TAX

What Real Taxes do you pay? Counting GST, ACC plus income taxes
it adds up to quite a lot. What of other compulsory payments, fees and charges do you pay? Rates can be around $3,000 per year. Rubbish fees, water fees, dog registration, vehicle registration, and other licenses, charges and penalties to compulsory enforcing bodies, like libraries too for instance, can amount to significant private costs to you. Plus Student Loans. All up what do you think it is? It is a large proportion of an average persons wage, salary or income. Counting all of the above, plus variable amounts to compulsory collecting bodies (depending on circumstances) for other things (fines or penalties for example; both civil and financial) then broadly speaking taxes paid to public institutions can amount to around nearly half of an average, 2012, NZ persons total income. Fifty percent! As much as that? YES, nearly 46% or more, easily.

Do the sums, in round percentage figures, for your own income.

(Allow a little downwards for percent of Percent in your calculation)

Income taxes are NOT all the of the REAL TAX story.

Average Income NZ = $40,000 @ 19%: plus15% GST. GST alone is 34% of that income, or, $12,500 plus 2K for ACC for some. (which equals 38%) plus, for others Rates taking it to 44% of your income, with extra fees, fines, penalties, sundries, consents etc taking it easily beyond 46% ... on its way to nearly 50%. Thus this degree of State intrusion into your life is coercive, compulsory, invasive and wrong. In fact such coercive, punitive and compulsory taxes, fees and levies are totalitarian or even fascistic in operation. How ironic that fascism is at the very heart and core of our beloved liberal democracy. Where the laws are reversed and you have to prove your innocence! Fight back for really lower taxes now. Freedom from fascistic tax laws now. 'Colonial' NZ once paid NO income, let alone other, taxes. Now you can see why fascistic statists love big taxes: more power for them. Colonial days were days of FREEDOM! Given that recent research shows that 80 percent - yes 80 percent! - of New Zealanders dont pay any nett tax at all after tax credit and working for families subsidies the Government had better deliver tax cuts to the 20 percent of taxpapayers who pay for everything any government does. Thats right, only 20 percent of us (plus companies) pay for the health system; the education system; 30,000 public servants; new ships, planes and trains.

If Keys doesnt make a real tax cut, then more of us will catch a plane to Australia, We call the 50 cents in the dollar the effective marginal tax rate or as there is only 100 percent to pay in any case: as we approach 45% something akin to tax cannibalism occurs so that any increase in the real tax rate above that actually lowers the productivity side of things (where the 50% on the government expenditure side are considered un-productive {though this is not always strictly true, there are Government trading departments that do not, or refuse, to pay any taxes!}, while only nett taxpayers can be considered actually productive and fulfilling real needs in a market costing and tested type of sense, in that having to eyeball customers ensures it) so that a recent three percent increase of GST actually lowers productivity and the total tax receipts by that self-same 3%, in withdrawing said amounts directly from the local economy whence it is paid. We see this also locally in Newtown: where too these three Red Yellow and Blue sheets from my artwork entitled Whos Afraid of Red Taxes, and Yellow Liasons, with Blue Rights? (Taken from Barnet Newmans similarly famous title in response to the red, yellow and blue primary colours of the Dutch DeStihl geometric visual artist Piet Mondriaan) are placed on the 3% of abandoned bankrupt Newtown businesses that represent an exact real-world proportional result of the recent 3% increases in GST. As 3% of spending by poorer people was precisely withdrawn from Newtown and spent overseas. An increase leading downwards, hardly a successful way to govern. Thus meaning exactly three percent of marginally struggling businesses had to close. A business accountant recently confirmed this in that 4 of his accounts closed their doors last weekend, out of his 160 business accounts. As GST continues at this new higher level next year a further three percent of businesses that remain must fold in 2013, with another 3% folding in 2014 and so on. All because the unintended, tax-cannibalism effect occurs. Well, at least we hope it is unintended. This is the only clear economic effect from policy seen over this period. Why, as an artist am I even interested in these things? Well for starters my father Maurice Joseph OSullivan retired as the most senior Treasury official of the Waikato tax district and it becomes me belatedly to create art on things that such a numerically acute man would appreciate. He was born in an

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economic zone that no longer exists: a town with a school, hotels and a post office called Taylors Mill, in the National Park King Country, in the rata?.... timber landscape of trees forest etc 1926. Tax rates then were very low and men worked very hard. From colonial days where the real overall tax rate was just ten percent, approximately just that 10% were on the Governments payroll. This is our real historical freedom: where the money a man earns by his own efforts mainly remains in his own pockets to feed his own wife and children well, and so it was for all other men, that was when New Zealand grew in liberty. Then came a period of insecurity where greater control and management increased and we lost all masculine freedoms. Women got the vote and community collapsed, as women network together freely, community is the currency for women. This collapse of social consciousness creates guilt and anxiety and the artificial need for community initiatives: money pours into health, education and welfare, the main concerns of women in regard to monetizing community, yet fails to stem insecurity, and in fact creates more by withdrawal of womens free association, in non-monetized relationships, basic altruism breaks down and the paid, coerced and compulsory taxed versions cost vastly more than the previously freely given. Nor do they perform nearly as well. TOP TEN AS MUCH AS BOTTOM 40 PERCENT OF WHOLE WORLD Rothschild owns 50% of world! 500 Trillion accumulated, collateralized, gold, diamonds etc. Can we convince them to do ..? NOTES Killing goose that lays the golden egg. Straw broke camels back. Cultural myths that inform us of western economy prosperity set aside in multi cultural confusion. This is how our wealth was built, otherwise lost. Nett tax takers/ versus nett tax makers American revolution right There is only 100 percent. 15% off everything you buy locally/ moved overseas from gov invest. So that increasing tax reduces take; to tarry & take motto 67% possible because of closer free sex, drugs, booze, clubs, gambling etc in former soviet Lithuania etc. otherwise unsustainable delusion. Widespread

