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Trivia Tidbit Of The Day: Part 452 -- Is America's Tax Structure Fair?

"Tax Cuts For The Rich" Not Supported By Latest IRS Data-

"The tax cuts for the rich must go."

We're still hearing this same tired refrain from Presidential candidates on the left, more than four years after President Bush signed the major tax relief that left more money in the pockets of taxpayers and jump-started the ailing economy.

Four years after Nancy Pelosi declared of the "tax cuts for the rich":

“None of these tax cuts is affordable. None of them creates jobs, and they are not fair. All of them do damage to our long-term economic growth and contribute to the national deficit.”

... we are now seeing the longest uninterrupted period of job growth on record. The federal budget deficit is now below historical averages, relative to the size of the economy-- and it's still shrinking. Meanwhile, GDP growth following the tax cuts has been robust and continuous, despite ongoing war and housing bubbles and unprecedented natural disasters.

But what of the fairness argument? Speaker Pelosi argued that the tax cuts were not fair. Maybe she was right. Let's look at some numbers and find out.

The Tax Foundation has the latest IRS data, and notes that those at the top pay more than their fair share of taxes:

This year's numbers show that both the income share earned by the top 1 percent and the tax share paid by the top 1 percent have reached all-time highs. In 2005, the top 1 percent of tax returns paid 39.4 percent of all federal individual income taxes and earned 21.2 percent of adjusted gross income, both of which are significantly higher than 2004 when the top 1 percent earned 19 percent of AGI and paid 36.9 percent of federal individual income taxes.

....

The top-earning 25 percent of taxpayers (AGI over $62,068) earned 67.5 percent of the nation's income, but they paid more than four out of every five dollars collected by the federal income tax (86 percent). The top 1 percent of taxpayers (AGI over $364,657) earned approximately 21.2 percent of the nation's income (as defined by AGI), yet paid 39.4 percent of all federal income taxes. That means the top 1 percent of tax returns paid about the same amount of federal individual income taxes as the bottom 95 percent of tax returns.

So, as it turns out, the tax code has become more progressive under the Bush administration. Unfortunately, when Nancy Pelosi argued that the 2003 tax cuts were unfair, she didn't mean that they weren't flat enough. She meant that the tax cuts were not progressive enough.

The only really fair tax code is one that taxes people evenly.

15% of a million bucks is $150K.
15% of $10K is fifteen hundred bucks.

$150K, the last time I checked, was still quite a bit higher than $1.5K. While some might say that 150 thousand dollars is way too much for anyone to pay in taxes, regardless of income, others clamor for a heavy progressive or graduated income tax on the wealthy.

Instead of 150 thousand dollars, how about 300 thousand dollars. Or 500 thousand. Or, more than a Twilight Zone-worthy 900 thousand dollars.

It gets us back to the parable of the buddies at the bar, splitting the bill amicably based on income/wealth, until the bar owner lowers prices a bit:

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man," but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"

"That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

Sound familiar?

Well, based on the Tax Foundation's latest data, here are some visuals of the American tax code:

In the wake of "tax cuts for the rich," the share of income taxes paid by those at the top has actually grown, while record numbers of people at the bottom now owe no income taxes whatsoever. My guess is that the tens of millions of American workers not paying anything in income taxes are now less likely to support additional tax relief because there is simply no incentive to do so. After all, taxes already seem pretty low to them.

Is any of this fair?

Fairness is such a strange and subjective concept, but maybe we can ask whether the current tax system is best for America. Does the current tax system incentivize success, or punish it? Does the current tax system promote prosperity and innovation and the creation of new wealth? Does the current tax system optimize America's position in the increasingly globalized economy? Does the current system make any sense at all?

No.

Our tax rates ought to be flatter and lower, not higher and more progressive than they already are. If we are going to have a national income tax, everyone ought to feel the burden of paying taxes. That burden should be proportional. Taxes ought to be easy to understand. Taxes should not bankrupt anyone, or dissuade anyone from working harder or from taking more risks. Taxes should not force anyone to take their business offshore or underground.

Is today's tax code fair? Absolutely not.

Is the solution to roll back the 2003 tax cuts? No way, unless that plan involves completely scrapping the current tax code and replacing it with a simpler, flatter, lower one.

Previous Trivia Tidbit: Capital Gains Tax Cuts Produce More Revenue.

Posted by Will Franklin · 8 October 2007 07:49 PM

Comments

Posted by: Ken McCracken at October 8, 2007 06:09 PM

Posted by: John in IL at October 8, 2007 08:37 PM

Posted by: John in IL at October 8, 2007 08:50 PM

Posted by: GOP and College at October 8, 2007 11:49 PM

Posted by: ChrisR at October 9, 2007 11:56 AM

Posted by: John Gaver at October 10, 2007 05:33 AM