Arbitrary Fairness

With the fiscal cliff looming there has been renewed discussion of “fair share” and how it’s only “fair” to ask the wealthiest Americans to be pay more taxes. Yes, “ask”. I believe that is the same kind of “asking” a mugger engages in when he “asks” for your wallet. I have yet to have revealed to me a definition of “fair share” so perhaps it is time to offer one myself. The income tax system is built on the notion that one’s payment burden should correlate to net income. If your share of society’s aggregate income is 25% then it logically follows under such a system that it is not unfair to demand you pay at least 25% of total taxes. A “progressive” tax system (the one we have today and which is a plank in the Communist Manifesto) demands one pay more than their proportionate revenue stream. Some argue this is “fair” on the grounds that mere ability to pay more is sufficient grounds to take more because on balance society (supposedly) benefits. However there exists no non-arbitrary method that reveals precisely how much more above one’s revenue proportion one’s tax burden should be. How exactly do these wise sages propose to derive a fair ratio between tax burden and income share that results in a perfect balance between societal benefits at the expense of the individual? Is a 2:1 ratio fair, but a 3:1 ratio not fair? If not, why not?

Sadly the mainstream media leaves us (unsurprisingly) with the impression that top taxpayers are paying less than their proportionate share. Nothing could be further from the truth. For 2010 (IRS data) 3% of taxpayers (earning above $200,000/year) had a 27% share of income and a 52% share of all personal income taxes with an average tax rate of 22%. Yes you read that correctly, 3% of taxpayers pay over HALF of all personal income taxes even though they earn only ONE-QUARTER of income. Earners between $75k – $200k (18% of taxpayers) receive and pay about a third in income and taxes with an average tax rate of 11%, so in terms of balancing income and tax burden this group is perhaps the most “fairly” taxed. Those solidly in the middle class ($25k-$75k – 38% of taxpayers) earn 30% of all income and pay only 14% of the tax burden with an average tax rate of 6%. And lastly those in the under $25k (41% of taxpayers) range earn 9% of all income but pay a mere 1% of the tax burden with a 1% average tax rate. Including payroll and corporate taxes would alter the numbers somewhat however the overall analysis remains the same: there is only one segment of taxpayers paying far in excess of their share of national income and for some bizarre reason they as a group are the ones most vilified for not paying enough. I’m not suggesting those in the lower brackets pay more and the top less. What I am suggesting is we cut spending so that everyone can pay less.

Due to the persistent fairly tale that there was a budget surplus during the Clinton years people somehow imagine that if we simply let rates rise back to where they were under Clinton we will magically close the budget gap and have surpluses again. As the Democrats are fond of saying “the math just doesn’t work.” Allowing the top marginal rate to rise on 3% of taxpayers would raise only approximately $100 billion/year. Coupled with a projected $900 billion deficit for 2013 that barely scratches the surface.

Consider what a $100 billion increase in taxes means. It is $100 billion removed from the private sector where it could be spent OR used to build new factories, hire more employees or invest in R&D. All of these events occur regardless of current demand. They are the direct result of the speculation incentive, that is, the incentive to possibly make more money in the future by spending money today. Increasing taxes kills the speculation incentive on two fronts: slowing the rate of investment (as more money goes to taxes and less to saving) and decreasing the incentive to invest due to lowered potential after tax returns.

Instead the tax dollars are redirected to government favored entities. If you think this might produce a net benefit, then ask yourself: Is society really better off if we allow the government to funnel money to those businesses that are most effective at the art of lobbying and suckling at the government teat (the political entrepreneur) by taking from those businesses and individuals that are most effective at actually producing things people want (the market entrepreneur)? Until we can face the reality that wants are infinite but resources finite nothing will stop us from going over that fiscal cliff.

One thought on “Arbitrary Fairness

  1. Matheus

    They’ll probably thsurt a VAT on us, but they’ll forget to remove the income tax Hey, let’s just do both Technology and efficiency is constantly putting people out of work, and we keep adding more workers to the work force. In good times, maybe all those surplus workers can become musicians, sell Avon, or become merry maids. But with government screwing things up, higher unemployment/underemployment might progress.Manufacturing of ipods or anything is becoming more and more mechanized it sure seems it will get rougher for the average worker. The good thing is a nice standard of living can be had for not much money. But managing distribution or redistribution of wealth/jobs might make for some angst. Maybe competition would bring more services to more people merry maids and child care for more commoners ? Better care for the elderly? To some degree we’ve already had this problem, with government and unions providing cushy lifetime employment, often for those that might have more trouble competing in the open market. Perhaps a working welfare program would be needed, but they should make less than the privater sector, not much more with early retirement and lifetime super benefits.A vibrant middle class might keep a whole economy humming, but constant trillion dollar stumbles by big government keeps crippling the capitalist/socialist mix we have now.

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