This word "fairness" keeps coming up around tax day, particularly in discussions around the Buffett rule.
Many have questioned what I and others mean by "fair." I've got five answers. A fair tax system should be:
Conservatives invariably counter that it's not fair for 47 percent of households to pay zero federal income tax (most recent data from 2009).
I even got a pretty moving note from a guy who said he didn't think it was fair that just because his income was so low, he didn't get to pay federal taxes. He wanted to contribute! (The usual Republican talking point here is "well, why don't you write a check to the Treasury?!" which is just silly. Whether it's this big-hearted low-income citizen or Buffett himself, their point is clearly systemic, and while their actions alone might make them feel better, they won't cure the perceived problem they're identifying.)
Liberals counter with two points. First, as the figure below shows, almost everybody pays taxes, and in fact, when it comes to payroll taxes, the middle class pays a higher effective rate than the wealthy (because those taxes cap out at around $110K). Middle and low-income households pay an effective rate of about 9 percent on payroll taxes; the top 1 percent pays 2 percent; middle-income families pay 17 percent of the total payroll tax bill; the top 1 percent pays 4 percent. And state tax rates tend to be pretty flat.
Second, as the next figure shows -- and these are important data points in reference to the first fairness principle above (progressivity) -- the actual effective tax rates of the wealthiest families (taxes paid as a share of income) have fallen quite sharply, because a) supply-side tax cuts from the Reagan and GW Bush-era only partly offset by Clinton's progressive changes in '92, and b) their pretax income has grown so much more quickly than their tax liability.
In other words, the wealthy have been paying a larger share of federal income taxes not because their tax rates have gone up -- in fact, they've gone down. It's because they've been collecting the lion's share of the growth for decades.
A key factor here has been the large decline in the rate of taxation on asset-based income, like capital gains, and the much increased concentration of that income among the wealthiest families. Those changes are related -- once you advantage a particular income type, you're going to see more of it. And these dynamics are also related to the bubble and bust syndrome in which we've been stuck, along with the financialization of the economy, both of which are problems to be discussed another day... let's stick with fairness for now (though I could see another principle here: a fair tax system doesn't incentivize the underpricing of risk, leading to busts that invariably whack the have-nots who are then called upon to bail out the haves; in practice, this principle would militate ending the favored treatment of debt financing in the tax code... hey, I like that... let's call it principle #6!).
Anyway, that's the rationale for claiming the Buffett rule increases fairness: it partially repairs the diminished progressivity with respect to certain millionaire+ households, specifically those with most of their income from capital as opposed to wages.
Now, you might object to progressivity, but I'd argue you're starting from a different place than most of us. Sure, you'll find folks to agree with you -- advocates of the flat tax might join you, for example. But those of us invoking fairness are generally invoking the progressivity that has always been a bedrock feature in the federal income tax.
And that is as it should be, particularly in an era of so much pretax income inequality. The fact that tax code has become less progressive in a period when the pretax income distribution has become more unequal is another dimension of unfairness -- a violation of principle #2. The figure below shows that the system of taxes and transfers (which are, of course, related as the former pays for the latter) has become less of a bulwark against inequality over time. It shows that inequality grew 10 percentage points faster after taxes and transfers than it did before.
I won't go through all the above principles, other than to say that #4 is clearly in trouble and this redounds to #3. Were we to follow the roadmap in the House Republican budget -- for that matter, any Republican, supply-side, trickle-down tax plan -- we would very much be violating those two principles, as these reverse-Robin-Hood schemes redistribute upward.
It's not simply that these plans lower taxes on the wealthy much more so than they do on the poor. It's that they leave us with too little revenue to help offset the disadvantages that block the opportunities of the least well off, that provide them a safety net in hard times, that help them meet basic needs of food and shelter. It is not at all hard to connect the dots between regressive tax changes and cuts in Pell grants, nutritional assistance, retirement security, and pretty much everything else.
Finally, despite all the predictable caterwauling, the only tax fairness principle that seems intact is #5. If you were rich or poor before tax day, you'll be so again tomorrow. Of that, you can be certain.
This post originally appeared at Jared Bernstein's On The Economy blog.
Follow Jared Bernstein on Twitter: www.twitter.com/@econjared
Rep. Jackie Speier: unEqual Pay Day
Lanny Davis: Obama and Romney on Buffett Rule - Both Right ... and Wrong
Robert Reich: Thoughts on Tax Day 2012
Phaedra Ellis-Lamkins: Let's Use Taxes to Put America to Work
Market(jobs) = Investors + Business Plan + Paying customers.
Leaving aside globalization which determines where the jobs are created. There is a proper balance between investors and paying customers. If government policy favors investors too much you get asset bubbles and if favors paying customers you get wage\price inflation. If the ultimate goal is to raise families, so we can procreate the species, than the solutions are rather clear. It's not a rich, poor divide nor is it about fairness, it's about creating and maintaining a functioning economic engine.
So here are my proposals to achieve a better balance. But it should be remembered that ALL income whether earned or unearned should be treated the same. And the government policies should at least lean toward paying customers a little, so that the investors actually get an ROI. Also this will be a multi-post due to HP's word limitation and on this thread may take days.
What's more by investing in state before diversifying to Wall Street, we would bring a smile to Adam Smith's face. It's much more efficient to spend locally, first, instead of either sending the money to Wall Street and waiting thirty years for the multiplier effect or to give huge tax breaks to entice a company to locate in your state. Both of which are like closing the barn door after the horses are gone.
