HUMAN EVENTS asked a panel of 14 distinguished judges, ranging from Nobel Prize winning economist Milton Friedman to our own Stephen Moore, to pick the Ten Worst provisions in the federal tax code. Each judge made nominations, then submitted a ballot ranking their Ten Worst from the full list of nominees. A provision received ten points for a Number 1 vote, nine points for a Number 2 vote, and so on. The estate tax won with the highest aggregate score of 71. Here are all the winners in ignoble order.
1. Estate Tax
Started when: 1916
By whom: President Woodrow Wilson signed the estate tax into law.
Why: To tax the “rich” and redistribute wealth.
What it does: Nicknamed the “death tax,” it requires families or other heirs to pay up to half the assessed value of a deceased person’s estate. Before the Bush cut, rates ranged from 18% to 55%. A 5-percent surtax was imposed on transfers between $10 million and $17.2 million, creating an effective 60-percent rate. Under the Bush cut, the top rate was instantly reduced to 50%, and the 5-percent surtax repealed. The rate will be reduced and the unified credit increased from $625,000 to $3.5 million until 2010 when the estate tax will be repealed. But the repeal will expire on December 31, 2010.
Revenue: In fiscal 2002, the unified estate and gift taxes brought in $27.2 billion in revenue—1.3% of the over $2 trillion in federal revenues.
Reform efforts: In 2000, President Clinton vetoed a repeal of the estate tax passed by Congress. In 2002, the House voted to make the repeal permanent, but Senate Democrats blocked it. This year, five bills have been introduced to make the repeal permanent.
2. Double Taxation of Dividends
Started when: 1913
By whom: President Howard Taft, evading the Constitution, signed the first federal corporate income tax in 1909 (see Number 5). In 1913, President Wilson’s original income tax law taxed dividends as income.
Why: Conservative economists say that politicians at the time did not bother to think that by taxing dividends they were taxing the same corporate profits twice.
What it does: By taxing corporate income through the corporate income tax and then taxing that same income again when it is paid to shareholders as dividends, the government creates a disincentive for corporations to pay dividends and for investors to buy stocks. Double taxation makes dividends a highly inefficient way to distribute corporate profits—imposing an effective tax rate of up to 60% on money paid out in dividends.
Revenue: OMB estimates that taxation of dividends will bring in about $24.9 billion in fiscal 2004. If the tax is eliminated that much will go back into taxpayers pockets.
Reform efforts: President Bush has proposed abolishing the dividend tax.
3. Alternative Minimum Tax
Started when: 1969
By whom: President Richard Nixon signed it. House Ways and Means Chairman Wilbur Mills (D.-Ark.) pushed it through Congress.
Why: To make sure the “rich” who are eligible for tax credits and deductions pay their “fair share.”
What it does: The personal AMT ensures that if a taxpayer’s tax bill falls below a certain threshold because his taxable income has been reduced by legally applicable credits and deductions—home mortgage interest, dependent deductions, child-care credits, charitable contributions—he will have to pay a higher, predetermined rate of tax. Because the AMT is not indexed for inflation, each year it applies to Americans at lower and lower real income levels. By 2010, almost one-third of American taxpayers (35 million people) could see their taxes hiked by the AMT. Only 2.7 million are affected now. The corporate AMT discourages investment in capital equipment, thus reducing long-term economic growth.
Revenue: In 1999, the personal AMT yielded $6.5 billion (0.3% of total revenue), a 29.2% increase over the previous year. According to the Tax Foundation, in 1998, corporations paid $3.3 billion in AMT.
Reform efforts: Rep. Phil English (R.-Pa.) has introduced HR 1233 to repeal both the personal and corporate AMTs.
4. Capital Gains Tax
Started when: 1921
By whom: President Warren Harding signed this tax into law after a Republican Congress approved it.
Why: The tax was considered a cut at the time: revenues from the sale of assets would be taxed at a lower rate than earned income.
What it does: Discourages saving and investment by taxing the increase in value of an asset between the time someone purchases an item and when he sells it. In 1997, when the capital gains rate was cut from 28% to 20%, government receipts from the tax actually doubled.
Revenue: In 2001, the federal government brought in $115 billion, or 5.4% of total federal tax revenue, from the capital gains tax.
Reform efforts: Mike Pence (R.-Ind.) and David Dreier (R.-Calif.) have talked about reducing the maximum capital gains tax to 10% this session. There is a bipartisan “zero capital gains tax” caucus, led by Senators Zell Miller (D.-Ga.), Orrin Hatch (R.-Utah) and Wayne Allard (R.-Colo.), and by Representatives Chris Cox (R.-Calif.) and Ralph Hall (D.-Tex.) in the House. The Senate came within three votes of passing a bill last year to cut the capital gains tax from 20% to 15%.
5. Corporate Income Tax
Started when: 1909
By whom: President Taft (R.) pushed it through a Republican Congress.
Why: Taft believed he could head off the creation of a personal income tax if he could raise revenues by taxing corporations instead. He was wrong. To avoid arguments against the constitutionality of a federal income tax—the 16th Amendment had not been ratified—Taft called it an “excise” tax.
What it does: Taxes corporate profits, increasing the price of goods and services. The tax also drives U.S. corporations to relocate overseas. It is also a double tax, since untaxed corporate profits can be distributed to individuals through dividends, which are also taxed (see Number 2).
