At The Hill Jerry Haar jumps heedlessly into a thorny subject—do the rich actually not pay their “fair share” in taxes?
Progressives often assert that wealthy individuals and corporations do not pay their fair share in taxes and therefore that tax rates on these upper-income people and companies should be increased.
But is it true that the rich and big companies do not pay their fair share?
A recent Internal Revenue Service (IRS) survey found that 95 percent of Americans believe it is everyone’s civic duty to pay their fair share of taxes. They also believe the current system is unfair, largely benefitting big business and rich people. But the truth is American business pays 93 percent of the nation’s taxes, and the top 1 percent pay over one-third of income taxes.
Let’s disaggregate the subject a bit, starting with corporations. Whatever you think a corporation’s “fair share” of taxes, however high the rate you impose, it will not fall on the corporation, as Mr. Haar observes:
In actuality, corporate taxes are paid by shareholders, workers and consumers, with a substantial share passed on through retail prices or lower wages. As economist Scott Lincicome points out, this can result in lower investment and economic growth, thus reducing wages and living standards, less innovation and lower productivity. An OECD study of major taxes and their impact on economic growth and real wages found that corporate taxes were the most harmful.
That’s not controversial. It is common knowledge among economists. If you want the corporate income tax to fall on the corporation itself, you will need to change more than the marginal tax rate. IMO such a notion is unworkable not to mention politically impossible.
Onwards to the personal income tax. I think there’s a reasonable conversation to be had about actual effective tax rates for individuals when all federal taxes are considered. In terms of effective tax rates everyone who is paid wages, whether a salary or by the hour, and earns less than $142,000 pays about 20% in federal taxes. That’s Social Security tax (FICA) plus Medicare tax combined. $142,000 is the present FICA max, the level above which FICA is not levied. Personal income taxes are on top of that. In the U. S. the average single worker without children pays about 28% in federal taxes (the average married worker with one income and two children pays 14%) compared with OECD average of 35% (24%). Even that is not really an apples-to-apples comparison for a variety of reasons include that just about every other OECD country has a VAT and most don’t have state taxes on top of federal taxes.
The key point is that the U. S. federal tax system is slightly (repeat slightly) regressive because of Social Security and Medicare taxes. Most European tax systems are much more regressive than ours because of VAT.
Our system is even more regressive when you recognize that workers who earn more than $142,000 don’t have FICA taken on it. That lowers their effective tax rates quite a bit. Translation: workers in the top 1% of income earners pay considerably lower than 14% and genuinely rich taxpayers even lower.
Now we get to the question of what is “fair”?
I’ve expressed my own view on taxes many times in the past. I think FICA, the Medicare tax, and personal and corporate income taxes should be abolished and replaced by a prebated VAT. Progressivity could be ensured by the size and incidence of the prebates. To my eye the second best alternative would be 1) levying FICA on all wage income and 2) a prebated flat rate tax on income with progressivity ensured by the size and incidence of the prebates.
Neither of my preferred approaches have the slightest chance of being enacted into law because either one would take Congress out of the equation, removing its main power which is to give tax breaks to the individuals and organizations it favors while imposing taxes on the disfavored.
So we’re left to squabble over what’s a “fair share”? Nobody really gives a damn. They just know that you can’t get blood out of a stone.
… with a substantial share passed on through retail prices or lower wages. …
This notion should be tossed onto the trash heap along with the tropes about imported goods. To be accurate, this pre-supposes that companies are paying too much and charging too little, but in fact, companies are paying as little as possible and charging what they can.
Instead, they will lower costs. Fewer workers will be required to do more work, and to ensure that there are wage slaves, the minimum wage and unemployment will be kept as low as possible. In fact, companies will spend as much as needed to ensure this occurs.
… As economist Scott Lincicome points out, this can result in lower investment and economic growth, thus reducing wages and living standards, less innovation and lower productivity.
Mr. Lincicome has a slightly better argument, but note, he uses the caveat “can”. Companies that can offshore work and import goods & services will. They have been doing this for the past 30 years, but we have been assured this was “progress”.
Automation will increase investment and economic growth, but there is no way to worsen working conditions for robots through legislation. No amount of lobbying can force a robot to do more work, and a replacement robot costs as much. On the other hand, robots do not unionize.
RE: VAT (Value Added Tax)
I assume most people mean sales tax. An actual VAT is not a sales tax. It is a tax on the value added to a product, and it occurs at every step of production. In reality, it is a production tax.
I have been lectured that taxing something will result in less of it. So, taxing added value will result in less production. The easiest way to lower a VAT is to add value in a place without a VAT, and thus, we have turned the clock back 30 years.
Personally, I bought into all this pablum, but then, “the scales fell from my eyes.” I was forced to accept that much of what I believed was wrong, and I “left the cave”.
Tennessee Ernie Ford – 16 Tons
Same old, same old. Like all of these coming from the right it concentrates on income tax. If you ignore FICA and all other taxes then yes, most people dont pay taxes, but if you are really concerned about taxes per se then you would be concerned about all taxes. He isn’t. This is really just another attempt to reduce taxes of higher income people. Next, it ignores income. He says richer people pay 1/3 of taxes, meaning income tax. Yet you need to know the share of income those people earn to know if it is disproportionate and that leaves out wealth.
