How we distribute the burden of sustaining governments determines in good part who prospers and who does not, who invests and who sinks into debt, who takes from society and who gives. When we decide who, and how, and how much to tax, and how to spread the burden, we shape the kind of nation we are and will become.
The moral philosophers of ancient Athens came to recognize this 2,500 years ago. When Athens was a tyranny it had a flat tax, an onerous burden that fell in the same amount on everyone subject to it. The less one had, the heavier the burden.
The philosophers of the Greek city-state concluded that morally the tax burden was upside down. Those who received the greatest material benefit from being Athenians should bear the greatest burden of maintaining Athens, they concluded. With this moral principle - taxation based on ability to pay - the Athenians invented democracy.
Every leading world philosopher from Aristotle and Plato to Adam Smith and Karl Marx, the fathers of capitalism and communism, has embraced the Athenian insight. Only in the past third of a century, in America, have these time-tested ideas been forgotten.
Today our airwaves, especially talk radio, are rich with denunciations of our supposedly progressive income tax, in which those who make the most pay the highest rates. Politicians who call themselves conservatives denounce the idea that those who make the most should bear a disproportionate burden.
They are ahistoric. Since taxation based on ability to pay spawned democracy, progressive taxation is the most conservative principle in Western civilization.
George W. Bushs first tax cut was so heavily tilted towards the rich that more than half of the benefits in the first decade
went to the top 1 percent of Americans, those making more than about $300,000 annually. Even within that group the tax relief was highly concentrated in the top tenth of one percent - households with an income of $3 million or more annually. Go out beyond the first 10 years and the benefits to the super rich grow much more.
Rather than a progressive tax structure with the highest rates paid by those at the top, we have a bubble structure in which the upper middle class and the modestly rich pay more so that the super rich can pay less. And two-thirds of Americans pay more in Social Security taxes than in income taxes. If you consider the combined burden of Social Security and income taxes, people who made from $60,000 to $10 million paid a larger share of their money to the federal government than those making $10 million or more.
Political capital? Those who make millions each year depend far more on capital than wages. A goal of the second Bush term is to eliminate taxes on capitalon dividends, interest, rents, some kinds of royalties, and on capital gains from selling assets for more than they cost. The president articulates this when he says that "a dollar should only be taxed once" and "you shouldnt be taxed on money youve saved."
Taxes on capital have already been cut sharply. President Clinton lowered the top tax on long-term capital gains to 20 percent from 28 percent. President Bush lowered them to 15 percent and included dividends at that rate.
Shortly after the 2004 election President Bush, in one of his rare press conferences, laid out his tax reform agenda for his second term. He gave few details, but said he wanted to lower taxes on savings and investment and on "risk takers," which is Bushspeak for entrepreneurs and capitalists.
This idea that tax cuts for the rich are key to jobs, which Bush promoted in both of his presidential campaigns, has become ingrained in recent years. Almost any talk radio show or C-SPAN hour devoted to taxes will bring forth callers saying that their job will be secure only if their bosses get tax cuts.
Missing from this equation is the emergence of new rules for the world economy. The rich can, with the push of a button, invest their money overseas, creating jobs elsewhere. Creating prosperity in China, India, Vietnam, and other poor countries is a moral good, too, but if it comes at the expense of American workers while enriching American capitalists, new questions are raised about who bears the burden and who gets the fruits of taxes.
Significantly, the president also said that his plan would be "revenue neutral," meaning that the new tax system will bring in the same revenue that the old system would have. In plain English, the president was saying that he wanted to shift the burden of taxes off capital and onto wages.
There are only three ways to do this while being revenue neutral. One way is to raise tax rates on wages, which Bush says he will not do. The second is to grow the economy so that more people make more wages and thus pay more in taxes at current tax rates.
The third way is through a backdoor tax increase that leaves rates untouched, but reduces tax breaks to wage earners. Those who itemize, for example, can now deduct what they pay in state and local income and property taxes. If that deduction ends, the one in four who itemize would pay more. A big way to accomplish the same shift would be reducing or ending health insurance as a tax-free fringe benefit.