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absenteeism. Bell shaped curve Tax rich little to gain 300 families already pay 80% of all tax. Tax poor? Ie GST? Unfair. Cuts must come from bulk middle class. Workers bosses old hat. Reuters owned by Rothschild. Not on workers as they build country. Not on tax makers but ON nett tax takers. But not poorest. Half nett takers but not poor Civil service since haslfxhalf = 6%} 12% just to equate 2011 fully 12 percent must be sacked NOW! if it worsens which it will staff cuts and wages, overseas temp labour contracts etc? lower standards. Therefore on civil service: offshore hospitals international outsourcing Digital education 60 in class. Capital punish is cheap 3 times and OUT. New Vision for NZ Fishing Maui myth As GST increase reveals this tipping point then to take back to 2011 level Means no vote women= community, as desired. When state sanctions new morality attitudes to a new baseline morality solidify, but where is the new upper line: beastiality, snuff movies? Never happened before? All go down together? PERMANENT Max human litter tax cannibalism, UN cars oil = greenies. Hist of Green movement. Immigration false solution. NZ last place on Earth for green washed by a thousand breezes. Socialism, costs of Keynes=debt No free lunch if Roths dead then who gets crumbs of trillions? Pope Jews not Judea but Kahzaria ashkenzis fract banking What if tax 100% wither the State? State house lived state Job, State bus, car train food etc health school? = slavery What wrong dull boring safe. OSullivans law: tax cannibalism increase tax take, lowers tax make: limit begins fron 45% / this 5% tax differential = human motivation= lawful profit

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and must be built into any meaningful constitution proportioanately. .. There are now more than 312,000 businesses employing less than 19 people - thats 96.3 percent of all New Zealand businesses. Some 86.8 percent employ five or less people and 64.7 percent have no employees. A recent study from the Ministry of Economic Development (www.med.govt.nz) found that the number of SMEs increased 10 percent in the year to February 2004, although the proportion of SMEs remained relatively constant. The study says that SMEs accounted for 37 percent of the economy's total output in 2003 and that firms with five or fewer employees had the highest average real profits per employee. mOST OF THESE HAVE BUT one PERSON! tAXOCRACY

April 13, 1999 Where's the Tax Revolt? by J. D. Foster, Ph.D. Reporters and Republicans are united in asking the question: Why dont Americans demand a tax cut? Nearly every day, economists at the Tax Foundation are asked this question.

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With the tax burden rising year after year, the question has taken on an almost metaphysical dimension, This years increase in Tax Freedom Day to May 11th underscores the paradox. Tax Freedom Day has now risen for seven consecutive years. For 26 years between 1969 and 1994, Tax Freedom Day varied in a fairly narrow range between April 28 and May 4. It is now 7 days above its previous cyclical peak. The source of the increase remains the same as it was last year and the year before: the combination of a growing economy and a progressive federal personal income tax. For example, taxes as a share of Gross Domestic Product rose to 20.7 percent. NZ 30 something percent This was the second highest ever, exceeded only in 1944 at the height of World War II spending. The bad news associated with this soaring tax burden is the increases of the budget deficit. the tax burden started pushing 20 percent of GDP and tell him its time for a tax cut. Conventional wisdom had it that tax compliance would plummet, taxpayer resistance would erupt, and the economy would falter whenever taxes got above that magic figure. What has changed? If the economy starts to choke, however, taxpayers may quickly shift their attention to the governments share of their income. When that happens they may again discover their tax revolt roots. Who Benefits From A Tax Cut

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by Scott A. Hodge Like you, I get a lot of junk e-mail. But I also read many messages from concerned taxpayers who give their insights into the tax code, and often their frustrations with it. Over the past six months, however, dozens of Tax Foundation supporters have e-mailed me the same parable that puts our tax system, and President Bushs tax cuts, in terms everyone can understand. Despite my attempts to identify the author, he or she remains anonymous. (It is not, as some e-mails have claimed, an economics professor in South Dakota.) So while another urban legend lives on, I want to share this story with you and relate it to some of the research we have done recently on who does not pay taxes in America. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100. They decided to pay their bill the way we pay our taxes, so they divided the bill like this: The first four men the poorest would pay nothing. The fifth would pay $1, the sixth $3, the seventh $7, the eighth $12, the ninth $18, and the tenth man the richest would pay $59.

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One day, the owner threw them a curve (in tax language, a tax cut). Since you are all such good customers, he said, Im going to reduce the cost of your daily meal by $20. So now dinner for the ten only cost $80.00. The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still eat for free. But what about the other six the paying customers? How could they divvy up the $20 windfall so that everyone would get his fair share? The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybodys share, then the fifth man and the sixth man would end up being PAID to eat their meal. So the restaurant owner suggested that it would be fair to reduce each mans bill by roughly the same amount. And so the fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $12, leaving the tenth man with a bill of $52 instead of his earlier $59. Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings. I only got a dollar out of the

