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A Fair Tax is a Flat Tax

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Published on Friday, 28 December 2012 21:10

Written by Tax Policy

With the federal deficit spiraling out of control and the country about to fall over the fiscal cliff, it's back to tax talk. The gist of the argument is that Obama and the Democrats want to tax the 'rich' and Republicans want to leave rates where they currently stand. The media and the left have pounded this discussion into the table non-stop

and make the claim that the 'rich' don't pay enough taxes. The president himself has said it, and most of Americans believe it. Have the politicians bothered to look up the facts or are they just playing populist politics to fool the people?

Let me start with a thought experiment: Say that you are throwing a party with your friends. Everyone is supposed to bring something. What situation would bother you more: a friend only bringing some chips and dip when they were told to bring sandwiches, or a friend not bringing anything, and then going into your wallet and taking out twenty bucks when he arrives? I think the answer is clear for most people that the second situation is worse. But why would this not be tolerated on a micro scale, but is celebrated on a macro scale? The situation that I just described is exactly what we have in the federal tax system. You've heard of the 47%, but it is actually quite worse than that because most of these 47%ers are receiving a negative tax rate. 

Liberals seem to be a little confused about something: They keep mentioning that the 'rich' should pay their fair share, but they don't seem to understand the definition of fairness. Nearly everyone agrees that the only fair taxation system is where people put in an amount proportionate to their income. Before continuing to read, think about that statement. Isn't it agreeable? Could you take a position against that statement and be able to defend it?

Most agree that it would be unfair if there were a flat fee that everyone had to put in, such as $1000, because the poor would have to pay a larger percentage of their income than more successful people. Okay fine. So if it is not a flat fee, then to be proportionate to income it will have to be a percentage of income, right? But then stop! Suddenly up is now down, left is now right, and fair is not considered fair anymore. The rules change and liberals suddenly want successful people to pay even MORE than what was previously considered fair. Now successful people have to pay a higher percentage of their income to subsidize other people who aren't contributing their fair share. And then liberals have the audacity to make claims that they still aren't putting in enough? Are they just ignorant of the facts or are they just pushing their socialist agenda? They do not seem to understand the the 'rich' already do pay a higher percentage of their income and a higher dollar amount than their lower earning counterparts on average. Of course, the typical American would not know this when high profile politicians such as Obama repeatedly keep touting the horn at every possible chance and making ignorant comments such as "It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million." Really? How many examples could you possibly present that represents this situation? Because it's definitely not the norm. Warren Buffett started this meme with the mention that his secretary pays less of a percentage in taxes than him (while omitting the different types of income each earns). 

So, let's defer to the facts. Look at page 6, figure F of IRS return data (below). 

Take a look at the row titled "Total income tax minus refundable credits as as a percentage percentage of AGI." What you will see there is an upward sloping tax rate with respect to income (that trails down slightly beyond $2 million). The tax percentage of income of someone making more than $10 million a year is a rate 6 times more than the rate for someone making between $30-50k on average. And below $30k a year, the average federal tax rate is negative. You have a whole boat load of people freeloading (47.9%), with a large crowd of them getting paid not to contribute and most of the tax burden is placed on a small subset of the population (table below).

Right about now is when someone usually will start crowing about the payroll taxes that he and other workers pay. Yes, you do pay these, but these are taxes for different purposes. These are not the taxes paid hitting the point of this discussion. You get these monies back in the form of social security, and healthcare when you are old. These are not taxes being paid and get vaporized to run the federal government. Don't want to call social security or medicare an entitlement because "you've been paying into the system all these years?" Then stop sounding the horn about all the payroll taxes that you've paid to justify your existence in this country - you can't have it both ways. But even then, we still have the freeloading 15: the 10 percent of 'taxpayers' who get paid not to pay federal or payroll taxes. This is welfare laundered through the tax code plain and simple. 

Usually about this time is when those making the arguments above are cornered because they've just been proved wrong on both claims that the 'rich' pay less of a percentage of income or less total money than everyone else, so they just throw up their hands and say, "Well, it is okay if they pay more than they currently are now." I would respond in two ways: 1) These 'rich' are still part of the economy and actions against them will still impact the economy. And 2) there is a huge preoccupation with 'rich' in this country but the focus really shouldn't be on the producers, but on the takers. How can you possibly complain about those contributing tax dollars to the system, but not be bothered by those taking from the system? Personally, I'm a lot less worried about a producer contributing hundreds of thousands of dollars a year and taking care of his own affairs than the millions of leeches sucking this country dry.

So what is fair exactly? A flat percentage tax with limited deductions is the most equitable tax system, by definition (it would also have the added benefit of simplifying the tax code; see the form to the left). But voters are usually asked to vote for public policy that will discriminate against people they are jealous of, and they vote for policies that will prevent any of the burden from falling on themselves. As the system stands now, how can it be fair for someone to vote for higher taxes on someone else? I've heard the answer many times: "Well, what do I care?" The tax does not affect them and they have no skin in the game, so of course it is easy for them to vote to have  someone else shoulder their tax burden. They are being asked to vote for discriminatory policy with myopic benefits to themselves. Anyone who votes for higher taxes that targets another demographic should have to be subjected to those higher taxes, Period. If that were the case, we'd have to most fair tax system in the world.