1. The tax system needs to collect enough to cover NECESSARY government services.
2. It should be simple and easy to collect. (avoid wasting resources preparing and collecting taxes)
3. Beyond that it should encourage people to take actions that over the long term build a more prosperous society.
I will leave one and two alone for now and focus on #3.
Incentives:
Every economist knows that to give benefits based on income discourages work. Example: If you earn a benefit worth $5k as long as you earn less than $30k then people will avoid making the next $ over $30K even if they have to lie. The problem is of course if do not take the steps to earn that next $1 you will never make the $50+.
This reality makes progressive tax rates a counterproductive policy. This does not preclude high income earners paying higher taxes. With a flat tax rate clearly someone making $100K will pay more than someone making $50K.
Continued…
The proper number is 47%....I swear it keeps growing each and every time you and your ilk post.
Why don't you keep your stats up to date?
More importantly, you realize that Obama actually confirmed the 54% a few days ago in a speech on the Buffet rule, right?
Before the recession that number was 35% and we all know why that number got larger.
BUT, about 47% pay NO Federal INCOME taxes...these taxes fund the Govt and we ALL use services from the GOVT....
The worst part is shown in this graph, that the bottom two "quintile" pay no Federal Income Taxes and GET MONEY FROM THE GOVT....I have no problem setting a number that if you make "less than this amount" you pay NO Federal Income Tax....But at the same time you will NOT get anything from the Govt
Why don't I hear you rantingabout that?
$0-50,000 - 5%
50,001 - 150,00 -10%
150,001-300,000 -15%
300,001 - 500,000 - 20%
500,000 - 1,000,000 - 25%
1,000,001+ 30%
Any $$ made on wallstreet - Same as above
political contributions 40%
No if, and's , or but's, no loopholes, no special NOTHING !
Otherwise, I like it.
The other thing to consider is if the income is retirement. If the person is receiving investment income for retirement and it is their only income, they are of retirement age, then the tax rate could be adjusted in a reasonable manner to allow for a good retirement.
If we tax capital investment at the same rates as income, then we risk stifling capital investments and savings which are a large portion of our economy. There is certainly room for change and improvements.
Just because everyone pays a tax, somewhere, at some point, does not mean they are participating in the support of anything.
IE: Paying state/local taxes does not mean a damned thing to the federal government, nor does it entitle that person to scream for more federal spending/subsidies for themselves with a leg to stand on.
Yes and 18-25% of them are seniors on SS and were already taxed once. Do you want to tax them again?
The Dems are making the Republicans out as the party of the rich simply because it wants to reduce the size of government.
When a government borrows more than 42 cents of every dollar it spends, some people would say that's not sustainable. Dems say, let's Pahrtay in Vegas!
When Republicans discuss diminishing the size of government, in fact what they are talking about is reducing services, diminishing social services, privatizing essential government duties, and disenfranchising as many people as possible. When they start discussing reducing the size of our military, I might just take them seriously.
IMO, the problem isn't the tax rates or even what they pay. It's that they make so much more then everyone else. It's the fact that their income has risen while the middle and lower classes' income has stayed or even shrunk in some cases. The Buffet rule expects to raise about $47 billion over 10 years. While it may make things "fair" in the minds of the people, it does nothing to solve the spending issues at hand. $1.3 Trillion in deficit spending this year alone.
The tax system needs to be changed, no doubt, but spending also needs to be handled much better. And spending so much time and energy on something as trivial as the "Buffet rule" is trivial. Neither party is solely responsible or solely innocent.
As tax rates declined though, revenues fell and the promised reinvestment from those making more money never happened thus stifling not only tax revenues but the entire GDP. We have a revenue problem in both the public and private spheres. Spending in the public sector can be trimmed, but never to the extent we need t to be to trim the debt substantially.
We need revenue to grow our way out, and since that has failed to be reinvested voluntarily by our captains of industry it is time to revisit the social contract that affords them such low taxes.
Do you think your taxes go into a black hole and are never spent back into the economy and dont come back to you and if you leave in the red states,. more comes back to you than you pay in by 50% on avg...
Does where you work sell products to the government directly or indirectly, or are government workers your customers, or do your kids get an education?
Is there a defense contractor in your area or a military base....
If yu say NO, then you are BSing yourself...
regards
And yes much of the tax money we pay goes into a bottomless pit called Washington. The benefits to society are smaller than if the money was left to the individual that earned it.
You are only looking at the benefits that emerge from the money that government spends, not the benefits that would have occured if the money was left to the private sectory and invested productivly.
If you make that promise....we're good.
Before you agree, you may want to go research all the things our taxes pay for.....
No, really, name a place.....then we'll talk.
How many dollars in total tax should I pay?
So basically you had income after expenses of 540K minus 256K...
You paid P/R taxes(soc sec, medicare) of about 16% on your wages...
Your income was 256K totaling .very good placing you in the top 2 percent...
You paid less taxes on that earnings, less than at any time on our history, since around 1929.... be happy... You did good! And likely paid abiout twice as much as itt has paid during mpost of his career at Bain and after except the period when in 1987 Reagan raised cap gains to 28%, to make the tax sturctuer fairer.. that dam Commie!.
regards
If you look around at your business, i will bet you 10K (lol) you find that the money you pay in likely comes back to you... and if you are in a red state which gets back 50% more than they pay in.. well thats a guarantee..
Get a perspective.
I need to know how you can rationalize this!
The vast majority of households making up to $30,000 fall into the category, as do nearly half of all households making between $30,000 and $40,000.
Nearly 22% of those making between $50,000 and $75,000 end up with no federal income tax liability or negative liability as do 9% of households with incomes between $75,000 and $100,000.