Sharon Busick Howell, a retired Lincoln National Corporation officer and real estate investor, owns a farm in southeast Allen County.
Tax reform over the last 30 years has meant lowering taxes significantly for the top 5 percent of Americans while making a token effort to lower everyone else's taxes. The president's new lower tax rate proposal will just continue that trend.
To prove my point, I reviewed our old tax returns; the oldest federal tax book I could find was 1984. In 1984, there were 14 tax rates and the rates ranged from 11 percent to 50 percent, whereas by 2016 the rates were compressed to seven tax rates which ranged from 10 percent to 39.6 percent. The midpoint of the rates in 1984 was 26.5 percent, whereas in 2016 the midpoint rate was 28 percent – an increase, not a decrease. In 1984, couples in the top tax bracket of 50 percent paid that on everything over $162,400. In 2016, taxpayers in the top tax bracket of 39.6 percent theoretically paid that on everything over $466,950.
The reason I said theoretically is because of the special dividend and capital gains rate. In 1984, a couple was able to exclude $400 of dividends and capital gains, all “qualified” income above that was taxed at their normal rate. Now there are special tax rates for dividends and capital gains that range from 0 percent to 20 percent. In 2016, the effect of those rates for a couple with one child and an income of $225,000, assuming $25,000 of it was from dividends and capital gains, would be $40,925 or 18.2 percent of their income. Without the special “qualified” rate, that couple would have paid $43,055 or 19.1 percent of their income; less than 1 percent more. If that same couple made only $80,000, they would have paid $7,364 in taxes or 9.2 percent of their income. The special “qualified” rate does not apply to them because usually, their income is all salary.
Now, look at how these special rates affect a couple earning $4 million, of which $2 million is from dividends and capital gains.
In 2016, that couple would pay $1,128,181 in taxes or 28.2 percent of their income. The total tax includes the special investment and Medicare taxes enacted as part of Obamacare.
Now, without the preferential tax treatment for capital gains and dividends, even without these new taxes enacted as part of Obamacare, that couple would pay $1,091,834 or 35.3 percent of their income, an increase of 7 percent.
As one moves up the income ladder, the amount of income coming from dividends and capital gains is a greater percentage of one's total income, thereby lowering their total tax rate. Which is the reason Warren Buffet says he pays a lower percentage of his income in taxes than his secretary.
I then calculated the taxes for two of the couples listed above using 1984 rates and rules pertaining to dividends and capital gains. The dollar amount of the ranges, exemptions and standard deductions were adjusted for inflation. The couple making $80,000 would pay $7,360 in tax, about the same as today. The couple making $225,000 would pay $38,393 in tax, which is less than they paid under 2016 tax rates and rules. Why?
Tax reforms have favored people with very high income.
However, the real problem with the tax reforms of the last 30 years is not just that the rich are paying a smaller percentage of their income than others; it's also that as a nation we are not collecting enough taxes.
Economists have proven that lower taxes do not increase economic prosperity. If we want to make America great again, every citizen should contact their legislators urging them not to lower taxes.
Instead, the legislature should increase taxes by eliminating the special dividend and capital gain rates, which would also simplify tax preparation. People age 60 and older who are counting on Medicare should especially worry if tax rates are lower. Without more revenue, Congress will be forced to cut Medicare benefits.
I urge you to contact your legislators today.