April 15 came and went and most of Americans who owed taxes dutifully paid them. Today, I thought we would look at the latest data showing who pays income taxes and who doesn’t. The numbers from 2014 may surprise you. 

According to the Tax Policy Center, the top 1% of earners – who had so much hate directed at them when the Occupy Wall Street movement captured the media’s fancy a few years ago – pays 45.7% (almost half) of all income taxes while making only 17.1% of national income.

The top 20% of earners pay 83.9% of all federal income taxes. At the same time, they make only 51.3% of total U.S. income. The middle 20% of earners pays only 5.9% of federal income taxes, while earning 14.8% of national income.

Meanwhile, the bottom 20%, which earns only 4.5% of all U.S. income, pays -2.2% (yes, negative 2.2%) of federal income taxes. In other words, those in this quintile, instead of paying an income tax, actually get paid money from Uncle Sam after Washington has taken it from everybody else. 

Income and Federal Taxes

Anyone who thinks this distribution is fair should think again. The system is so steeply progressive that Karl Marx would likely approve if he were alive today!

This, of course, isn’t what we hear from redistributionists who go on and on about how “the rich don’t pay their fair share.” A Pew poll in mid-February found that 72% of Americans think many wealthy people don’t pay their fair share of federal income taxes.

An Investor’s Business Daily poll in March found that 90% of Democrats favor “raising taxes on the wealthiest Americans to pay for programs that will benefit the lower and middle classes.” So Democrats are now embracing a more full-throated kind of populism, releasing a new tax plan that takes from the richest Americans and Wall Street. Rep. Chris Van Hollen, the Maryland Democrat, is behind the proposal. You will be hearing more about it just ahead. 

How Government Disguises the Real Level of Taxes

In various polls, most Americans say they believe they pay too much in federal taxes. Yet those views would be even more negative if people felt the full pain of funding the $4 trillion a year federal government. But the citizenry hasn’t resorted to pitchforks yet because politicians use “fiscal illusion” techniques to hide a lot of the costs. Here are some of the techniques (hat tip to The Daily Caller): 

Debt. The government finances half a trillion dollars a year of its spending by borrowing. So people see the benefits of the spending, but the costs are pushed forward by deficits and debt. The government has run deficits in 85% of the years since 1930, so this is not a transitory problem but a deliberate strategy of hiding costs.    

Withholding. The federal government requires employers to withhold income and payroll taxes from paychecks, and that makes earnings disappear before workers get their hands on the cash. Withholding was introduced during World War II to make income taxes feel less painful, and thus to reduce taxpayer resistance.    

Refunds. The IRS has rigged the withholding system so that more than three quarters of tax filers get refunds every April. As a result, the government appears to be Santa Claus rather than a fiscal oppressor.    

Business Taxes. The government collects hundreds of billions of dollars a year from taxes on businesses, including the corporate income tax and the employer half of the federal payroll tax. The burden of these taxes ultimately falls on individuals, but the collection is invisible to them.    

Real Bracket Creep. Federal income taxes are indexed for inflation, but not for real economic growth. Because tax rates rise as one earns more, the system results in the government automatically and invisibly gaining a larger share of incomes over time.    

Complexity. Congress has spread out the federal tax burden across multiple different tax bases. It has also made the largest tax – the income tax – hugely complex. These features of tax design have reduced the ability of voters to understand the overall cost of government.    

Regulations. When Congress wants to confer benefits on voters, an alternative to a tax-funded program is a regulation. For example, regulations require most businesses to provide workers with health insurance and a range of other benefits. The costs of such mandates ultimately fall – in a hidden manner – on individuals in the form of lower wages and higher prices. [AOA:  Another example is Tenant Welfare that property owners are forced to “pay”!]    

Smoke and Mirrors. The government uses accounting tricks to hide costs. One is the “salami strategy,” which is used by the Pentagon and other agencies on large projects. With this technique, the full costs of projects – such as weapon systems – are only revealed one slice at a time, so that by the time the full costs are evident, the project is too far along to be canceled. 

All these techniques make the “price” of government seem artificially low, such that Americans keep electing politicians who promise to give us even more of it. At the same time, fiscal illusions embolden politicians to spend money on activities that make no economic sense.