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$20, declared the sixth man, then, pointing to the tenth. But he got $7!. Yeah, thats right, exclaimed the fifth man, I only saved a dollar, too. Its unfair that he got seven times more than me! Thats true! shouted the seventh man, Why should he get $7 back when I got only $2? The wealthy get all the breaks! Wait a minute, yelled the first four men in unison, We didnt get anything at all. The system exploits the poor! The nine men surrounded the tenth and beat him up. The next night he didnt show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered, a little late what was very important. They were FIFTY-TWO DOLLARS short of paying the bill! Imagine that! And that, in a nutshell, is how the income tax system works. Like all e-mail stories, the numbers arent exact but see pages 10 and 11 for statistics that show how true-to-life this story is. The people who pay the highest taxes get the most benefit from a tax cut. We dont have to feel sorry

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for them because they earn a lot too, but a fair tax cut goes to highly taxed people. If overtaxed, high earners will react predictably theyll earn and invest less. One of the most exciting projects we started last year at the Tax Foundation is called Putting a Face on Americas Tax Returns. The goal is to study the demographics of American taxpayers to find out who really bears the burden of taxes. For example, although the top 10 percent of tax filers are routinely disdained in the press as being too rich to merit a tax cut, the Bureau of Labor Statistics tells us that an assistant high school principal married to an assistant fire chief is in the top 10 percent statistically rich, but decidedly middle-class by any reasonable standard. When estimating the value of tax cuts, the January 12 edition of Time contained a typical presentation: Although Bush touted the fact that the average tax bill would shrink $1,083, almost half of all filers would get reductions of less than $100, according to the left-leaning Center on Budget and Policy Priorities.

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The reason this statement is misleading is that the people who make up almost half of all filers owe almost no income taxes to begin with. Indeed, this year, 35.8 million tax filers (representing 69.6 million people) will have a zero tax liability. That is 26.7 percent of the roughly 133 million expected tax returns this year. The Bush plan will take 3.8 million more tax filers off the tax rolls (see story on page 11). The bottom line is that it is impossible to give income tax relief to people who do not pay income taxes. Unfortunately, when Congresss Joint Tax Committee or Congressional Budget Office calculates the distributional impact of the Presidents plan on taxpayers, they include all 133 million tax filers, including the millions who owe nothing. If distributional analysis is to be the standard by which Washington judges any tax plan, then we should calculate the plans benefits to taxpayers those filers who have a positive income tax liability. And that number shrinks with every new tax bill. The Cost of Closing the Tax Gap

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by Scott A. Hodge A few years ago, the National Research Council and the Institute of Medicine produced a headline-grabbing report that recommended dramatically higher taxes on beer and alcohol in order to dissuade children from drinking. The report estimated the number of kids who would stop buying beer because of such a tax, but made no estimates on the burden such a tax would place on responsible adults and legal drinkers. The Tax Foundation calculated the cost and found the tax would boost the tax burden on every Joe Sixpack by at least $500 per year. In other words, the tax would have a marginal impact on teen drinking - which is already illegal - but place a substantial cost on law-abiding adults. I am reminded of this study by the current debate over the so-called "tax gap" - the difference between what the IRS says taxpayers owe and what they pay. The IRS estimates the tax gap to be roughly $300 billion and the thought of recouping even a small portion of that amount has some Congress members in a tizzy.

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The question missing in this debate is, how much of an extra burden do we place on compliant taxpayers in order to raise a small amount of extra tax revenues from the noncompliant or those who make simple mistakes? Compliance cost is no small matter. According to the most recent Tax Foundation estimates, the total compliance cost to individuals and businesses of the current income tax system is roughly $275 billion and rising. The cost of this huge dead-weight loss to the economy should not be ignored. A study on small business compliance burdens that IBM conducted for the IRS found that the burden of just the income tax for a firm of 20-99 employees was 450 hours and $4,738. That translates into more than 11 days worth of paperwork. Employment taxes added another 229 hours - another week of paperwork. Even the best IRS estimates suggest strict reporting will only recoup a small portion of the tax gap. How much higher do we push that compliance burden in order to collect an indeterminate amount of tax revenues? Further, hastily proposed legislation could make the cure worse than the

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disease and hinder our ability to manage future challenges. The National Taxpayer Advocate identifies complexity in the tax code as a significant contributor to the tax gap. Indeed, ninety-four percent of non-compliance is attributed to mistakes made by people trying to follow the rules. A higher burden on taxpayers increases the likelihood of mistakes. If Congress wishes to see compliance rates rise, the evidence points to simplifying the tax code, not making it more complex. Lawmakers have argued that closing the tax gap makes us fiscally responsible. But the tax gap is a problem not because it threatens our long-term fiscal outlook; rather, it is a symptom of a burdensome and complex tax code that few understand. To improve fiscal responsibility and close the tax gap, the only long-term solution is tax simplification and fundamental reform. Today we are increasingly asking the tax code to direct all manner of social and economic objectives. The result is a Swiss cheese-like tax code rife with numerous preferences and special carve-outs for

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politically favored groups. As difficult challenges emerge, such as entitlement reform, the ability to collect revenue through a simple and efficient process will become crucial. It is easy to look at the tax gap and see a pot of gold. But it will hardly be worth it if it means a mountain of costly paperwork for compliant taxpayers and making future tax reform significantly more difficult. Scott Hodge is President of the Tax Foundation (http://www.taxfoundation.org/). Companies' Fair Share: Zero Percent by Andrew Chamberlain (The following article originally appeared in the February 20, 2007 edition of TCSDaily.com.) Conventional wisdom on taxes these days is that good taxes are progressive taxes. The more we earn, the higher our tax rate should be. And for nearly a century that logic has been etched into federal tax law, with progressive income tax rates rising along with Americans' rising incomes. The usual justification for those graduated rates isn't that they raise more money. It's that they're