I will say there is one thing new here, his claim that business pays 93% of our taxes. He is counting the income tax withheld on people’s income. Technically true in a way but awfully ingenuous. (Arguments about being fair are pretty unrewarding. End up with a lot of subjectivity.)
Steve
Just to correct some facts.
The Medicare part of FICA (2.9%) has no income limit. Any income above $200K for single earners and $250K for married couples is subject “Additional Medicare Tax” (0.9%). Also, there is the NIIT which is 3.8% of investment income OR income above $250K. Above 250K, the payroll tax is ~7.6%.
I believe the question whether FICA counts or doesn’t count as “tax” depends on one’s view on whether Social Security benefits are “earned” or not. The framework that the more one “contributes” to the fund, the more benefits one can legally expect makes it act like a pension. Social security is on that line between “social welfare” and “pension” program. That’s why I don’t count social security contributions as strictly taxes like VAT / real estate / personal income taxes are.
Note that I included all taxes not just the income tax.
CO correctly points out that payroll taxes and the related benefits are an intertemporal matter. The calculation would be difficult, but they should be netted.
It also is disingenuous to compare the effective taxes paid on “income,” using only one label. Broadly, income comes in two flavors, ordinary (wages) and capital gains. The composition of income matters and to ignore it is sophistry. The rates are different for a reason. Further, capital gains also come with an attendant cost never discussed in these debates: risk. Raising the rate on cap gains will only hurt the less well off, and provide voting chits to be handed out by and for the benefit of politicians and their wealthy donors.
Well, it only makes sense to leave money in the hands of those who know it’s value, and strip it from those who do not.
Pearls before swine.
“Well, it only makes sense to leave money in the hands of those who know it’s value, and strip it from those who do not.”
Well, it only makes sense to leave money in the hands of those who have earned it and shown how to best employ it, and keep it from entities like the government who have not.
There, fixed it for you.
On a more serious note, I’ve never been able to get a tax advocate to specify what is “fair,” or why, or how much is enough. All I hear is more, and because that’s where the money is.
Depending upon how finely you want to parse definitions you could make similar arguments for Medicare, public education and maybe even Medicaid. For me, these are all govt run programs available to broad groups of Americans regardless of their level of contribution and we pay for them with taxes. (You only need to work 10 years to qualify for SS or Medicare.)
” capital gains also come with an attendant cost never discussed in these debates: risk.”
I think we all have risks. The guy making $25/hour driving a truck has the risks that his job disappears or he gets hurt and can never work again and has no money. He still pays taxes. With capital you have the risk of losing the money but for this group we want to make special allowances. Plus, you have the possibility of reward. A worker doesnt really have a comparable reward available.
A better version of 16 tons.
https://www.youtube.com/watch?v=fzlT80jQ3lo
Steve
Medicare, public education, Medicaid don’t behave like Social Security at all.
The returns one gets from those programs are not fixed directly by contribution. Take public education funded by property taxes — I could pay 50% more then my neighbor yet it won’t entitle me by law to get 50% more education for my child then my neighbors child. Or Medicare, where everyone pays the same premium, and is eligible for the same care regardless of the amount of Medicare contributions made after meeting a threshold. Medicaid is inversely related to income, in that the more income one makes, the less benefits they should expect.
With social security, benefit levels are directly correlated to contribution levels by law.
The CBO runs these numbers regularly for federal tax rates including all sources of federal taxation to include the payroll tax:
https://www.taxpolicycenter.org/statistics/historical-average-federal-tax-rates-all-households
Effective tax rates are surprisingly stable over time for the upper quintiles. If you look at the lower quintiles, you’ll see that negative income tax rates offset payroll and other taxes which have, over time, made effective rates more progressive not less.
The basic question of “what is fair” when it comes to taxes is entirely appropriate but also entirely subjective.
Yes. The OECD numbers to which I linked differ in some ways from that report in that 1) the OECD (correctly) attributes both employer and the employee portions of Social Security and Medicare deductions to the individuals and 2) the OECD (correctly) adds direct federal payments received by individuals as negative taxes.
I think the relative stability of effective taxes tells us two things:
1) the political assessment is that’s what Americans will tolerate and
2) it’s hard to have as complicated a tax system as we do and not have people in the upper income levels able to adjust the taxes they pay to what they find acceptable.
CO- You are looking at some kind of correlation but what I am noting is that in none of those cases does what you put in necessarily cover what you receive. So in the case of Medicare if you are very healthy you put in a lot more than what you take out. If you are sick you take out more than you paid in. With Social security if you die young you take out less than you put in. Die a lot later and you could take out more than what you put in. Get disabled and you get SS disability which wont necessarily equal what you paid in. With public education you can pay in more or less than what you receive. SS is different in that, to date, it is overall self funding.
Steve
Aren’t you proving my point?
A contributor’s heirs receives social security benefits if they die young. I don’t know of any other government benefit that one’s heirs receive based on their parents contributions.
Social security was designed as a form of public-run pension. No one I know thinks their pension contribution is purely a tax.
I am going to retire at 68. If I die at 70 my 30 y/o son won’t receive any of those benefits. My wife would receive a fraction of mine since my payments will be larger than hers. With a private pension ERISA just says that if you have a vested pension the spouse needs to receive some money. How much depends upon the plan with a lot fo plans giving the spouse a 2/5 contribution. So even with a private pension, just like SS and just like SS, you can receive more or less in benefits than you put in.
Steve