Have you ever looked at your paycheck and wondered where half of it disappeared to? If you’re like most Americans living paycheck to paycheck, a huge chunk is taken out for taxes, thanks to the US Tax Code.
While paying taxes is important to fund government services we all benefit from, the current tax code in the US seems to punish the poor and middle class while rewarding the wealthy and large corporations. The more you make, the more ways you have to avoid paying taxes.
If you’re struggling to put food on the table, you don’t have that luxury. You end up paying a higher percentage of your income in taxes. How is that fair? In this article, we’ll explore how the tax code disproportionately burdens the poor and middle class, and what we can do to create a fairer system that provides relief for those who need it most. The solutions may surprise you.
The US Tax Code: How It Disproportionately Burdens the Poor
The US tax code is complicated, but one thing is clear: it hits the poor the hardest. While the wealthy enjoy loopholes and tax breaks, low-income families face a higher tax burden relative to their income.
The poorest 20% of Americans pay about 10% of their income in taxes. The top 1%, on the other hand, pay only about 7% of their income. The US tax code is filled with deductions and loopholes that mostly benefit the rich, like lower rates on capital gains and huge breaks for mega-corporations.
The poor also pay higher state and local taxes since those taxes are often flat or regressive. Sales taxes, for example, take a much bigger bite out of a poor person’s income. The poorest families also spend a larger portion of their income on necessities like housing, utilities and food — all of which are often subject to sales tax.
It’s not just the rates and loopholes that hurt the poor. Compliance with the insanely complex US tax code costs individuals and businesses over $400 billion each year. While the wealthy can hire accountants and lawyers to help them navigate the code, the poor are left struggling to understand it on their own.
Policymakers need to make the US tax code fairer and stop shifting the burden onto those least able to pay. Simplifying the code, eliminating loopholes, and making the system more progressive could go a long way toward balancing the scales. The poor deserve a break, not another penalty. It’s time for real tax reform that helps working families get ahead instead of pushing them further behind.
How the Earned Income Tax Credit Fails to Help Most Poor Families
The Earned Income Tax Credit (EITC) was meant to help low-income families, but for most, it just isn’t enough. To qualify, your income has to be below a certain threshold – for a family of four, it’s around $50,000. Sounds reasonable, right?
The problem is, the maximum credit is only about $6,000. While every bit helps, that’s not going to lift a family out of poverty. And the income requirements severely limit who can benefit. Many poor families make just enough to not qualify, but not enough to actually get by.
Another issue with the EITC is that it’s tied to the minimum wage. So as the cost of living has gone up over time, the EITC hasn’t increased to match it. This means its buying power has dropped dramatically since it was introduced. What could once help pay for basic necessities now barely makes a dent.
- To really help low-income families, the EITC needs an overhaul:
- Increase the maximum credit and income thresholds to match the current cost of living.
- Index the EITC to automatically adjust for inflation so its value doesn’t continue to drop.
- Expand the income range so more middle- and low-income families can benefit.
- Make the credit partly refundable so families can get money back they actually paid in.
Instead of a hand up, the EITC has become more of a token gesture. For the goal of lifting families out of poverty to become a reality, the program needs to provide much more substantial assistance. It’s time for real reform that gives hardworking families the support they need and deserve.
Why High State Sales Taxes Hurt the Poor the Most
Sales taxes hit the poor hardest
State sales taxes seem straightforward enough: you buy something, you pay a percentage of the purchase price. But in reality, sales taxes disproportionately impact lower-income individuals and families. The less you earn, the more any tax bites into your budget.
If you’re living paycheck to paycheck, an extra 5-10% at the register means you may have to cut back on essentials like food or medicine to pay the tax. The wealthy, on the other hand, won’t feel the pinch from sales taxes and won’t have to make those difficult trade-offs. Sales taxes also apply the same flat rate regardless of the item, so lower-cost necessities like groceries and clothing are taxed at the same rate as luxury goods.
- Groceries and other basic needs should be exempted. Exempting necessities like food, clothing, and medicine from sales tax would make it fairer. Over 20 states exempt most groceries from sales tax to ease the burden on low-income families.
- Sales tax revenues should be balanced with other sources. States rely heavily on regressive sales taxes for revenue rather than more balanced sources like income or property taxes. Shifting some of the tax burden to higher-income individuals through income tax increases could make the overall system more equitable.
