What can the tax deal tell us about our country and values?

A lot of information can be derived from examining a country’s tax policy. What values and ideals does the country espouse? What are the country’s short and long-term fiscal goals? How does tax policy affect class structure? Last week the President reached a tentative agreement with Republican leaders on a tax deal. Below I highlight two major aspects of the deal focusing on the conclusions we can draw about our government’s societal values.

• 1. A 2% cut in taxes that are used to fund Social Security (FICA). This is one of the more “populist” of the tax policies. It is an across the board tax cut that will give individuals at all income levels a slight boost in take-home pay. The implications, however, are interesting. There is widespread agreement from both parties that our Social Security system is underfunded and in need of reform. This policy, while decreasing federal withholdings, undoubtedly adds pressure to an already fragile public support system. It seems as if the government is in essence undermining the need for Social Security and advocating the use of individual retirement planning (i.e. IRAs, 401(k)s, etc.) in lieu of the public system. Americans do not have a history of responsible savings behavior so it is doubtful that individuals will divert the 2% in social security tax cuts towards private savings. More likely, the result will be an increase in short-term consumption and the deferral of important public policy decisions like social security reform until a later date.

• 2. The estate tax will be lowered to 35% with an exemption on the first five million dollars. This is one of the more troubling of the recent policies: the tax rate is in effect being lowered from 55% to 35% and the exemption is being raised from $1 million to $5 million. The estate tax serves an important purpose in our society, preventing the perpetuation of wealth from one generation to the next. More than ever, income inequality has reached unparalleled levels. Globalization, technological advancements, and stock market rallies have not benefited the country equally. In fact, the richest one percent of Americans now earns 24% of the country’s income. This is a one-sided policy that benefits the rich. It will increase income inequality, add to our deficit, and remove strong incentivized charitable behavior, which previously existed due to a high estate tax.