This month, I reached out to the Hilton Head Monthly editor and inquired about the overall theme of the May issue. He informed me that the focus was restaurants, and more specifically, local restaurants. So much for trying to correlate my column with the overall theme.
While thinking about food, it came to me that this column would be published a few weeks after April 15, or tax day — so why not write about taxes? As Americans, we are taxed in so many ways: state and federal income taxes, Social Security taxes, Medicare taxes, unemployment taxes, sales taxes, property taxes, gasoline taxes and, of course, those ever-present “sin” taxes on tobacco products, beer, wine and liquor. Then there is that final payment, or pound of flesh, the estate tax, which is levied on the transfer of an estate after a person dies, usually via a will.
Taxes are usually thought of as coming in two forms. There are “progressive” taxes and “regressive” taxes. I am certain that residents of Beaufort County, the wealthiest county in South Carolina, won’t be surprised that the United States has one of the most progressive tax systems in the world. Let’s explore these two approaches to taxation and how they are used to fund our federal, state and local government activities.
A progressive tax is a tax in which the tax rate increases as the taxable income base increases. Often we forget, in casual conversation, that our individual tax rate is actually an average and not the top marginal rate paid. In our income tax system, the marginal rate can vary drastically based upon individual tax deductions, tax exemptions and even tax credits. Ever since the first personal income tax was suggested in 1861 to fund the Civil War, U.S. tax policy has been challenged in courts and used as a tool to promote government policies. It was only in 1913 that the 16th Amendment to the Constitution was ratified and a progressive income tax was with us to stay.
Early U.S. income taxes ranged from 1 percent to a top rate of 7 percent in 1913; by 1944, the rates were up to a first bracket of 23 percent and a top bracket of 94 percent. Today, the income tax rate includes seven brackets starting at 10 percent and capped at 39.6 percent on adjusted income over $400,000. During the Reagan era, the top rate was cut from 70 percent on adjusted income over $215,400 (roughly $563,000 in 2015 dollars) all the way down to 28 percent, with the top bracket starting at $29,750 (equivalent to roughly $59,000 in 2015 dollars).
Income tax deductions have long been the tool of presidents and Congress to promote federal policies. No deduction is more obvious than the mortgage interest deduction, which promotes homeownership and subsidizes the cost of owner-occupied housing. Other commonly used deductions that promote social objectives include tax breaks on charitable contributions, energy-efficient appliances, individual retirement accounts, student loan interest and tuition.
Our personal income tax structure has become so complex that it is now overburdening taxpayers and forcing them to seek help from tax preparers and computer programs, not to mention the more expensive CPAs and tax attorneys. It might be time for a total overhaul of our tax code. Let’s remain true to the concept that has served us well with a progressive structure in which those with the ability to pay bear the greatest burden, but where all Americans have “skin in the game” with some level of simplicity that this “average Joe” can understand.
The other progressive taxes that Beaufort County residences are familiar with include real property, personal property and vehicle taxes. But the regressive tax (or sales tax) is 6 percent here on Hilton Head, and that 6 percent tax is levied on everything you buy except groceries — and don’t forget those hidden taxes included in the price of gasoline, beer, wine, spirits and tobacco products.
So while you’re reflecting on the price of living in America, just remember the only two things that you can be certain of are death and taxes.
Elihu Spencer is a local amateur economist with a long business history in global finance. His work has been centered on understanding credit cycles and their impact on local economies. The information contained in this article has been obtained from sources considered reliable, but the accuracy cannot be guaranteed.