Wasteful Spending Central to Tax Apathy

There was a time when it was considered not only a duty, but even a privilege to pay taxes – especially at times when the country was at war. It's impossible to say exactly when and where it became more fashionable to be able to claim great skill at avoiding paying your prescribed amount, but for many Americans, resentment toward paying taxes is rooted in an awareness of how much of their contributed earnings are wasted on graft.

Any conversation about reforming the tax code must begin with changing the way Congress spends money – period. It's unlikely that giving a billion dollars in subsidies to the uber-profitable oil companies or hearing that corporations like General Electric go entire fiscal years without paying a dime to the treasury is ever going to engender an eagerness to pitch in. Whether you make a billion dollars a year or thirty grand, you want to know that the portion of your income paid in taxes is going toward those worthwhile services that government performs and not to enriching the political elite through crony capitalism. Even if we disagree on exactly what the most worthwhile services are, giveaways like the ones mentioned above (as well as thousands of others like them) are unlikely to pass the smell test, regardless of whether the nose administering it is tinted red or blue.

One of the problems with tax policy in the United States is that the highest effective rates, while designed to be paid by those taking in the most wealth, are often paid by those in the upper middle. As the dust-up over Mitt Romney's tax returns (or at least the ones he's released) has illustrated, the bulk of the most generous policies in our tax code tend to benefit those at the very top of the pyramid. Taxation of carried interest as a long-term capital gain, as well as capital gains taxes themselves, are two examples of how many of the wealthiest Americans have managed to pay only a portion of the effective tax rate of someone near the bottom end of the top bracket, who usually earn their compensation through more traditional income vehicles – like a salary.

This tends to engender a cynicism about taxes among this class of earners, especially since they are also less likely than the Wall Street CEO, defense contractor or hedge fund manager to be benefiting directly from government spending. If someone is a successful mid-level executive with a taxable income of say $180,000, they're paying 33 percent of their income in federal taxes. That $59,400 constitutes an enormous chunk of their earnings and it's going to sting every time they read about people at the top or bottom getting over – which they're going to read about quite often.

You can argue that someone like Warren Buffet is paying much more total income, but the fact that he acknowledges paying an effective rate that's less than his secretary and that he routinely profits from government spending of that tax money, like when he loaned cash to and bought options on Goldman Sachs, who was then given preferred status in the AIG bailout, suggests a systemic flaw. In our big-money government, billionaires are in a unique position to influence everything from the tax code to government spending. It's also much easier for them to benefit from offshore tax havens and other shelters. These are all advantages that the $180k executive or $60k sales person and certainly the $45k teacher or police officer are not in touch with.

So, you end up with a class of the poorest and most desperate citizens on the bottom relying on assistance paid for by higher earners, a growing class of working Americans legitimately too poor to even earn the minimum taxable income required to pay federal taxes, and a Cadillac class of those worth tens or hundreds of millions, even billions of dollars that is expanding at its fastest rate in U.S. history – all sandwiching a group of Americans in the upper middle who end up the only ones tied to the tax code's expressed intentions.

Contrary to "class warfare" rhetoric, very few Americans begrudge that class at the very top their financial wealth. Indeed, they often aspire to be one of them. The idea of class warfare is a manufactured distraction created to engender friction between the upper middle and those below them, because their masses are dangerously large if aligned. The cynicism comes rather from what appears to be a rigged system in which wealth will accrue at the pinnacle in a deliberate and systematic manner, and at an alarming rate, because the members of that class have carved out such a favorable set of rules that at certain levels of the social order, climbing up from the depths or falling down from the summit remains all but impossible.

When it comes to the federal balance sheet, our problems are equal parts increased government spending and depressed tax revenues. Tax rates are at historically rock-bottom levels and there is no way we will solve our fiscal mess without growing the tax rolls. Some are pitching the idea that we need to reduce tax revenue and go further into the red in order to spark growth, but recent history does not offer much hope that such will be the case. We have cut taxes to the bone, ostensibly to spur growth. It has not worked. However, the government will have very little luck in creating an environment in which Americans are receptive to paying higher taxes until it can build a trust that the money it takes in will cease being squandered on enriching those who need it least.

It's long been said that the federal government handles money with a leaky bucket, but while that may have been sustainable during times of dramatic growth, there is no indication that such economic largesse will be at their disposal in the near future, if ever again. The business of taxing Americans and using that revenue to efficiently conduct the business of government needs to once again become serious business. If not, we'd better settle in for a long bumpy ride to the bottom and Americans in any of those classes who think they can escape the pain of such economic collapse will quickly learn otherwise.

Dennis Maley's column appears every Thursday and Sunday in The Bradenton Times. He can be reached at dennis.maley@thebradentontimes.com. Click here to visit his column archive. You can also follow Dennis on Facebook. Sign up for a free email subscription and get The Bradenton Times' Thursday Weekly Recap and Sunday Edition delivered to your email box each week at no cost.