Whoopi the Decoder Finds Out Why We Get ‘Taxed up the Behind’

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Editor’s note: When people say it isn’t rocket science, ever wonder what it is that makes rocket science so darn hard? In our Decoder series, Whoopi Goldberg seeks out experts across a wide spectrum of fields to find out how things work, from the encryption on your iPod to the fine print on your tax bill. So next time you see a rocket, don’t be surprised if it’s one Whoopi built herself.

David Cay Johnston is a former writer for The New York Times and the Pulitzer Prize-winning author of Free Lunch.

WHOOPI: Here’s my first question. How is it possible that we are being taxed up the behind in such a way that no one realizes it? And the reason I say that is because you look at your bills – you know, your gas and electric bill, your phone bill, your cell phone bill. You get six or seven taxes that make no sense. Why is this OK? Why is this happening?

DAVID: Let me argue the case for why it’s done and then I’ll give you the other side of it.

WHOOPI: OK.

DAVID: If you only tax one thing – let’s say the only thing we taxed was your income, or the only thing we taxed was the house you live in, then people would find a way to get around that one tax. So you have to have an approach that taxes multiple things.

WHOOPI: So you’re telling me that basically the idea is people think people are going to cheat anyway, so we might as well just make sure they don’t have any money to cheat with?

DAVID: No, it doesn’t even involve cheating. It’s that people will simply organize their lives to get around a single tax. If there was only one tax it wouldn’t be hard to get around it.

WHOOPI: Really? Could you tell me how because I can’t figure it out.

DAVID: Well, let’s say that we taxed just wages — that’s what the flat tax proposal is. You wouldn’t pay tax on capital gains, interest, dividends, rents, royalties – most royalties. Some you would, some you wouldn’t. Well, if that’s the only tax we had then people who own a business, for example, would take a $1 salary and report everything as a capital gain — then they wouldn’t pay any taxes. You have to design the tax system to flow from the economic order; and what we have is a tax system that works against the economic order. I’ll come back to that in a second. Let me answer your question now. The reason we have all these other little taxes – your phone bill, your cell phone, your utility bill, the sales tax, all these other little taxes — is that they are perceived to be minor annoyances that the public will put up with. And the art of taxation is plucking the goose while not killing it and getting the maximum with the least amount of hissing from the goose.

WHOOPI: But do they realize that with everything that’s happening, that they are killing the goose?

DAVID: No. And I’m not sure you can make the case that they are. Taxes overall are 37 percent of the economy, net, in round figures. Figure a third – a little more than a third of the economy.

WHOOPI: But let’s take it on an individual basis. What is the tax for a middle-class person?

DAVID: For two-thirds of Americans – two-thirds of them – they pay more in payroll taxes, Social Security and Medicare taxes than they do in income taxes.

WHOOPI: OK. So this is every week, right?

DAVID: That’s right, and that’s a major part of the problem. In 1974 – now you and I were both working in 1974 — the maximum Social Security tax was about $327; it’s now going to be almost $6000. That’s an enormous increase. Even when you adjust for inflation, ‘74’s tax today would be about $1600, so it’s gone up about fourfold. And half of the decline in savings by Americans is attributable to the payroll tax collecting more than is needed to currently pay out benefits.

WHOOPI: OK.

DAVID: This is an important issue to understand. If Social Security were run to collect as much as it has to pay out, which is how it used to run before Ronald Reagan, the tax would be a third lower than it is. Now that extra money we were promised back in the ’80s by the Reagan administration was going to be used to pay off the federal debt. And, the plan was, then we would store up that money by having the government invest it in bonds. And when the boomers got older they would get back what they paid for in advance. Well that isn’t what Congress did; instead they went and spent the money. When Reagan took office the government owed about $900 billion of debt; it now owes about $9 trillion of debt. And – here’s the real shocker – all of the income taxes you pay in January, February, March and April just go to pay interest on the national debt. One-third of your income taxes. Now you … did you read the Jane Austen novels?

WHOOPI: Yeah.

DAVID: Let’s take Pride & Prejudice to use for example. The mother, whose name I forget, is always going around finding these wealthy young men to marry her daughters off to because that’s the way society was. Mr. Darcy has 10,000. Mr. So-and-so has 3,000.

WHOOPI: Right.

DAVID: Well, what they’re talking about is something very much like what we’re doing. Mr. Darcy’s 10,000 — he has bought bonds from the state. He’s loaned money to the Crown and he gets £10,000 of interest. And then how does the government get the interest? It taxes people who are less wealthy – the poor and the middle class – to get the interest to pay to Mr. Darcy. Well that’s what we’re moving towards in this country: a system where we are taxing people to pay interest on the national debt for all the money that Congress spent that we don’t have. And the Comptroller General projects that by 2050 or 60, somewhere in that range – you and I won’t be around by then, unfortunately – about 50 to 60 percent of federal taxes will just go to pay interest on the debt. That’ll be the principal business of the government: to collect interest from the masses to pay to those who hold the federal debt.

WHOOPI: Right.

DAVID: If we don’t go bankrupt before then.

WHOOPI: We’re entering s sci-fi movie? And that’s basically what it is?

DAVID: Yeah. We’re entering this age where what we’re actually doing is, we’re shifting the burden of federal taxes increasingly away from high income people. There are two big shifts that have taken place with Mr. Bush. All of the tax cuts championed by President Bush have been financed by borrowing money, which really means nobody got a tax cut.

WHOOPI: Yeah.

DAVID: They just got a tax deferral with interest. The government took its ATM card, went and took money out on the national credit card, and now you’re going to pay five percent interest forever. Secondly, we got into this war against a country that was no threat to us, and Joe Stiglitz calculates that it will eventually cost us $3 trillion — and that assumes that we have a reduced presence and that we’re out of there by 2017. Well think about what we could do with $3 trillion. I mean, we could have had universal health care, we could have had dramatic improvements in the schools, we could have had all sorts of benefits. We could have fixed roads and bridges and put money into scientific research …

WHOOPI: Plus we might have been able to save some dough.

DAVID: Absolutely.

WHOOPI: We are in the midst of bankrupting the only people who can save the country – which is the middle class.

One comment so far.

  1. avatar siward says:

    Thank you very much for this information.

    Perhaps it explains why over the last few years the prices of food, oil, gold, and some others have been rising by about 20%/year in dollar terms.
    So, effectively the value of the dollar is being decreased, and that would mean that the value of the US national debt is being reduced,
    and if the debt is the problem, then this would be how the problem is being solved.
    This is just a guess of course, i’m not an economist.