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"fair." And what do we mean by that? Ask an economist and she'll tell you there are two basic approaches to tax fairness. One is "benefits received" which says taxes are fair if those who use the most government pay the most taxes. The other is "ability to pay" which says to forget how much government we usepeople who make more money should pay more tax. In today's policy world, ability to pay wears the pants. And although adherence to that principle doesn't require that tax rates be graduatedeven a flat 20-percent tax means rich pay more dollars than poorin practice ability to pay is the ethical centerpiece of America's progressive income tax, currently with rates from 10 percent to 35 percent based on incomes. So here's a question. If graduated tax rates on people are fair, are they also fair for corporations? I hope you're sitting down, because the improbable answer is that they're not fair. Even if we enthusiastically embrace progressive income taxes on people, progressive taxes on corporations don't follow at all. In fact, it turns out today's steeply graduated corporate tax

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rateseight brackets ranging from 15 percent to 39 percentare unfair to a large number of low-income workers and consumers. And once you see why, you might find yourself whispering among friends that maybe, just maybe, the fairest corporate tax rate of all is zero percent. Let's start with a simple example. Imagine two companies. One is a start-up that makes high-tech satellites. Like most start-ups, it's well-financed but earns no profits. It has rich customers, highly-paid employees, and very rich venture-capitalist shareholders. Now consider a second company. It's a large big-box retailer. Like most big companies, it earns handsome profits. Most of its thousands of employees earn low wages, and so do its customers. Its stock is publicly traded, and shares are mostly held by mutual funds feeding 401(k) retirement plans of workers, many of whom fall in the middle of the nation's income distribution. Question: which of these two companies should pay a higher corporate tax rate, given their ability to pay? At first this seems easy. The one with higher profits should pay higher rates. But look closer. What do

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you mean by the company's ability to pay? Every freshman economics class teaches companies can't bear taxes, only people can. Companies are just legal fictions that shove off taxes onto customers, employees and shareholders. The firm itself pays nothing. And so the age-old notion that we should hammer rich companies because "they can afford it" is really based on a simple misunderstanding. Personally, I blame lawmakers for the mix-up. They notoriously preach the gospel of "tax companies, not people" with campaign promises to shift taxes from families onto businesses. But business taxes are just a tricky way of dumping tax burdens back onto different people. So in the world of corporate taxes, the right measure of ability to pay isn't the profits of the Fortune 500. It's our own pocketbooks. Back in our two-company example, one earns zero profits but has well-paid workers, rich shareholders and wealthy customers. The other earns huge profits but has low-wage workers, poor customers and middle-income shareholders. How can a progressive corporate tax be fairly applied here? What's the logic

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in taxing poor folks who work and shop at profitable companies with a 39 percent rate, while rewarding wealthy employees and customers of unprofitable start-ups with a 15 percent rate? Yet that's what our current tax code does. And that leads to our take-away point. Those buildings downtown don't pay taxes, we do. So progressive corporate tax rates that treat companies like people aren't just silly, they're unfair. And unfair in an especially capricious way that should infuriate people who really care about tax fairness. If you can understand this simple argument, congratulations are in order. You understand something an army of Washington lawyers, economists and lawmakers who continually wring their hands about "companies not paying their fair share" do not. As if companies ever paid a dime. As if the only thing keeping Americans tethered to the yoke of taxation are those darn buildings, desks and cubicle dividers that won't pay their share of the tax bill. Sam Walton was rich. But the poor families who bought jeans at Wal-Mart this morning aren't. Why soak them for shopping at a profitable company? Why not tax the Waltons directly,

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and forget the rococo con game of corporate taxes altogether? Andrew Chamberlain is an economist at the Tax Foundation in Washington, D.C. Unique Opportunity Is at Hand for Far-Reaching Federal Tax Reform by Scott A. Hodge This commentary appeared in the July 1, 2008, issue of Budget & Tax News, published by the Heartland Institute. For the first time since 1986, the stars may be aligning for a grand bipartisan compromise on fundamental federal tax reform. Regardless of who wins in November, the next president and Congress will have to deal with the collision of two cataclysmic tax events: The 2011 expiration of the Bush tax cuts and the growing irritation of the Alternative Minimum Tax (AMT). The seeds for compromise lie in the fact that both sides have something to gain by addressing these problems at once. Naturally, Republicans want to avert the largest tax hike in history by maintaining

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the lower tax rates on income, capital gains, dividends, and married families with children. Meanwhile, Democrats will be brought to the table by the fact that the AMT is largely a Blue State problem, mostly affecting those living in high-tax and high-income states such as California, Massachusetts, New Jersey, and New York. 43 Million Pay Nothing The first land mine is the distribution of the tax burden itself. The 2001 and 2003 tax cuts knocked millions of lower-income people from the tax rolls. When Bill Clinton left office, some 29 million tax filers had no income tax liability after they took advantage of their credits and deductions. Today, the number of "non-payers" has grown to more than 43 million, or one out of every three Americans who file a tax return. And since so many lawmakers see the IRS as a giant ATM dispensing "refundable" credits, such as the Earned Income Tax Credit, it will be very difficult to convince them to support fundamental tax reform. With the nation's tax burden now so concentrated at the top--the top 20 percent of taxpayers pay about