Revenue: In fiscal 2002, the corporate tax brought in $211.5 billion in revenue, or 10.4% of total federal tax revenue.
Reform efforts: Republican President Warren Harding and Democratic President Franklin Roosevelt each tried unsuccessfully to abolish it. In the 1970s, the left-wing Americans for Democratic Action urged repeal because it is regressive, hitting low-income workers hardest. Today, no serious plan exists in Congress to abolish the corporate income tax. Many large corporations see the complicated tax code as an advantage over smaller competitors.
6. Progressivity of Income Tax Rates
Started when: 1913
By whom: President Wilson’s original income tax law featured progressive rates.
Why: Class war. Politicians argue that people who make more money should pay a larger share of it in taxes. It is central to the politics of envy and resentment that is the staple of the Democratic Party.
What it does: The tax rate escalates in steps for progressively higher levels of income. Under current tax law, the first $12,000 in taxable income is taxed at 10%; from $12,000 to $46,700 at 15%; from $46,700 at $112,850 at 27%; from $112,850 to $171,950 at 30%; from $171,950 to $307,050 at 35%; and from $307,050 up at 38.6%. This punishes people as they make more and reduces their incentive to invest and create jobs.
Revenue: In 1999, the highest personal income tax bracket yielded $164 billion in revenue, 8.6% of total federal revenues.
Reform efforts: The drive for a flat income tax, boosted by the Steve Forbes in his 1996 presidential campaign and promoted by now-retired Rep. Dick Armey (R.-Tex.), has stalled.
7. Income Tax Withholding
Started when: 1943
By whom: President Franklin Roosevelt signed the Current Tax Payment Act into law.
Why: Roosevelt promoted it as “a temporary wartime measure” to ensure a steady flow of funding for World War II. Lawmakers feared taxpayers might refuse to pay the higher tax rates and surcharges enacted in the Revenue Act of 1942.
What it does: Compels employers to withhold federal taxes from workers’ paychecks and pay them directly to the government on the workers’ behalf
Revenue: According to the IRS, in fiscal year 2002, the federal government took in $1.39 trillion through income and payroll tax withholding.
Reform efforts: In 2001, Representatives Ron Paul (R.-Tex.), Jeff Flake (R.-Ariz.), and Steve Largent (R.-Okla.) introduced H.R. 1364, the Cost of Government Awareness Act, which would have eliminated the withholding of income taxes and required individuals to pay income taxes in monthly installments. No serious effort is now under way to pass such a law.
Started when: 1935
By whom: President Roosevelt pushed the Social Security Act through Congress.
Why: Roosevelt said Social Security “will take care of human needs and at the same time provide for the United States an economic structure of vastly greater soundness.”
What it does: Social Security is a Ponzi scheme that can only be sustained as long as working taxpayers vastly outnumber Social Security recipients. It socializes savings, making many elderly Americans dependent on the government. In 1950 there were 16 workers paying taxes to support at each retiree. Today, there are 3.3. By 2025, there will be only two. Congress saves not one penny of current surplus Social Security tax. All is spent on current programs. Unless the system is converted into private retirement accounts, the prospect looks bad for younger workers getting any return on the approximately 13% of their income taken by this tax.
Revenue: In 2002, the Social Security tax brought in $565 billion, or 28% of federal revenues.
Reform efforts: President Bush has proposed allowing workers to choose whether to put a small portion of their Social Security tax in a private retirement account.
8. Social Security Tax
9. Taxation of Social Security Benefits
By whom: President Bill Clinton dramatically increased taxes on Social Security benefits in his record tax hike of 1993.
Why: Democrats, in complete control of the government, wanted more money for more government.
What it does: Social Security recipients pay Social Security taxes during their working years. Then when they retire and receive benefits, the government taxes those benefits as income even if the recipient only earns a modest amount of money above the benefits. Before 1993, Social Security recipients paid income taxes on half their benefits if their income exceeded $25,000 for individuals or $32,000 for couples. The Clinton tax plan forced individual seniors making more than $34,000, and married couples making more than $44,000, to pay income taxes on up to 85% of their Social Security benefits.
Revenue: Economists estimate that seniors returned between $12 and $36 billion in Social Security benefits to the government in taxes.
Reform efforts: In March, the Senate failed by one vote to repeal this tax. Senators Gordon Smith (R.-Ore.) and Evan Bayh (D.-Ind.) and Rep. Sam Johnson (R.-Tex.) are now pushing another bill to abolish it.
10. High Marginal Income Tax Rates
Started when: In 1913, the highest bracket was 7%. By 1917, it was 67% for income over $2 million. In Word War II, the top rate hit 94%. President Kennedy’s tax cut reduced the top rate to 70% and then Reagan’s 1981 cuts put it at 50%. The 1986 tax reform cut it to 28% but eliminated many exemptions. It trended back up during under the senior President Bush and President Clinton. President George W. Bush so far has managed to cut it to 38.6%.
By whom: President Woodrow Wilson started it.
Why: World War I was the excuse.
What it does: High income tax rates, compounded by other forms of taxes, impose a charge against the next dollar that an earner makes. The higher this marginal rate is, the less incentive someone has to do the work or make the investment that will earn him that dollar. High marginal tax rates therefore work as a drag on economic growth and job creation.
Reform efforts: President Bush tax proposal calls for accelerating cuts in the income tax rates already set to take effect in future years.