Tax the Rich

President Obama and Governor Brown of California want us to increase the Federal and State taxes on the rich people, so that they "pay their fair share."

I have written in the past about the real unfairness of the tax code.  [Taxes, Taxes, Taxes, July 18,  2011] 

For a while, though, I found the "pay their fair share" mantra extremely seductive.  It's easy and attractive to go after the 1%.  It's so attractive that the supporters who ride the "tax the rich bandwagon" either don't bother to check the math, or they don't believe the facts, or they don't want to hear the facts.  If taxing the rich does not solve our governments' debt problems, we will have to come up with more complex and painful solutions.

First, to increase the taxes on the rich will not solve the problem. If we tax the top 1% of our income earners at a rate of 100%, it will not solve our problem.  There are not enough people in the top 1%, and their total annual income would not significantly reduce the debt.

Second, the rich people (with a few notable exceptions) are already paying more than their fair share of taxes:

• The top 20% of taxpayers earned 51% of the nation's personal income, but in 2009 they paid 68% of the total federal taxes.  That's more than their fair share.
• The top 1% of taxpayers earned 13% of the income, but paid 29% of all federal taxes.  That's more than twice their fair share.
• The bottom 20% of taxpayers earned only 5% of the income, but paid only 0.3% of all federal taxes.  That's not a fair share, but most of us concede that the very poorest should not have to bear a tax burden.

Some simple arithmetic shows that the middle 60% of filers earn 44% of the income and pay slightly less than 32% of the taxes.  That's certainly not a fair share, but our politicians are wooing this middle 60% for their votes. 

Remember, too, that 46% of tax filers pay no federal taxes at all.   That's not just poor people.  Almost 7,000 people in the top 1% pay no federal taxes.   Many more of that middle 60% also pay no federal tax as well, but a lot of people are falling hook, line and sinker for the "tax the rich" slogan.

Some people consider taxes just to be a fee for the services the government provides.  If that is the case, then 46% of our people are gettting all those govenment services free of charge, while the rest of us are over-paying for them.

Reducing government spending by itself will not reduce the nation's annual deficit.  Some tax increases will be necessary.  But, like it or not, some of the freeloading 41% will have to chip in, including some of that middle 60% who are not paying their fair share.
 
Our Congressmen don't want to tell us that.  They do not want to propose specific, realistic debt reduction plans.  If they do, we the people won't re-elect them.  So instead, they throw us the "make the rich people pay their fair share" slogan.   Don't fall for it.

Economic Food for Thought

I recently read an article proposing a “progressive consumption tax.” It made me look at economics and taxation from a totally different viewpoint. On the surface the ideas have merit, but I am a little concerned about the possible unforeseen consequences.

The author, Professor Frank, suggests that the Feds tax consumption rather than the income. You report your total income, the amount you saved, and the amount you spent. Both the amount saved and a pre-determined portion of the amount you spent are not taxed. The “excess” spending is taxed at a progressive rate. To me, it seems a lot more fair than the "fair tax."

The populist side of me has always sought a way to tax the super-wealthy. The article reminded me of Thorstein Veblen’s writings about “conspicuous consumption.” And it occurred to me that if we really want to “soak the rich,” we should find a way that does not penalize earning, but instead punishes wasteful consumption and enables and encourages spending of money on things for the common good. Theoretically, government revenue increases. With this approach, the economy is not driven by an "invisible hand," but by a very visible government.

The article does bother me a little because I believe that the purpose of taxation is to fund government operations, not to control human behavior.

I am including a link to the article. It is fun to see the (almost fanatic) comments it drew from the (somewhat conservative) Cornell alumni.

http://cornellalumnimagazine.com/index.php?option=com_content&task=view&id=483

If you are too dogmatic a conservative to read this with an open mind, please don't append knee-jerk tyrades in your comment. I am looking for calm analytic discussion of the merits and potential dangers of the concept.