The tax system in the United States enriches the rich. In a country where the top one percent earns twice as much of the national income as the bottom 50 percent, it is not surprising that richest 400 families have the lowest overall tax rate of 23 percent, while workers pay about 25%, and middle-class people 28% of their total income in taxes.
The loopholes and exceptions in the federal tax system enable rich individuals and corporations to avoid taxes. People are right to fume about that, but the federal tax system at least preserves a semblance of progressivity and the wealthy pay rates that are higher than those paid by people with lower incomes.
One of the major reasons why middle-and-low income people end up paying taxes at higher rates than the rich is because most state and local governments use flat sales, payroll, and property taxes along with “fees” to raise revenue and these taxes impact lower income people the most. A person who earns $500,000 per year can much more easily pay flat tax rates on goods, services, and property than a person who earns $50,000.
Salem is typical of how Oregon cities rely on regressive flat taxes. Salem’s budget of $632 million pays for a wide range of costly products, such as rate-payer-funded water and sewer services. From that total amount, $138 million is in the general fund, which covers key services including police, fire, parks, the library, and street maintenance. The general fund is largely financed through a property tax of $5.83 per $1,000 of assessed value on a home. Additional property taxes also pay for school and county services.
The elimination of federal revenue sharing under Ronald Reagan and voter approved limits on property tax increases in the 1990s have resulted in decades of belt tightening for Oregon’s cities as rising costs outpace revenues and force them to reduce services. To cover shortfalls, cities seek new revenues. Salem’s general fund is currently short about $16 million per year, and the city cannot cover the gap much longer using reserves. Rather than cut services further, the City Council has imposed a new surcharge on household and business utilities and will ask the public to approve a payroll tax on most Salem workers.
The monthly surcharge is modest: $8.00 on single family homes, $6.40 on multi-family units, and $38.56 on businesses. The payroll tax is also small: 0.39% on all workers except those earning minimum wage, who are exempt, and those who earn between minimum wage and $15.00 per hour, who will pay 0.266%. While there is some differentiation here, like the property tax these are regressive, largely flat taxes, which impact people with moderate and fixed incomes much more severely than the rich.
Socialists aim to restructure the tax system to favor workers. As one study concluded in 2003, if Salem replaced the property tax with a progressive income tax on all who live and work in the city, it could exempt the bottom 35% of residents, tax middle income families at about the same rate, and increase rates modestly on the upper sixth to cover its budget needs and substantially enhance services. Another possibility (currently banned by state law) is a progressive real estate transfer tax, the revenue from which could be used for low-income housing. A third option could focus on increasing tax rates on large business enterprises, whose proportion of the tax burden is much lower than it was thirty years ago.
How we tax ourselves is a political choice. For a society based that seeks social justice, the choices are clear.