But fiscal illusion is fiscal dishonesty. Whether people believe in small government or big government, they should want lawmakers to trade-off the costs and benefits of programs in a transparent way. So … one goal of federal tax and spending reforms should be to repeal as many of these illusionary techniques as possible.

I could go on (and on), but I’ll leave it there for now.

IMF Urges Fed Not to Raise Interest Rates Until Next Year

The International Monetary Fund (IMF) cut its forecast for US economic growth in 2015 last Thursday and simultaneously called on the Federal Reserve to delay its much expected Fed Funds rate hike until sometime next year. In all my years of Fed watching, I don’t recall the IMF ever openly attempting to influence Fed monetary policy.

For those not familiar with the IMF, the International Monetary Fund is a global organization headquartered in Washington, D.C. representing 188 countries. The IMF works to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world.

Formed in 1944 at the Bretton Woods Conference, the IMF came into formal existence in 1945 with 29 member countries with the goal of reconstructing the international payment system. Member countries contribute funds (dues) to a pool through a quota system, from which countries with payment imbalances can borrow. 

Through this pool of funds, and other activities such as statistics keeping and analysis, surveillance of its members’ economies and the demand for self-correcting policies, the IMF works to improve the economies of its member countries. The IMF is considered by many (including your editor) to be a liberal-leaning organization – it is a big proponent of global warming, now better known as “climate change.”

Getting back to an earlier report, the IMF reduced its forecast for U.S. economic growth in 2015 from 3.1% as recently as April to 2.5%. It cited several negative developments including the severe winter weather, the strong US dollar, the West Coast port dispute and collapsing oil prices as reasons for the growth downgrade.

As a result of these negative developments, the IMF said it believes that risks are rising in the U.S. financial system, most notably in the insurance industry and in riskier assets such as stocks. The IMF obviously is concerned that higher short-term interest rates would pose even greater risks for the financial system in general.  Thus, the call on the Fed to delay interest rate liftoff until sometime next year.

The IMF warned that regardless of when the Fed raises rates, the increase could trigger “significant and abrupt rebalancing of international portfolios with market volatility and financial stability.” Inflation also could rise faster than expected, potentially provoking a sudden shift upward in borrowing costs, the IMF added.

“In either case, asset price volatility could last more than just a few days and have larger-than-anticipated negative effects on financial conditions, growth, labor markets, and inflation outcomes around the world,” the IMF said. “Spillovers to economies with close trade and financial linkages could be substantial.”

Last week’s IMF report also noted that a Fed rate hike this year could lead to a sharp appreciation of the dollar, which would badly hit emerging countries with large amounts of dollar-denominated debt. If the Fed raises rates this year, some analysts fear a wave of defaults which, in the most exposed countries, could lead to another serious global financial crisis. 

But is Fed Chair Janet Yellen Listening? Maybe, Maybe Not

The IMF’s Managing Director Christine Lagarde told reporters last week: “We believe that a rate hike would be better off in early 2016.” Yet she declined to say whether she had discussed the IMF’s effort to influence U.S. monetary policy with Janet Yellen. But she insisted the IMF’s view was not at odds with that of Ms. Yellen, who has said that the Fed would raise rates only when economic data was right.

However, the conclusions of an earlier IMF report seem to go against what Fed Chair Yellen said just last month in a speech she gave in Rhode Island. Yellen sees signs of a recovery in the economy and believes the Fed will be able to raise rates sometime later this year. Most experts believe the Fed will raise rates in September, but the IMF recommendation to hold off will likely re-open the debate.

A recent IMF report is another worrisome sign that the U.S. economy is stalling. Although the IMF still expects America’s economy to grow this year at a rate of 2.5%, that is little improved over last year’s growth of 2.4%. The hope was that America would have a breakout year in 2015. As noted above, the IMF projected 3.1% growth for the U.S. in April, but now the global agency sees too many factors holding the economy back.

The Fed hasn’t raised rates in almost a decade and the FOMC would clearly like to begin the process of “normalization” to get rates higher in advance of the next recession. In Yellen’s mind, a rate hike would show that the Fed is confident enough about the economy’s health to take off the training wheels (zero interest rates) that have been in place since the financial crisis began in 2008.

A spokesperson for the Federal Reserve declined to comment on the IMF’s report, but it may be safe to assume that Janet Yellen didn’t appreciate the IMF sticking its nose in the Fed’s business. 

Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at www.halbertwealth.com