It’s Fix the Tax Code Friday! Earlier in the week, we took a peek at the UK’s planned tax increase for its wealthiest taxpayers, something that the US has been struggling with over the last year.
Proponents of increasing the tax on the wealthy argue that they have more ability to pay – and that’s what happens in a progressive income tax system. According to the 2001 Census, the share of wealth owned by the top 1% of households was 33%; the richest 20% held 83% of the country’s wealth. This is in comparison with the bottom 40% which controls less than half of 1% (0.3%).
Opponents of increasing the tax on the wealthy argue that it shouldn’t matter that they own more wealth, that the tax burden should be the same for every person. A study from the Joint Economic Committee shows that the top 1% of taxpayers pay 34.3% of federal income tax; the top 25% pay 83.88% of federal income tax.
Yes, if you look closely at those statistics, they are very, very similar, arguing very, very different points.
So today’s Fix the Tax Code Friday question is:
Should the wealthiest taxpayers (in the US, the UK, wherever you live) pay the most tax since they have the most ability to pay?
Yes. That’s where the money is.
This misses the point entirely. We already have a highly-progressive tax system, and it’s gotten more progressive since the Clinton years, not less:
http://www.atr.org/federal-income-tax-isbr-already-steeply-a3096
The top 1% paid 26% of income taxes in 1986, 37% in 2000, and 40% today. This is despite the fact they only earn 22% of the income.
Here is the important distinction that seems to get dropped in these arguments – I mean, debates. 😉
Are we talking about the rich paying more in DOLLARS or paying more in PERCENTAGES?
If I make a million dollars a year and pay 30% of that in taxes… I am paying $300,000.
If you make $30,000 a year and pay 30% of that in taxes… You are paying $9,000.
A flat tax (based on percentages) still means that the rich are paying more (based on dollars).
Whereas a flat tax based on dollars would mean that the rich would pay far, far less in terms of percentages. I don’t think anybody advocates a flat tax in terms of dollars.
Personally, I think that the rich should pay more in dollars. Obviously. That just makes sense. I don’t mind the rich paying more in percentages, but only to a certain point. I just don’t see the need for the government to ever take more than 35% of a person’s earnings. Ever.
Which is about where we stand now. The rich pay about a third of their income to the government (see Obama’s tax return, for instance). The poor pay nothing, or in many cases get paid by the government (refundable tax credits, anyone?). Everyone in the middle pays something in the middle.
(For the record, my household income – married filing jointly – is roughly $60k. I pay about $5k in income tax – less than 10%.)
Maybe I should clarify my situation. Last year our income was about $110K. We filed joint. We paid the Feds $11,000 in income tax and another $7,000 in FICA/Medicare tax. That $18K was 16.4% of our gross income.
However, I’m 67, so the Feds sent ME $26,300 in Social Security benefits, so on balance I ended up GETTING $8,300 from the Federal Government. Although it took me almost all my life to get here, you could say I’m now making out like a bandit. And . . . I have all my hair, all my teeth and almost all my health. I guess I’m one of the lucky ones.
To be fair, though, there is no intelligent argument to support the gov’t paying Social Security to someone whose income is $100K+. Fortunately for me, the gov’t has come up with stupid arguments for paying me that $$, and I am way too “greedy” to send any of it back on principle. Okay, I paid lots and lots of $ into Social Security over my (so far) 49-year working life, but the idea that Social Security is some sort of insurance system is a total fiction — it’s a transfer program pure and simple, and always has been. One wonders what the situation of Social Security would be if people like me didn’t get any benefits, and it all went to people who needed it a lot more than I do. I have a rfriend age 61 who had a heart attack last summer. He was making around $60,000 a year; now he’s on full social security disability and gets a little over $17,000 a year. He should be getting more and I shouldn’t be getting any.
I live in California and some of these arguments seem to affect people here adversely. In order to buy a house in much of CA it takes two incomes. Those two incomes combined could be over the $250,000 figure Obama had mentioned. These would not be wealthy people because housing is so expensive and a large percentage of the gross income would be going to mortgage payments. The state tax rate WAS 9.3% scheduled to go up, sales taxes are 8.25% plus the local addition of generally another 1%. Property taxes and withheld payroll taxes affect net income also.
I don’t disagree that wealthy people should pay more tax, I just think we need to do a better job of defining wealthy. It can’t be just an arbitrary income number.