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86 percent of all the income taxesany tax reform plan is caught in a rhetorical Catch 22; tax reform equals "tax cuts for the rich." Enter land mine number two: AMT and the interests of Democrats. Although the vast majority of households affected by the AMT earn between $100,000 and $500,000, Democrats have masterfully positioned it as a middle-income issue. Wrapping fundamental tax reform around AMT reform could inoculate the debate from the predictable class warfare diversions. Considering these land mines, how do we craft a politically realistic tax reform plan? Step 1: Eliminate tax exemptions and deductions. More than 80 percent of the benefits of these tax deductions flow to households earning more than $80,000, and more than half of the benefits flow to those making more than $118,000. Eliminating these deductions would solve several problems. It would free up dollars for marginal rate cuts to keep effective rates down, and it would add greater simplicity and equity to the tax code. Affluent taxpayers may be the initial beneficiaries of these tax exemptions and deductions. But in the

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end, the real economic subsidies flow to well-heeled interest groups such as the housing industry, state and local governments, and public employee unions. In particular, the state and local tax deduction allows local politicians and school districts to shift as much as one-third of the cost of any tax hike along to Uncle Samand thus other taxpayers. Step 2: Make any tax reform a tax cut and tax simplification. Next, one must recognize that tax cuts will always generate more support than a revenue-neutral tax shift. A 2007 Tax Foundation/Harris Interactive Poll found about half of all American adults would give up their credits and deductions for an across-the-board cut in their income tax rates. The repeal of deductions, as outlined above, would fund significant marginal rate cuts. However, the task of mobilizing the other half of Americans who said they were not sure or who rejected the idea will require the sweetener of a lower tax bill as well as the promise of a simpler 1040 form. Step 3: Continue to shield low-income earners with a super-deduction. Politicians are not likely to put the non-payers back on the tax rolls by shrinking the value of the

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personal exemption, standard deduction, or child credit. With the political consensus that some low-income people should be protected from income taxes, the practical solution is to collapse the various credits and deductions into a super-deduction that accomplishes what current policies already do inefficiently: Eliminate the income tax bill for a family of four earning up to about $42,000. Continuing to protect low-income taxpayers in this way will help earn goodwill from the left without actually creating any new programs. Step 4: Make everyone a stakeholder. An ideal plan would take this process a step further (as did the 1986 act) by slashing all tax rates equally, giving every taxpayer a stake in the reform. Better yet, the plan could condense the number of brackets to no more than two, as existed in 1988. Such a tax code would be simpler, fairer, and closer to the kind of efficiency economists have long called for. It would reduce the compliance costs for families and small businesses. It would almost certainly strengthen the American economy and help move the tax code back

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to its proper purpose of revenue-raising and away from its current distorted function of social policymaking. Step 5: Fend off the special interests. None of this is to say that fundamental tax reform will come easily or cheaply. With absolute certainty, every interest group and lobby will line the halls of Congress demanding their interest have protections carved into the new legislation. Advocacy groups of every stripe will take to the airwaves bemoaning the plight of their specific interest. They will scream that this new tax bill will evict people from their homes, leave children hungry on the street, and force seniors into destitution. Of course, like most cries from special interests, none of this would be true. What would be true is that the United States would enjoy one of the best and most effective tax systems the world over. The new tax code would still show compassion for the poor and take a hefty chunk from the rich, while becoming considerably more fair and equitable. Scott Hodge (hodge@taxfoundation.org) is president of the Tax Foundation. An earlier version of this

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essay appeared in the February/March 2008 issue of The Ripon Forum, www.riponsociety.org. Reprinted with permission. Top 10 Tax Stories of the Decade by TF Staff The decade that will end tomorrow (2000-2009) will go down in the tax history books as a relatively low-tax decade. The Bush tax cuts combined with annual patches to the Alternative Minimum Tax reduced taxes by trillions of dollars during the decade. Not since Ronald Reagan's tax cuts in the early 1980s had taxes been cut by so much. Despite all the tax cutting, opportunities for revenue-neutral fundamental tax reform were wasted or defeated by strong special interests. Looking ahead, huge fiscal deficits and new entitlements will likely mean that tax reform may come back on Congress' radar screenas an avenue for raising revenue. This decade of lower taxes will likely not extend too far into the next one, as Democrats appear set to raise billions of dollars in new taxes to finance health care reform, just one month into the new

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decade. In this commentary, the Tax Foundation staff takes a look back at the top 10 tax stories of the 2000s (as judged by the Tax Foundation Staff), discussing the economics and politics of each story, and looking ahead to how that story may continue to play out in the next decade. Top 10 Tax Stories of the 2000s 1. The Bush Tax Cuts 2. The Alternative Minimum Tax 3. The IRS, Rebate Checks, and Fiscal Stimulus 4. Influence of the Housing Lobby on the Federal Tax Code 5. Emergence of Environmental Taxation as Key Policy Issue 6. Health Care and Tax Reform 7. Growth of Tax Competition (Good and Bad) 8. Rising Popularity of Nanny Tax Policies 9. The Tax Gap 10. California's Decade of Fiscal Decay and 11. The Fair Tax Movement #1: The Bush Tax Cuts

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Candidate George W. Bush campaigned on tax rate reductions throughout 2000, and the rapidly increasing federal surplus helped make his case more persuasive. Even Vice President Gore proposed his own large tax cut plan late in the season. When elected, President Bush sent Congress a plan of specific rate cuts and credit increases that adhered closely to his campaign promises but disappointed free-market conservatives. Supply-siders thought cuts for capital gains, dividends and the top income tax rates would help the economy most. Instead the 2001 tax cut focused on immediate cuts in wage taxes for lowand middle-income people, especially: creating a 10% tax bracket and mailing each taxpayer a check for the current year's savings; raising the ceiling of the 15% bracket to protect middle-income couples from the marriage penalty; and raising the child tax credit from $500 to $1,000 and making it refundable The legislation did include tax cuts at the high end of the income spectrum, but those were scheduled to phase in over many years. The top income tax rate of 39.6% was only cut to 39.1% in the first year. No positive economic impact was noticeable during 2002, and pressure built for

