What is your fair share?
We all know that a key to the President's success in the upcoming election is to convince the electorate that those on the upper end of the income ladder do not pay their "fair share" of federal taxes. Further, the media has spent an amazing amount of time focusing on Mitt Romney's tax returns mainly to see if he paid a "fair share". Beyond the fact that "fair share" conveniently has no quantifiable definition, I still think we can look at some key indicators to make a more informed decision as to which direction we think tax policy should head.
1) Proportionality - I lifted this little nugget right out of the President's latest state of the union address: "Now, you can call this class warfare all you want. But asking a
billionaire to pay at least as much as his secretary in taxes? Most
Americans would call that common sense."
I do not know what the average billionaire's secretary earns, but lets call her middle class at $50k per year. Even if she pays the full 25% (unlikely), she pays $12.5k in taxes. Now, look at Mitt Romney's famous tax returns, he paid around 15% in personal income taxes on $20M and thus about $3M in taxes. $3 MILLION vs. $12.5k. If my math is right here, Romney paid at least as much as 200 secretaries combined. Gasp, that bastard. He paid for as much national defense, medicaid, and government warmth as 200 other Americans combined. So, no Mr. President, I would not call your statement common sense, I would call it bad math.
We have come to a place where we equate the percentage of taxes to the absolute amount of taxes. If we turn that concept around and equate the percentage of government spending to the absolute amount of taxes paid, then shouldn't Romney get 200 times the amount of national defense and medicaid and such. Of course not. Seems odd to me that someone who is footing the bill of 200 other people is accused of not paying their "fair share."
I have actually come to accept that proportional taxation is the best practical immediate solution to our problems. However, even there, the amount paid by different income groups is extremely skewed. Take a look at the graph in one of my favorite blogs that shows the share of federal taxes vs. the share of income:
The conclusion here is simple, In 2010, top earners made 30% of the income pie and paid 40% of the federal taxes. Low end earners took home 25% of the income and pay 13% of federal taxes. If your definition of 'fair' says people should pay proportionally to what they earn, then you should be advocating a flatter tax structure, NOT asking for a surtax on millionaires.
(So how does the rest of the world charge their top earners, no other country leans on the top 10% of tax payers like the U.S. does.)
2) Dividend Taxes & Capital Gains - So owners of corporations (stockholders) get taxed on the earning of the company at a top rate of 35% and then the same owners of those corporations get taxed AGAIN on the earnings when received as a dividend. Would you say double taxation on the same income is fair? Do you think raising this tax will increase or reduce business investment (a supposed common goal of all elected officials). Again, use the Mitt Romney example here, his personal income taxes say he paid 15%, but he actually paid close to 50% on that money in taxes due to this double taxation.
3) The Death Tax - Seriously, the most egregious overreach of government confiscation I can think of. So two people: one invests, produces and saves enough money to be very wealthy at the time of his death. His reward for such prudent activity, a 35% tax on his entire estate of which EVERY DOLLAR HAS ALREADY BEEN TAXED, with no option as to how he could choose to pass that on to his family, charities, and community. The second person produced very little, spent every nickel the second it hit his hand, and passed on with just the clothes on his back. The government says, kudos, you have achieved the American dream, you owe nothing, rest in peace. Is it fair to tax this income yet again?
4) Deductions - Mortgage Interest, Child Tax Credits, Child Care Deductions, Property / Sales / State Tax Deductions, and Making Work Pay Credits greatly raise the threshold before individuals actually start paying taxes. Don't get me wrong, I benefit from these deductions as much as the next guy, but it greatly reduces the effective tax rates on a subset of individuals. Somehow we are suggesting that people who make the personal choices to buy a house, have a baby, buy cars and boats, live in states with ridiculously high taxes, or work very little do not consume as much of the bloated government bureaucracy as those who don't make these choices. Would you say it is fair to tax different groups of people based on their personal choices?
(Side note: A lot of the argument I have seen for why lower income Americans pay more taxes do not hold much water. Seriously, do not blame the federal government for how much your state and municipality charge in income, property, and sales taxes. If you have issues with your state and local taxes, talk to your local representatives. Its a different issue.)
In the end, I agree with the President, I believe the federal tax system is wholly "unfair." I believe you should tax people based on the cost of protecting their rights and freedoms as Americans, and since all citizens have the same rights and freedoms, they should be taxed the same amount.
In lieu of that ever happening, I would just take a system where we all pay proportional rates to our earnings, do not get penalized by double taxation, and eliminate preferential treatment for individual choices.
Whether you agree with each point above is irrelevant, your "fair share" is not a quantity that can be readily calculated, but the more we let the government decide how society should spend its money, the less freedom society will have.