The interesting thing with this is that it is deceptive in that many of the bases listed are actually garrisons which can be multiple but different geographically located facilities under one local administrator.  For instance, Ansbach, Germany, is actually 7 geographically different facilities.  Check out Italy, which on the link above shows as having 7, then look at this list compiled by Italian non-military:  List of Over 100 US Military Installations in Italy, with Map and Descriptions.

Granted, that list is from 2007, but you can't tell me they've closed 93 US Military Installations in Italy in the past 4 yrs.   The Western Europeans were exceedly grateful that we were there to hold back the Soviet Union after WWII.  But after the USSR collapsed in '89 (?) the Euro and Pacific Zone Countries are asking more and more why we're still there, in spite of the many economic advantages to their economies under the various SOFAs (Status of Forces Agreement).



Posted by: Phil Edwards | Aug 02, 2011 13:24

We have to keep our eye on the ball. The problem is not about revenues coming in--- it's about too much going out.

 

The Department of Human Services has over 400  entitlement programs!! The Department of Education does not educate anybody;dismantle it.  We are still protecting Germany from the Soviet Union, which doesn't even exist anymore. Why have military bases in England? Or other spots in the world? Why keep sending billions to Africa so they can continue to breed, consume, die, breed, consume , die, breed ,consume ,die. Why are we the world cops? Why do we jump at every chance to save the world?  Next time we have a national disaster watch your TV and try counting the foreign flags there to help us for a change. What a joke. Why do we feel the need to protect everybody? Don't tell me it's to bring freedom and liberty to the downtrodden. If that was the case,why did we not attack the Soviet Union, Poland, East Germany, Yugoslavia, Chechoslovakia (I can't even spell that one!), Hungary, Rumania, Albania, Cuba, North Korea, Red China, and all the tin pot dictators in South America, and all the warlords in Africa. Somebody once said that you only fight the wars you can win. Well, we did defeat Grenada with her army of five generals and one Private. We took on a bunch of rice pickers in Southeast Asia, needlessly lost 55,000 brave soldiers, and tossed in the towel.  

 

There is planty we can do to cut back on the money going out. somebody in DC has to have the nads to stand up and do it---and that's the problem.  



Posted by: Mary Beth Thomas | Aug 02, 2011 10:07

Andy, care to look at taxes as a percentage of disposable income??

 

Actually, I'm misusing the term.  Should be "descretionary income" (income less taxes and necessities).   "Disposable income" is income less taxes.   See: Disposable income.

 

Point being that there is a world of difference between having a few thousand and a few million in descretionary income, so the IRS figures you cite are really meaningless.  The question is how much money do people have left over after taxes and basics.   For those with $million+ as net, it might mean one less new Mercedes.  For the typical middle income or working person, it might mean the difference between getting the old clunker fixed or getting a newer used car.  I'd rather have huge income and pay a lot of taxes than have marginal income and pay just a little taxes.



Posted by: Andrew Carpenter | Aug 02, 2011 08:46

Inconvenient facts courtesy of the Internal Revenue Service:

In 2008 the bottom 50% (anyone making less than $33,048) paid 2.7% of federal individual income taxes.

In 2008 the top 5% of all taxpayers (income split on this group was at $159,619) paid 58.72% of all federal individual income taxes.

In 2008 the top 0.1% of earners in 2008 (140,000 tax returns with an the average income of approximately $6 million) paid 18.5% of federal individual income taxes.

So after all the demagoguery who is really paying their fair share of taxes?

 




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