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a supply-side tax cut. That was delivered in May of 2003 in the form of an acceleration of the 2001 phase-ins, plus a new 15% tax rate on capital gains (down from 20%) and a 15% rate on dividends (down from a high of 39.6%). The economy did turn up after passage of the 2003 cuts, and the argument will go on forever about whether the legislation boosted the economy or the economy was on the way up anyway. One long-term impact of the Bush tax cuts was the rapid growth of so-called nonpayers. In 2000 approximately a quarter of all tax filers ended up owing nothing for the year. That is, after all their deductions and credits were tallied, they got back every dollar that had been withheld from their wages during the year, and many got even more than that. Out of a desire to "cut the taxes" of these people who already paid none, Bush-era tax policy greatly increased refundable tax credits that result in cash paid out to people who already have a zero tax liability. The largest of those was the child tax credit, which in conjunction with a larger earned income credit expanded the number of people who have no

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liability to more than a third of all filers. To comply with Senate budgetary rules, the Bush tax cuts were enacted as 10-year temporary laws. President Obama campaigned against the Bush tax cuts vehemently during 2008, but he has taken no action to hasten their expiration due to the recession. The 2010 Obama budget projects making many of the Bush tax cuts permanent, but rates for capital gains, dividends, and high wages will rise. Estate tax law is expected to freeze at 2009 rates, preserving a portion of the Bush cuts but avoiding repeal. #2: The Alternative Minimum Tax The U.S. tax code has long been full of so many loopholes that some skillful taxpayers (often with the aid of their lawyers, accountants and lobbyists) have been able to avoid paying taxes completely. In response to the public relations nightmare of trying to explain why some wealthy individuals legally owed no income tax, Congress created the alternative minimum tax (AMT) in 1969. In theory, it sets a minimum percentage of income that must be paid regardless of credits and deductions. Most taxpayers could safely ignore the AMT in its early years, but inflation

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and real income growth gradually pushed more and more taxpayers into the ranks of AMT payers. When Congress indexed most of the tax code's parameters for inflation in the mid-1980s, the AMT was left out, compounding the problem. Because taxpayers pay whichever is highertheir ordinary income tax liability or their AMT liabilitythe Bush tax cuts of ordinary liability in 2001 and 2003 pushed millions more taxpayers into AMT in the past decade, putting it front and center every year in Washington tax policy. And so the 2000s witnessed the annual late autumn ritual of waiting for Congress to pass an AMT patch, which would retroactively raise the AMT exemption level just before the end of that tax year. When Democrats took over Congress and instituted Paygo rules, the promise was to "pay for" any AMT patch. But such a promise quickly dissipated as Democrats (who often represent districts hit heavily by AMT) were not ready to play a game of chicken with President Bush over AMT, despite Charlie Rangel's "Mother of All Tax Reforms" proposal that would have eliminated AMT by instituting a surtax on high-income taxpayers. After Bush left office, the final year of the decade saw relative calm

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on the issue as the AMT patch was passed early for 2009 as part of the $787 billion stimulus package. #3: The IRS, Rebate Checks, and Fiscal Stimulus Over the past decade the federal government has repeatedly recruited the IRS to deliver checks to millions of taxpayers. These are not the checks that the IRS would send out routinelytax refunds to people who overpaidbut rather checks designed to stimulate the economy by increasing federal borrowing and pumping the money into the economy by sending checks to taxpayers. Of course, in addition to the high-minded idea of improving the economy, politicians have the less high-minded idea that sending unexpected cash to voters is a good political strategy. Vote-buying could hardly be more brazen. It had been tried in 1975 and was deemed an economic failure by many analysts, but that didn't stop the Bush team from trying it again in 2001. After passage of the first Bush tax cut in May of 2001, the President's team decided that instead of just instructing the nation's employers to adjust their

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withholding down to the new, lower level of income tax, the IRS would send each taxpayer an advance of $300 ($600 for a couple), which represented the one-year value of the new 10% tax bracket. Even though the IRS's job doesn't include tracking the whereabouts of all taxpayers (thank goodness), the service did a good job of locating most eligible recipients and getting them the checks, albeit at the cost of auditing and other administrative work that was supplanted by this essentially political exercise. The political value of sending a "here's some moneyaren't we great?" cover letter was overwhelmed by the wrong impression it created in the minds of many taxpayers: that this check was the full value of the tax-cutting legislation, when in fact it was only a tiny fraction of the relief. The foolish exercise was repeated in 2003 with delivery of $400 checks to each taxpayer who was supporting a child 16 years or younger. That represented the one-year value of the higher child tax credit after passage of the second major Bush tax cut in May of 2003. Five years later the IRS had to play Santa Claus again when Congress passed a stimulus package that included sending checks of varying

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amounts to millions of taxpayers. The Obama administration also believes in the power of the federal government to micromanage the economy with fiscal stimulus, but at least it repudiated the mailhouse approach. In 2009, the new President's first tax bill adjusted withholding to deliver $400 to each taxpayer ($800 to married couples). The federal government, and by extension the states, have run amok with the idea of micromanaging the economy with dispersals of cash. The IRS needs a break in the coming decade, but it doesn't look good. The political appeal of using the IRS to deliver vote-buying cash is apparently too hard for our elected officials to resist. #4: Influence of the Housing Lobby on the Federal Tax Code It is well known in tax policy circles that the housing industry is powerful on Capitol Hill. As they have for decades, the lobbies for real estate agents, home builders and mortgage lenders constantly pushed one-sided talking points on Congress and the media about the critical importance of their special-interest tax breaks -- tax breaks that helped fuel a housing boom

