The Biggest Problem with American Taxation

Taxation is an incredibly complex matter. It affects so many different aspects of the global economy. And designing the perfect tax system would be nearly impossible. That’s why every country has its own system.

The way different countries deal with taxes varies greatly, and each system has its own complications. But, being the superpower that it is, you would think that America would have perfected their taxation system. Unfortunately, this isn’t the case.

In fact, even with the 16th highest tax rate in the world, the United States still operates on a deficit.

So what’s the problem? Why does ramping up taxes not compensate for the nation’s spending? It’s difficult to pin the blame on a single point, but we’ve got a contender for the primary culprit.

What’s to Blame?

In a nutshell, it all boils down to payroll taxes.

Payroll taxes are funds that employers deduct from their employees’ salaries. The amount varies depending on how much an employee makes. This money then goes into government coffers.

So does this somehow harm the US economy? Not really. Rather, it’s about who’s at the short end of the payroll stick.

Namely, the top percentile in terms of income deal with a 15% income tax. This isn’t radically different than what we see in middle-class households, which fall in the 15 to 25 percent ballpark. But payroll taxes are a completely different matter.

For the ultra-affluent, the amount they owe the government in payroll taxes is next to nothing. Meanwhile, the middle class has to bear a significantly higher tax based on their payroll. This is what people mean when they say that the rich should be taxed more severely.

Since over 80 percent of government funding relies on both income and payroll taxes, it makes sense.

This tax slumping is a trend that has been around in the US for decades. In the days of the Great Depression, the rich would be subject to significantly higher taxes. But somewhere around the Reagan presidency, tax cuts for the upper class began to pile on.

Won’t Lower Taxes on the Rich Improve Things?

Many have countered that the solution to the deficit problem entails going in the exact opposite direction. In other words: lower taxes on the rich.

This is a common alternative suggested by the more conservatively-minded, citing that giving free rein to the wealthy will enable their enterprizes to expand. As a result, they will open more jobs and contribute positively to the country’s economy.

This viewpoint, however, does not seem to have much evidence to support it. In fact, some research shows that reducing taxation pressures on the rich will not boost a country’s economy in any real way.

And considering that countries like Germany and France are growing economically at about the same pace as America–without reducing taxes on the rich–this research seems to be on to something.

Don’t Put the Blame on Payroll Taxes Alone

While payroll taxes are seemingly an important contributor to the current economic situation, it’s important to understand that this issue doesn’t exist in a vacuum.

There are a myriad of other factors that comprise the deficit hurdle the US is facing. And the way payroll taxes are applied through social stratas is only one piece of the puzzle.

Again, taxation is complicated.

Nevertheless, we ought to look at the problem honestly and try to handle it appropriately. For now, the data is in favor of increasing payroll taxes for the wealthy.

Just some food for thought.