The “Tilted” Tax Code
by Rick Kahler, President, Kahler Financial Group

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I am always amused when politicians play the greed and class cards to convince middle and lower income Americans that the rich are getting richer and are not paying their fair share in taxes. A typical example was a December speech by Hillary Clinton in Ottumwa, Iowa, in which she said the tax code was “totally tilted towards the wealthiest Americans.” Being the inquisitive person I am, I decided to check her facts.

According to the most recent information available from the IRS, those Americans earning the top 1% of income paid 39% of the total revenue collected by the US government from personal income taxes. The top 5% paid 60% of the income tax burden, and the top 10% paid 70%. The top 50% of income earners paid 97% of the entire income tax burden. That means that 50% of all Americans paid only 3%.

I would agree with Senator Clinton that the income tax code is “totally tilted.” It’s just not tilted in the direction she suggests.

What about the argument that the rich are getting richer? Let’s check the facts as reported by the Treasury Department in October 2007. In 2000, the end of Bill Clinton’s term in office, the richest 1% of Americans earned 21% of all income and paid 37% of all income taxes. In 2007, the richest 1% of Americans still earned 21% of all income and paid slightly more, or 39%, of all income taxes. It looks to me as if the rich actually got slightly poorer during the Bush Administration.

Another statement that plays well in stump speeches is bludgeoning US corporations for earning “obscene” profits, suggesting that corporate America is not paying its “fair share.” Another check of the facts finds that the U.S. levies the second highest corporate taxes in the world. We tax corporate profits at 39.3% (Kiplinger Newsletter). Japan is slightly higher at 39.5%.

Perhaps some of those crying for higher taxes on corporations forget that their retirement depends upon corporate profits. Lower corporate profits spell lower returns on equities, which spell lower returns (and perhaps years of losses) for 401(k) and IRA plans.

An important factor in creating wealth, trade, and a strong economy is plenty of economic incentives, including a moderate to low income tax structure. A low tax structure played an important part in the US becoming a world economic power. The US didn’t even have an income tax until 1913.

Today, Americans at the highest level pay 40% of their income to the federal government, plus state income taxes. Still, our total tax load as a country is one of the lowest in the world. When you consider corporate taxes, income taxes, FICA taxes, and sales taxes, the US has the 12th least miserable tax burden in the world, according to Forbes 2007 “Misery Index.” (Unfortunately, we have fallen from 6th in 2005.) The United Arab Emirates had the least miserable tax burden, while France ranked as most miserable.

A married couple in the US earning $70,000 would keep about 83.46% of their gross income, 10th highest net in the world. Higher income earners don’t fare as well. Married couples earning $300,000 a year only keep 72.8% of their income and slip to number 14 worldwide.

Most Americans don’t have much to complain about when it comes to taxes. While we certainly don’t pay the world’s lowest income taxes, we pay nowhere near the total taxes of much of the world. However, given the current political temperament of our electorate, I expect our tax load to move up on the global scale. If we want to remain a world economic power, we should be moving in the opposite direction.

Rick Kahler, Certified Financial Planner, MS, ChFC, CCIM, is President, Kahler Financial Group