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(turned eventual bubble). In 2005, experts on President Bush's tax reform panel recommended eliminating the tax deduction for property taxes, as well as converting the mortgage interest deduction into a more equitable credit. But the Realtors, Home Builders, and Fannie Mae and Freddie Mac launched an all-out assault on the reform proposal and effectively dealt the proposal a rapid death blow. But these lobbyists weren't satisfied with merely preserving housing's favored status in the tax code. As the housing bubble burst (something the National Association of Realtors said would never happen), they lobbied with their cronies in Washington like Georgia Sen. Johnny Isakson (a Realtor himself) for more tax credits for housing. And so now we have a standard deduction for property taxes paid. And now we have had three back-to-back-to-back versions of new tax credits for homebuyers all with the promise of being "temporary." These lobbies aren't ashamed of what they do. In fact, the National Association of Home Builders in 2008 publicly threatened to withhold contributions to members of Congress unless they expanded the "net

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operating loss" carryback provision that would benefit their industry. Even President Obama was unable to get his health care reform bill funded in the way he preferred. He wanted to cap high-income tax deductions (including housing deductions) at 28%, but the housing lobby's influence on Congress is so powerful that the idea was "dead on arrival." Our belated Christmas wish is that for the next decade the general public and members of Congress will turn a deaf ear to a housing lobby that should no longer be trusted as a source for policy recommendation. #5: Emergence of Environmental Taxation as Key Policy Issue After narrowly losing the presidency in 2000, Al Gore did not fade away. In the last 10 years he has helped move environmental taxation from the ivory tower to the real-world policy debate. Not every Democrat believes that global warming's destruction of the world is imminent, or that tax policies are the only answer, but the Democratic majorities in Congress have pushed for tax policies that they believe will keep global temperatures lower (Lieberman-Warner and Waxman-

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Markey). In fact, both presidential candidates in 2008 (McCain and Obama) endorsed cap-andtrade as a carbon-limiting way to prevent global warming. But even before the 2008 presidential election, the past decade witnessed enactment of myriad new tax laws aimed at getting people and businesses to "go green." Tax credits for hybrid cars and energy-efficient appliances appeared as new lines on the federal form 1040. They were easy to pass because their costs are less visible. The Energy Policy Act of 2005 was passed in response to public disgust over the rapid rise in gasoline prices. Signed into law by President Bush, it included all sorts of tax provisions supporting both clean energy innovation and traditional dirty energy. In 2008, candidate McCain's support for cap-and-trade didn't stop his Republican colleagues from attacking "cap-and-tax" as the potential ruination of the nation's economy. This opposition has combined with the so-called Climategate email scandal and the difficulty of international negotiation to make passage of a cap-and-trade regime or a carbon tax unlikely in 2010, an

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election year. #6: Health Care and Tax Reform The 2000s saw a lot of talk about reforming health care or health insurance, and the tax code was the favorite vehicle to achieve it. One bad tax provision in particular deserved that special attention, the exclusion from taxable income of employer-provided health insurance. But special-interest advocates and demagogues beat back every sensible attempt to improve the tax code in this area. Early in the decade, the Bush administration promoted medical savings accounts as a tax idea that would allow people to purchase health care in a more efficient way (high-deductible plans). In 2005, the President's tax reform panel proposed taxing the value of employer-provided health insurance, but that panel faded quickly and quietly (largely due to the housing lobby see #4). But health-related tax reform wasn't dead. In 2007, Pres. Bush proposed imposing both payroll tax and income tax on the value of employer-provided health insurance and then allowing a standard deduction for health insurance purchased. This too died quickly, though, ridiculed by Democratic opponents who

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criticized any proposal from an unpopular Republican president, despite the fact that the proposal would have made the tax system more progressive. Honest policy experts on the left such as those at Brookings and Urban fully supported taxing employer-provided health insurance, and they defended the president's concept, suggesting only that the new standard health insurance deduction be a refundable credit instead. Sen. McCain essentially endorsed this tax credit proposal as a candidate for president. He was attacked in a politically expedient and often dishonest fashion by then-candidate Obama and the labor unions for wanting to tax health benefits. As president, Obama has been pushing health reform generally, but not any specific proposal. It's somewhat humorous that the Senate health care bill, which Pres. Obama has said he supports, contains a provision that would tax health benefits. Unions want this killed in committee and replaced with other tax sources, preferably taxing millionaires. And that's where we sit on health care and tax policy at the end of the decade. Two health care bills

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that have drastically different tax plans are to be mashed together in conference in the first days of 2010. #7: Growth of Tax Competition (Good and Bad)

The 2000s were a decade of expanding tax competition, both internationally and domestically. Governments across the world, especially those in developing countries, slashed their corporate income tax rates in an effort to lure business to their countries. Other larger nations, except the United States, followed suit in cutting their corporate income tax rate. Attempts to lower the corporate income tax rate in the U.S. were proposed (such as that by Congressman Rangel) but only with replacement taxes on corporations. In 2008, the Treasury released a study highlighting the U.S. falling behind in the area of corporate taxation and suggested various reforms, such as a Business Activities Tax as a replacement to the CIT that would be similar to a VATall with the goal of making the U.S. tax system more competitive for business.

