Inspired by the linked post by Alex Tanzi at Bloomberg Quint, consider the graph at the top of this post.
Now provide a narrative explanation of what the graph illustrates. If you think it’s fair, please provide your definition of “fair”. I’m pretty sure it will hinge on ability to pay. In other words the same reason that Willie Sutton robbed banks.
It also bears noting that the top 50% of income earners pay 97% of the personal income tax. To be really fair (in this case meaning “even-handed”) it would probably be more illustrative to see a graph of total federal taxation (including payroll taxes). That looks more like this and strikes me as pretty unfair. I would love to see a breakdown like the graph at the top of the page of percent of total revenues paid by income group and relative to percent of income. My instinct tells me it would show that the top decile minus the top percent or two are getting screwed.
Extra credit question: what would it take to make the whole system fair? IMO the easiest way would be to eliminate FICA max. Sadly, that could be finessed.
Do you mean actually fair, or fair as in a series of “reforms?”
Fair. Fair in who’s eyes?
And definitions always seem to be made conveniently. Who pays the federal income taxes, who pays those taxes plus payroll taxes, or who pays ALL taxes – federal and state income, payroll, property, personal property, sales, excise….. I’d argue that money is fungible, and only a look at all taxes really addresses the question ‘who pays the taxes.’
Its not hard at all to demonstrate that a $500K/yr wage income earner or household pays over a third of their earned dollars (perhaps 40%) to government (over $210K in dollars), and that the median earner or household pays 20% of their gross earned dollars, but only $10-12K in dollars. As a ratio that might be 20x. Is that fair? By what logic. What do you get for your money? Should you adjust for government services heavy users vs non-users? If you increase or eliminate the FICA tax cap, do you adjust the SS payout?
Is it fair or wise that half the country can vote themselves the treasury – or their neighbors bank account – because they have no income tax skin in the game?
Capital can flee rapidly these days. Capital, especially risk capital, is precious. Is it fair or wise to double tax income, just because someone is prudent enough to save some of it?
If you ask someone ‘how much of your income should you pay to the government’ you generally get answers in the 15-25% range. You almost never hear 35-40%; and people, even higher tax advocates, are surprised at those figures. Which means they almost always wind up back at the Willie Sutton theory.
If you really want to talk fairness, or reforms you should first be focusing on the code and favors placed in it, not rates. (Well, the very first thing would be to focus on the spending addiction, not the funding problems.) There is a current claim that Jarred Kushner paid essentially no taxes the last few years. If true, as portrayed, that seems wrong. The mechanism is RE depreciation to offset income. It doesn’t sound right though. Most people are subject to depreciation recapture and basis gains. But maybe the RE business has a loophole.
All in, I liken these debates to the global warming debates when no one will address real solutions like nuclear power, just Rube Goldberg proposals. A flat income tax would simplify everything. But it won’t gain traction due to the real reasons we have a tax code measured by the pound of paper: the political power associated with granting favors, an entire industry that prepares returns, social engineering and partisan squabbles.
For many years “fair”, at least as it applied to federal taxation, meant that everyone paid the same amount. We have now come to accept that it is fair for people to pay not only different amounts but for those who are able to pay a larger percentage of their income in taxes. I think it’s a contortion but it’s a well-accepted contortion.
I don’t see by what stretch of the imagination it is fair for a single taxpayer who earns $120,000 and receives most of his or her income from salary to pay a higher percentage of his or her income than another single taxpayer who also receives most of his or her income from salary, earns $150,000, and takes identical deductions.
The tax code needs to be considered in toto not broken up into components to determine fairness. Otherwise fairness is merely redefined to mean expediency.
I understand the need for a progressive tax system. It’s not a construction of equity, but of practicality. But the majority should have skin in the game, or trouble will ensue. 3 wolves and a sheep deciding on dinner and all that. And uncapping payroll tax, a favorite point until you do math, isn’t the real problem in taxation.
“I don’t see by what stretch of the imagination it is fair……â€
What? If you are referencing capital gains the problem (in stylized construction) can be remedied easily. Both make $120k salary and taxes are equal. The $150k guy simply puts his capital in a mattress. Not a good result.
The insightful may recognize that today was filing day for those always on extension. As PE and the tax code are complex, I’m always on extension. My tax return was emailed to me, with thousands of dollars owed to accountants, last night. An inch and a half thick. This is absurd. And if the Kushcner story is correct, that is absurd. Talk to me about rates after the basic code is fixed. Rates are a total diversion, spending and code manipulation is the malignancy.
What I’m referring to specifically is the FICA cap. All wages should be subject to FICA. Treating capital gains distinctively isn’t the affront that differential treatment of wage income is.