The number of votes they got at the recent Iowa caucuses is not the only way that former senator Hillary Clinton and current senator Bernie Sanders are very close. Both have proposed new government programs throughout their campaigns. And because their new government programs must be paid for, both Clinton and Sanders have put forward new tax plans to raise the necessary revenue to fund them.
There is no such thing as a free lunch. Whether government pays the salary of a bureaucrat, builds a road, pays for a medical procedure, subsidizes someone’s rent, makes a welfare payment, or drops a bomb, there is always a cost involved.
The government has no wealth of its own. Every dollar in its bank account has been taken from the American people. Either the government collects taxes now to pay for its expenditures or it borrows money and then collects taxes later to pay the debts it has incurred, plus interest. According to the U.S. Treasury Department, the national debt is a little greater than $19 trillion and the interest expense on the government’s outstanding debt in fiscal year 2015 was $402,435,356,075.49.
Under our current tax system, there are seven tax brackets for individuals for ordinary income with tax rates of 10, 15, 25, 28, 33, 35, and 39.6 percent. Thanks to a net investment income surtax of 3.8 percent for those earning more than $100,000 ($250,000 for married filing jointly), the tax on income from long-term capital gains has a top rate of 23.8 percent. Short-term capital gains are taxed as ordinary income. Certain exemptions and itemized deductions are phased out for those earning more than $259,400 ($311,300 for married filing jointly). An estate tax is levied on the net value of property owned by deceased persons on the date of their death at the rate of 40 percent on assets greater than $5.430 million.
And then there are payroll taxes. The Social Security tax rate is 12.4 percent on the first $118,500 of wages (split between employers and employees). The Medicare tax rate is 2.9 percent on wages of any amount. It is also split, but the employee share increases to 2.35 percent on that portion of income that is more than $200,000 ($250,000 for married filing jointly).
Under Clinton’s tax plan, there is an additional tax bracket of 43.6 percent for taxable income greater than $5 million, a 30 percent minimum tax phased in on those earning more than $1 million (the “Buffett Rule”), a cap on all itemized deductions at a tax value of 28 percent, a new $1,200 tax credit for caregiver expenses, a complex new capital gains schedule with a new top rate for long- and short-term capital gains of 47.4 percent, an increase in the estate tax to 45 percent, and a decrease in the estate tax exemption to $3.5 million.
According to the Tax Foundation’s analysis of Clinton’s plan,
Hillary Clinton’s tax plan would reduce the economy’s size by 1 percent in the long run. The plan would lead to 0.8 percent lower wages, a 2.8 percent smaller capital stock, and 311,000 fewer full-time equivalent jobs. The smaller economy results from somewhat higher marginal tax rates on capital and labor income.
Under Sanders’s tax plan, there are changes and additions to the tax brackets and a new 2.2 percent “income-based [health-care] premium paid by those in all brackets, effectively making the tax brackets 12.2, 17.2, 27.2, 30.2, 35.2, 39.2, 45.2, 50.2, and 54.2 percent. In addition, capital gains are taxed at ordinary income rates for households with income greater than $250,000, itemized deductions are capped at a tax value of 28 percent, the Social Security payroll tax is also applied to earnings greater than $250,000, a new 6.2 percent employer payroll tax is instituted as an “income-based health-care premium,” a new 0.4 percent (split between employers and employees) payroll tax is instituted to fund a new family and medical leave trust fund, and the estate tax is increased to 45 percent and the estate tax exemption is decreased to $3.5 million.
According to the Tax Foundation’s analysis of Sanders’s plan,
Bernie Sanders’s tax plan would reduce the economy’s size by 9.5 percent in the long run. The plan would lead to 4.3 percent lower wages, an 18.6 percent smaller capital stock, and 6.0 million fewer full-time equivalent jobs. The smaller economy results from higher marginal tax rates on capital and labor income.
Although Republicans have criticized the tax increases proposed by Clinton and Sanders, their principles of taxation are basically the same as those of Democrats.
Like Democrats, Republicans are not averse to raising taxes. Republican icon Ronald Reagan is famously remembered for being a tax cutter. But he was also a tax raiser. He supported the refundable Earned Income Tax Credit, eliminated “loopholes” that allowed taxpayers to keep more of their money out of the hands of Uncle Sam, increased corporate income taxes, Medicare taxes, Social Security taxes, and capital gains taxes. He also began the practice of taxing Social Security benefits. It was Republicans who helped pass the American Tax Relief Act of 2012 that added the new top rate of 39.6 percent. And it was Republicans back in 2011 who opposed Barack Obama’s plan to extend the 2 percent Social Security payroll tax rate reduction for another year.
Like Democrats, Republicans believe in tax reform, not tax elimination. All of their tax-reform plans are revenue-neutral. They believe in tinkering with the tax code instead of eliminating it. Their flat tax and fair tax schemes are neither flat nor fair. The cries of some Republicans to abolish the IRS should not be taken seriously. Taxes won’t collect themselves. It is ludicrous to claim that you want to abolish the IRS and at the same time still want the government to spend trillions of dollars.
Like Democrats, Republicans have no philosophical objection to the income tax. They believe the government has a right to a certain amount or a certain percentage of every American’s income. They merely disagree on what amount or what percentage that should be.
Like Democrats, Republicans believe in progressive taxation. They believe in making “the rich” pay their “fair share.” And the “richer” you are, the higher the “fair share” should be. According to the most recent IRS data for tax year 2013, the top 50 percent of all taxpayers paid 97.2 percent of all income taxes while the bottom 50 percent paid just the remaining 2.8 percent. These numbers are basically the same as they were during the Bush years when Republicans controlled both houses of Congress for more than four years.
Like Democrats, Republicans believe in using the tax code for social-engineering purposes and income-redistribution schemes. They have no philosophical objection to the government’s taking money from one American and giving it to another American. They fully support refundable tax credits and every other part of the welfare state.
Contrast the Democratic and Republican principles of taxation with those of libertarians:
- Taxation is government theft.
- Progressive taxation is Marxist.
- The government is not entitled to any portion of any American’s income.
- The IRS should be eliminated and replaced with nothing.
- The tax code should be eliminated and replaced with nothing.
- The government doesn’t need tax revenue; it wants tax revenue so it can redistribute it, pay its bureaucrats, spend it on things not authorized by the Constitution, and police the world.
- Tax increases of any kind, tax reform that is revenue-neutral, tax base broadening, tax replacement of one tax with another, and tax shifting from one group of taxpayers to another are always bad.
- Any change to tax rates, tax brackets, tax exemptions, tax deductions, or tax credits that results in taxpayers’ being able to retain more money and government’s taking less money is always good.