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Domestically, tax competition between states largely took the form of special deals made between business and state/local governments. Special tax breaks for building a plant in one state (such as Intel in North Carolina) at the expense of another became even more common in the 2000s. This was especially true in the film industry where states sought to become the next Hollywood through the use of film tax credits. Hopefully states will turn the corner in the next decade and stop deal making and start enacting good tax policy. States need to stop asking business: "What special break will it take to get you here?" #8: Rising Popularity of Nanny Tax Policies The 2000s saw a surge in legislation designed to punish consumers for buying certain products. Cigarettes led the way among "sinful" products targeted for higher taxes, but many other products are suddenly being considered sinful by legislators who sound more and more like nannies who think their job is to micromanage the citizens. Serious policymakers like the governor of New York have proposed taxing soft drinks. To hear him

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describe the motivation, it's all about making people healthier, but cynics will be excused if they suspect that raising revenue is the real reason. Throughout the decade of the 2000s state legislatures have targeted snack foods and candy for extra taxes, invariably accompanied by nannyish rhetoric about helping people become healthier (by paying more taxes). At the federal level, Botox and tanning beds have made the naughty list as part of the new health insurance legislation, and the new head of the CDC is an avowed nanny-taxer. Without regard to health or even the environment, there are also unadorned moralizers: taxes on strip clubs, pornography and other sex-related taxes. In every case, it's a revenue raiser wrapped into a paternalistic justification: "This product isn't good for you anyway." Our wish for the new decade is that elected officials would realize that the people want government, not a governess. #9: The Tax Gap

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The tax gap is not a new issue to the decade of the 2000s, but it has gotten a lot of play, especially from Senate Finance Committee chairman Max Baucus of Montana. The tax gap is the amount of unpaid tax, money people owe but have evaded, some by failing to file a tax return at all but most by filling out their tax returns incorrectly. Since the IRS can't audit everyone, we don't really know how much tax evasion is occurring, but informed estimates are in the 15-to-20 percent range. So for every $100 collected, there's about $20 uncollected that should have been paid. Experts say that by comparison with other nations, the U.S. does a good job of collecting what's owed. Yet as the government spends more and more each year, it is increasingly intolerant of uncollected tax revenue. This is ironic because the complexity of the tax code is largely responsible for the tax gap, and Congress is directly to blame for that complexity. It has created numberless exemptions, deductions and credits for businesses and individuals, so riddling the tax law with loopholes that even professional tax preparers can't independently calculate a moderately complex tax return and agree on

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the amount due. There was a time some decades ago when most individuals, even people with high incomes and complicated finances, filled out their own tax returns at the kitchen table. Congress has made that impossible, and both political parties are to blame. Congressmen seem to see their mission here in Washington as the creation of a tax law that favors some of their voting constituency, ideally bearing the name or hometown of the lawmaker (the Roth IRA or the Hope credit). As a result, the vast majority of taxpayers need professional assistance to fill out their tax returns, assistance which still doesn't bring in all the money it should. The Obama administration is working hard on one part of the tax gap, money kept in overseas banks by wealthy individuals. Less is being done on the domestic front, perhaps because many prominent administration officials have been caught evading their taxes, notably the Chairman of the Ways and Means Committee, Charles Rangel, and the Secretary of the Treasury, Timothy Geithner. That's the sort of thing that makes it awkward to rail against people who can't figure out their

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tax returns. Congress should see the tax code as a fisherman's net. If they keep putting holes in it, supposedly to benefit certain fish, other fish will manage to wriggle through, and the fisherman will not pull in as many fish as he expected to. The way to close the tax gap is not to badger the IRS but to simplify the tax code. #10: California's Decade of Fiscal Decay Even before California raised income and sales taxes in 2009, the state had the sixth highest state-local tax burden in the country, undermining arguments that its fiscal woes are caused by supermajority requirements and Proposition 13, which combine to make raising taxes too difficult. For many years the state has relied especially heavily on tax revenue from capital gains and other income from high-income individuals. When the state experienced a huge revenue surge during the prosperous economic times in the middle of the decade, lawmakers responded by increasing spending levels to match those revenue surges. While general fund spending ranged between $71 billion and $75 billion in

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the 1999-2003 period, spending reached $99 billion in 2007, a 31% increase. During the same period inflation increased 12% and the state population grew just 5%. To top it off, each year since 2001, California has avoided fundamental solutions and instead used the full spectrum of gimmicks and one-time revenues: amnesties, temporary tax increases, record borrowing, issuing IOUs, increasing withholding requirements, and shifting expenses into future years. With routine cash shortage and a disintegrating credit rating, the state may go bust before it brings spending in line with revenues. Legislators are currently considering the views of a recent tax reform panel charged with stopping the state's boom-and-bust budget cycle. The panel majority recommended across-the-board reductions in the individual income tax and sales tax, elimination of the corporate income tax, establishing a tax on business net receipts, and strengthening the state's rainy day fund. The panel minority recommended broadening the sales tax base and requiring that revenues above a certain threshold be used for one-time purposes only.

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#11: The FairTax Movement And another story for good measure. We couldn't discuss the past decade without mentioning the FairTax. A movement that saw its origins in a popular book by the same title and in conservative talk radio became a grassroots tax reform movement full of local precinct captains for virtually every town in America. The movement is full of followers who believe that most of the U.S. tax troubles can be solved with a mere national retail sales tax that would conveniently eliminate our number one nemesis, the IRS. The FairTax movement even became a player in the 2008 presidential election as former Arkansas Gov. Mike Huckabee became the strongest challenger of Sen. McCain for the Republican nomination, due in large part to the legions of FairTax supporters who believe the reform is simply "amazing."

AEP Artists Economic Politics artpos@ymail.com Phillip John OSullivan

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