What you dont know will hurt you. The political template for stealth tax increases on the middle class and the upper middle class is already in place: the Alternative Minimum Tax. This little known levy, which exposes taxpayers over a certain income to a "parallel universe" in which many deductions disappear, was enacted in 1969 because some super-rich individuals were not paying any income tax. Because its income threshold does not rise with inflation, this year the AMT will take away some or all of the Bush tax cuts for about 20 million men, women and children. By 2010, the U.S. Treasury estimates, 40 million American householdsa third of the nationwill be affected.
But this number does not include the super-rich, who have access to sophisticated tax shelters; some pay no taxes at all. The AMT is a huge tax increase on the middle and upper middle classes, one totaling more than a half trillion dollars over 10 years.
Initially the AMT limited only exotic tax breaks taken by the rich, such as the oil depletion allowance. But in the 1986 tax reform act, the list of tax breaks that are limited or taken away by the alternative tax was expanded to include your exemptions for yourself, for your spouse, and for children; your deductions for state and local taxes; and your work expenses such as tools, uniforms, and union dues. Those who do not itemize can even lose the standard deduction, as couples with three or more children and income of $71,000 or so already know.
Worst of all, if you or a loved one gets some terrible disease and you spend more than 7.5 percent of your income on medical bills, Congress takes away your deduction until your spending exceeds 10 percent. Here, in stark terms, we see morality in taxes.
The horrible truth is that, if you get seriously ill, your government raises your income tax. The even more awful truth is what it does with this money. Under the 2001 Bush tax cut law, these funds are explicitly used to help finance the tax cuts for the richest 1 percent.
Lockbox or cookie jar? President Bush argued for his tax cuts by saying he wants "you to keep more of your money." He has not applied the same rationale to his drive to change the Social Security system.
White House memos indicate that the president wants to allow undefined "younger workers" to invest up to 4 percent of their incometwo-thirds of the Social Security taxes withheld from their payinto private investment accounts. The president says this will help create "an ownership society" in which almost everyone has financial assets. Ownership, in turn, is said to foster responsibility and individual self-reliance, also moral goods.
Much will be written and argued in the months ahead about whether his plan is fair or makes economic sense, especially since it involves assuming trillions of dollars of debt that will weigh on the economy through at least 2050.
What is unlikely to be heard is President Bush saying that those undefined "younger workers" should be given a Social Security tax cut, instead of having them invest in a vast new government-run investment program that will generate fees for Wall Street.
Just cutting Social Security taxes for these workers would leave it up to them to take responsibility for their own money. They could choose to join the ownership society by investing the money. Or they could spend the money now, which would improve their lifestyle and stimulate the economy at the same time, but leave them vulnerable to becoming like so many Americans just a few decades ago who sometimes ate cat food.
A big reason that the White House will never take the same line on Social Security taxes as on income taxes is that doing so would immediately expose how the excess Social Security tax collected from workers subsidizes the super rich. The government collects more in Social Security taxes than it pays out each year in benefits, and that extra money finances tax cuts for the richest Americans.
Since 1983, when the Democrats enacted the Social Security pay-in-advance-for-your-benefits tax rates, our government has collected more than $2 trillion in surplus taxes. This is the "lock box" cited in the 2000 campaign.
That lockbox is actually a cookie jar. Congress spends the money today and puts a special kind of federal bond in the Social Security trust fund. Without that extra spending money from Social Security, there would not be enough cash for Congress to cut taxes on the rich. The federal budget deficit, now at a record $450 billion before counting the costs of the war in Iraq, would be a third larger but for the surplus Social Security tax.
As the debates over Social Security and overhaul of the federal tax system unfold, it is crucial to keep in mind moral values. Those excess Social Security taxes are a debt that a moral and just society must repay. That debt can only be repaid through future income taxes to redeem the bonds in the lockbox. If our government continues to spend vastly more than it takes in, a day will come when it lacks the capacity to both operate and redeem those bonds.
And we should also not forget that, in an age when tax savings can be sent offshore with the push of a button to create jobs in faraway lands, adding pressure to lower wages paid to Americans, domestic job creation and wage rates are also important moral considerations.
We should keep in the forefront of our thoughts throughout these debates the most conservative principle in Western Civilization, the very idea that gave birth to democracy: Those who benefit the most from a society have a moral duty to bear the greatest burden of taxes to maintain that society.
David Cay Johnston is a Pulitzer Prize-winning tax reporter for The New York Times. This article is adapted from the new paperback version of Perfectly Legal (Portfolio), honored as investigative book of the year by Investigative Reporters and Editors.