Taxes

In the spirit of the day, I will engage in some subject-matter rhetorical musing... There has been a lot of talk recently about taxes - specifically, how our Democratic leadership will over-tax us. I decided that a short look at the tax situation would be in order. Everyone has heard the mewling that the top 20% pays 70% of the taxes, usually something like this: Picture an upside-down pyramid with its narrow tip at the bottom and its base on top. The only way the pyramid can stand is by spinning fast enough or by having a wide enough tip so it won't fall down. The federal version of this spinning top is the tax code; the government collects its money almost entirely from the people at the narrow tip and then gives it to the people at the wider side. So long as the pyramid spins, the system can work. If it slows down enough, it falls...A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes. They're the tip of the triangle that's supporting virtually everyone and everything. Their burden keeps getting heavier. BTW- just so we are all clear, the author of that article - Ari Fleischer - was George W. Bush's press secretary. hmmm... So, let's take a look at this - and listen to the stuff that Ari seems to forget: Income taxes do tilt upward. But they're the progressive bit of the federal tax wedge. Other federal taxes, like the payroll tax and the excise tax, are not progressive. (And we're not even going to get into state income, which are frequently regressive) That's why CBO calculates something called the "effective federal tax rate." The EFTR is simply a households’ federal tax liability divided by its income. The four taxes that are included in the measure are the income, payroll, excise, and corporate taxes. And they give us a pretty good idea of whether the rich really are overpaying. The following graph matches each income quintile's effective federal tax rate with its percentage of the national income. See if you think the rich are getting a bad deal... When you look at percentage of total tax liabilities, the rich do in fact bear a heavier burden. But it's because they have so much more money. They are not bearing a heavier burden as a percentage of their incomes. They're bearing it in relation to everyone else's incomes. Indeed, it's only because the sheer levels of income inequality in this country are frankly unintuitive that Fleischer can even write this sort of dreck. People hear that the top 20 percent pay almost 70 percent of the country's income taxes and nod their head. That's unfair! But it mainly seems unfair because people don't know the top 20 percent accounts for almost 60 percent of the national income. Wow, seems pretty obvious... Is it? Something worth noting, I think is the source of the dis-continuity that seems to exist in the upper 20%. How could they be so much higher? For a definition of these quintiles, we turn to the census bureau: Notice that the floor for the top 20% is around $88k. However, the floor for the top 5% is over $157k, which means that 80% of the top quintile makes between $88k and $157k. Taxing this group the same was as the top 5% seems a bit punitive. Therefore, as has been suggested many times before, an additional partition for the top 5% of earners seems appropriate. This is further augmented by a review of historical income growth, where the top 5% seem to have a distinct advantage again. So, the real question becomes, should taxation be income-based or wealth-based? In order to explain the question, consider the reality of marginal utility: 10% of a million dollars in income - $100K - is worth less to the person with that income than 10% of $10K - just $1K - is worth to the person with that income (in terms of living necessities, etc). This is to say that, given a certain minimum income necessary for survival (call it "minimum wage", although this is a completely separate and equally volatile topic), the wealth above that minimum is (should be?) taxed separately from the wealth below that line. I think that most people would consider this "fair", because income above the survival threshold is essentially disposable - used for bigger houses, cars, TV's and all other manner of self-indulgence. So, is it necessary for taxation to be "fair"? Most would say it is, but many others are un-concerned with "fairness". They focus on poverty and living conditions, or on economic growth and prosperity. Who is to say which is right? Personally, I feel that the perception of "fairness" is an important part of the American psyche. This is easily demonstrated with the following experiment: 2 people are randomly selected from a group. The leader hands the first $10 in $1 bills. He is told that he can give anywhere between $0 and $10 to the second person, and then he can keep the rest. The catch? If the second person rejects the offering, the $10 is taken back by the leader. Question: How much should the first person give the second? If you said $5, you have helped to prove the "fairness" requirement. Most people give this answer. In fact, if the second person is offered a smaller amount, say $1, he will often reject the offer. Although he is losing out on $1, he has punished the first person $9 for being "unfair". He has essentially paid to punish this lack of fairness. By contrast, if 2 computers play this game, the first computer always offers $1 and the second computer always accepts, because the second computer is better off with $1 than with $0, even if the first computer ends up with $9. In a similar way, the tax code is (should be?) structured to promote this sense of fairness. not surprisingly, fairness is defined differently depending on which end of the scale one sits. The top 5% consider a flat percentage to be "fair", even though the inequity in disposable income is immense. Conversely, the bottom quintile favor progressive taxation, even though it means that the top 5% will pay a dis-proportionate percentage. So, who is right?