You pay for what you get – FREEDOM!
@JBruce remember that in order to get SS you had to pay FICA for, what, 40+ years? You’re not “making out like a bandit” from that perspective – you quite possibly could’ve invested it better than the gov’t did.
@Rini You’re only talking about federal income tax. Bear in mind that there’s FICA, state tax, sales tax, property tax, sin taxes….need I go on? Those figures don’t even count indirect taxes like unemployment or fees such as auto registration. I agree with your principle that 35% of income is about the ceiling, but in practice many folks are close to 50% of their income going to the gov’t.
Frank: You’re quite right that I’ve paid in a lot to FICA over almost 50 years (and am still paying because I’m still full time employed). But I’ve always viewed FICA as just another tax. The fiction is that it’s an “insurance” program, and the gov’t keeps books as if the surplus (which, so far, we’ve always had) is “invested” is US gov’t bonds.
My Dad was “present at the creation” — he was working for the Commerce Dept in the late ’30’s when SS was enacted. He worked with one of the House or Senate subcommittees that was working on it and he told me that they decided to call it an “insurance” program because it wouldn’t pass Congress if it were just a “tax” supporting a simple transfer program (and, probably, one of the most regressive taxes the Feds have).
One thing that a lot of people seem to ignore, when they grouse about taxes, is that the taxes pay for a lot of things that we get “free” from the gov’t. The property tax on my house, and the sales taxes at the store pay for police and fire protection, streets, roads, etc. Our taxes and “fees” pay for our court system, wars in the Middle East, welfare, Medicaid, all kinds of scientific research, the PA Turnpike, AIG, Larry Craig, the VA, the INS, the US Marshals, the FBI, waterboarding instruction, wiretapping, Yellowstone, etc etc. The real questions ought not to be about “tax and spend”, but whether or bot we want our gov’t to spend money on certain things. You’d have a hard time finding anyone who opposes everything on the list I just gave, or who supports all of it.
@JBruce Certainly, I agree that our society has a lot of cognitive dissonance on “what I’m getting vs. what I pay” with regard to taxes. Like you, I tend to think of FICA as essentially an expense, and then, like you, I’ll be happy and consider it gravy if I ever get a distribution (I’m 25, so it’s a long way off).
My basic complaint with the tax system is that it’s not approached holistically in either discussion or implementation. I don’t think it’s realistic to think that FairTax or a similar system will be passed soon, nor do I think it’s a particularly great system, but it does have many qualities we should demand from our tax system as citizens. I think we need a simpler, less invasive, harder-to-cheat system with lower transaction costs, and it is achievable- but not without a shift in Congress to value long-term stability and sensibility over attempts at short-term vote generation.
Also, why are people so opposed to Pigouvian taxes? Although I understand the idea that people don’t want to expand the government’s tax base, the concept is sound. I think cap-and-trade is unnecessarily complicated, but it makes much more sense to me to tax energy and other commodities which have significant negative externalities than it does to just keep increasing marginal income tax rates.
I still think a 1 time sales tax for all is the best way, if not needed for the collection of money, how much of the Government could we lose ? This is my way, 10% federal, 10% state, 10% local. Let me have my paycheck and my land. Then make the government balance their budget, like we do, by the month of income. Think about how spread out the taxes are now, does any one know how much we really pay ?
PS. I wish I could own my land, and not pay rent to the King/government. The same for my paycheck, it’s mine keep your finger out of it.
A pure flat (percentage) tax misses the fact that basic living expenses doesn’t scale on the same percentage level. A person making $1M doesn’t require more food than a person making $10K. To the person making $1M, the cost of basic food is a very negligible percentage, but to the person making $10K, the cost of basic food is probably a gigantic percentage.
So, at a minimum, there would need to be a reasonable personal exemption first, and then the rest can be taxed as a flat percentage. However, what’s a reasonable personal exemption? Lower income people are more likely to get sick, so they would have higher medical bills, meaning that they need a higher personal exemption. And, once we start going down that path, there are probably other reasons why the rich should pay a larger percentage of the taxes.
One thing to keep in mind is that people have to work in order to get taxed at all. I’m happy that the lower-income people work instead of just abusing public support infrastructure. If they get discouraged and give up trying to work, the rich would be in far worse trouble than merely paying a slightly higher percentage in taxes.