Friday, July 11, 2008

An "I Told You So" on Taxes

There's an editorial in the Wall Street Journal that links up with my previous posts on taxes. The IRS will soon release data (which I'll likely link to if I see it) that shows that in the last year, the top 1% of taxpayers paid over 40% of all federal income taxes (they earn about 18% of the money). The top 50% of taxpayers shoulder 97% of the total burden, leaving only 3% of total revenue paid by the other half. This is the highest percentage of the total take paid by the top 1% in modern times, and maybe ever. By comparison, when top rates were double what they are now (in 1970, when the top rate was 70% instead of today's 35%), they only accounted for about 17% of revenue. By extension, this means that more of the total burden had to be paid by somebody else. This, of course, sheds a little light on the notion that the rich are not paying their "fair share."

Now, don't get me wrong. I'd love it if our entire federal budget could be met by only Bill Gates paying ALL the taxes, and him still being left with enough leftover money to have planes and boats and the cool mansion with all the gadgets. (We'll leave aside for the moment whether that would be in any way just.) But like I wrote earlier, what we would like has to be tempered by economic sense. If a tax increase would, perversely, result in more of the tax burden being paid by those with less income, then it's by definition not progressive. (And the reverse is also true--as I said earlier, if a tax CUT doesn't stimulate the economy, then it's economically unsound no matter how much supply-siders like it.)

I know some people like the idea of a flat tax or the Fairtax, which would be a national sales tax. Both of those would allegedly be "fairer." But under these plans, the burden would shift away from the "rich" paying as much as they currently do (in a flat system, the top 1% would pay about 18% of the taxes; in a sales tax, the guy who spends 90%+ of his income pays a higher effective tax rate than the millionaire who banks most of it). Again, this may be "fair," but it would result in a tax hike for some 99% of taxpayers. (BTW--I do know that the Fairtax involves a "prebate" that mitigates the tax damage at the lowest levels, but it still would screw most of what we call the middle class. If you don't know what I'm talking about, don't worry about it).

My prescription: if it ain't broke, don't fix it. That means making the 2003 tax cuts permanent (which only makes sense--if rates "reset" to 2002 levels in a couple of years, that's a de facto rate increase). And there may be some other tax code simplification, loophole closing, or even incentives that we may want to do incrementally for reasons other than straight economics (for example, the deduction for mortgage interest isn't in the code to raise revenue, it's there to encourage home-ownership, which is seen as helping with social stability). There's not much to dislike about the general structure of our current system.

But what about balancing the budget? Here's a neat thought... we could try... wait for it.... cutting spending! Again, this ain't rocket science. If your budget is not in balance and you are an individual, a family, or a business, you can either (a) spend less; (b) earn more; or (c) borrow the difference. We've been doing (c) for way too long, and I've already detailed why I think that (b) is pretty unlikely, at least at dramatic levels. That only leaves one option.

Of course, it's never going to happen. Politicians don't operate on math. They operate on emotion. And nothing is so emotionally satisfying as being told that you can have everything and somebody else is going to pay for it.


Pete said...


MichaelPolutta said...

I still support the Fair Tax. I think a consumption tax is better on every level than an income tax. With the lowest income folks paying no taxes under the Fair Tax plan, and the middle class being able to choose the things they pay taxes on (what they choose to buy), it is a win-win in my book. I have read the Fair Tax book, and I accept the explanations of how prices will settle to be basically what they are now, once all the hidden taxes worm their way out of the supply chain.

If only...

Coach Sal said...

I own the book, and I like Boortz a lot. And I'll hold off on debating whether the fair tax is a 23 or 30% tax or if the prices of goods and services would really adjust (although color me at least somewhat skeptical about that).

My biggest problem is the percentages. The fair tax is revenue-neutral, so the same net amount comes in. But who pays it changes radically. If the WSJ article is correct in saying 1% of taxpayers currently pay 40% of the tab, if they pay less, SOMEBODY else has to pay more. Since they only make 18% of the income, and likely don't spend every dime of that (they are, after all, rich), their share goes down by more than half, maybe much more. Again, I'll stipulate that this is "fairer" to those folks, by far. But the increased burden falls increasingly on those who can afford it the least. The poor are protected by the prebate, but the middle-class breadwinner earning $80k gets just nailed (even if he only spends $60k of it). Somebody has to pay the balance.

Still, there's no need to worry about it ever happening... the practical chance of a repeal of the 16th amendment (requiring a 2/3 vote of both houses of congress and ratification by 3/4 of the states) is only slightly greater than that of winged monkeys flying out of my butt. :-)

Pete said...

We're moving more toward a society where the voting public is becoming increasingly aware that they can vote themselves gifts from the treasury.

The downfall of a nation is when the government acts as the great equalizer among the wise and the foolish. When a person can expect the government to step in and alleviate (even negate) the consequences of their own actions and and the government requires the wise to pick up the tab, we're in a sad place. Especially when it has to do with their finances. Those who spend $1.25 for every dollar they make should be left to their own fall.

I believe in charity. I do not believe our countries leaders should be engaged in redistributing the benefits from intelligent choices.

I know it's not scripture, but I am sure that it lines up: The best treatment for continued bad behavior is the consequence that follows.

bekster said...

The WSJ article brings up something else that I thought was very interesting. Some people (Obama, etc.) may think that the rich just have all of this money laying around that the government can take, BUT let's think about what the rich actually DO with their money. They SPEND money that goes to support business where middle-class and poor people work, and they also SET UP business where middle-class and poor people work. If you take too much money away from the rich, they will readjust their spending and less money will go into the economy to support the little guy. Businesses will have a harder time, and some people who work for the rich guys will be laid off, leaving them with much less money to pay in taxes. Way to go, Obama!