- E-commerce loopholes need to be closed. Out-of-state retailers don’t have to collect sales tax on goods shipped to customers in other states. This “e-commerce loophole” costs states billions and gives online retailers an unfair price advantage. New laws aim to fix this by requiring large online sellers to collect sales tax, regardless of location.
Sales taxes may seem like a straightforward way for states to raise revenue, but they conceal the disproportionate burden placed on those with the least ability to pay. Exempting basic necessities, balancing revenue sources, and updating outdated e-commerce laws are steps toward building a fairer tax system.
How Corporations and the Wealthy Exploit Loopholes In the Internal Revenue Code to Avoid Paying Their Fair Share
The Federal Tax Code Favors the Wealthy
The US tax code is riddled with loopholes that benefit large corporations and the wealthiest individuals. While you and I pay taxes on virtually all of our income, the rich are able to shelter much of theirs from the IRS through clever accounting and taking advantage of legal loopholes in the tax code.
For example, the wealthy can stash money in offshore bank accounts and shell companies to avoid paying taxes on investment income and capital gains. They also get major tax breaks for donating to charity and for investment losses. And let’s not forget about the notorious “carried interest loophole” which allows hedge fund managers to claim a large portion of their compensation as capital gains instead of regular income, saving them billions in taxes each year.
Corporations Get Away with Highway Robbery
Large companies have teams of lawyers and accountants dedicated to finding ways around paying their fair share. Some of the biggest corporations in the US pay little to no federal income taxes each year by exploiting various deductions, credits, and loopholes.
In fact, over 60 Fortune 500 companies paid nothing in taxes for 2018 according to the Institute on Taxation and Economic Policy. How is that possible when the average American pays over 13% of their income in federal taxes?
While small businesses and the middle class carry the bulk of the tax burden, big corporations have rigged the system in their favor. They lobby politicians and donate heavily to their campaigns to influence tax laws. They also hide profits offshore and use accounting tricks to make their tax liability disappear, all while reaping the benefits of operating in the US.
The current tax system overwhelmingly favors the wealthy and large corporations at the expense of ordinary citizens. Until politicians make real reforms to eliminate loopholes and ensure everyone pays their fair share, the vast majority of Americans will continue to be shortchanged. There’s nothing quite like legalized tax evasion to make people feel like the system is stacked against them.
Policy Solutions: Making the IRS Federal Tax Code Fairer and Helping the Poor
The US tax code favors the wealthy while disproportionately burdening the poor. Some policy solutions could help rebalance the system and provide relief for those who need it most.
Simplify the Internal Revenue Service Tax Code
The US tax code is over 70,000 pages long, full of loopholes and exceptions that benefit large corporations and the rich. Simplifying the code by eliminating unnecessary complexities and loopholes could make the system fairer. Fewer deductions and lower rates overall may increase government revenue from the wealthy and big businesses.
Increase tax credits for low-income families
Programs like the Earned Income Tax Credit and Child Tax Credit help working families making less than $50,000 per year. Raising the amounts of these credits or expanding eligibility could lift many households out of poverty. Additional tax credits for expenses like childcare, healthcare, and education would also help ease the burden on the poor.
Raise taxes on the wealthy
Increasing taxes on the rich, especially by raising rates on capital gains and large estates, could generate hundreds of billions in additional revenue each year. A modest tax on Wall Street speculation may also curb risky financial practices while funding social programs. The wealthy have benefitted greatly in recent decades, so asking them to pay a little more is reasonable and fair.
Simplify small business taxes
Self-employed individuals and small businesses face an enormous tax compliance burden. Simplifying expense deductions, business credits, and filing requirements could save them thousands each year. This may allow small companies to grow, hire more employees, and boost local economies.
The solutions above aim to create a fairer and more equitable tax system without stifling economic opportunity. By simplifying the Internal Revenue code, providing targeted relief for the poor, raising rates on the wealthy, and easing the burden on small businesses, the government can generate revenue to fund important programs while still encouraging growth. Fixing the imbalance in the US tax code may be one of the most impactful ways to help citizens in need.
So there you have it. The numbers don’t lie – the current US tax system is inherently flawed and stacked against regular folks like you and me. While we struggle under the weight of taxes on our hard-earned paychecks and everyday essentials, the wealthy elite and massive corporations exploit loophole after loophole to pad their already deep pockets. It’s unjust and unethical, and serious reform is desperately needed to establish a fairer and more equitable tax code.
One where everyone pays their fair share based on their means, not one where the poor are punished for being poor while the rich are rewarded for being rich. Our leaders need to make this a priority. The future of the middle class depends on it.