A lot of the discussions we have about what's fair to tax seem to refer to questions of how people should “share the pain.” I don't like the way that discussion usually goes, but not because I don't think people should share pain. I just question the definition of “pain” that seems to get used.
And I should say at the outset that frequently when this discussion of alleged pain sharing comes up, a flat tax gets suggested as well. For some reason this is often asserted to be more fair. I don't think it is. But I'm going to assume a flat tax for presentation purposes here because a lot of people don't seem to understand how to visualize our present progressive tax system. Doing so won't affect any of the points I have to make.
Let's begin by looking at how this sharing of the pain is supposed to work. We'll imagine three different incomes of different sizes. We'll assume everyone is paying a proportional amount of their income. 15% is often suggested as an ideal flat tax. But it made my picture hard to annotate. So I'm going to use 30%. Again, it won't affect my point.
So here are some typical incomes. The green indicates the take-home that you have, and the gray is tax taken out. The longer bars are people making more income. The shorter bar is someone making less income. But it's all proportional, so it's all fair—right? Well, we'll come back to that.
Now the discussion is about the current suggestion that we take out more tax on people who have very high incomes. That would look like this:
The argument is made by those who might stand to lose that they're already paying a huge amount of tax. And now we want more. Oh woe is them. Look at that giant red bite. In fact, look hard at it. Focus on it. Be hypnotized by it. Especially don't look at the green part to the left of it because if you look there, you might not feel like the person who's complaining is hurting so much. Just look to the red.
Actually, that's not the real argument I want to make. But it is one thing that should already have you thinking “Maybe proportionality isn't all there is to this picture.” Those pushing proportionality would be happier with this picture because they like the idea of shared pain:
There's another concept I want to introduce at this point. I'm going to call it the concept of “enough.” We can have a discussion later about what that line is. But wherever it is, the line of “enough” is what I want to define as the line where people can reasonably live. It supports sentences like “I don't have enough.” or “You have more than enough.” It looks like this:
Right away, you notice that some people might not make enough. In this chart, everyone makes enough before taxes, but after existing taxes, one person is already hurting. I've marked that in red. And that's with the proportional tax. They had just barely enough, but merely asking them to participate in taxes meant they didn't have enough after all. I don't think people who make exactly enough or less than enough should have to pay taxes. It's a sham. If they're really not making enough, someone will have to help them—either another person or the government. Why take money away just to give it back? Unless people are making enough, there's no real money to take.
And if we want to add more tax, is that increasing the pain? Well, sure, for those who are not making enough. Because they're the ones whose needs are being cut into. Above the line of enough, I don't think it's fair to say you're experiencing pain in the first place, and unless the increase in tax causes you to cross the enough line, I don't think you get to complain about increased pain—or pain at all.
And this is the thing. Incomes scale but needs really don't. Oh, sure, we can all get used to having really big houses, vacation homes, jets, really nice clothes, etc. I think it's great to have things like that. But when you get to the point of not just having them but not knowing how you'd live without them, and not being willing to sacrifice some of that for the sake of others who are truly needy, you're pushing a line with me. Certainly, at minimum, if you claim to be experiencing pain because you don't receive money at quite the lavish level you've been used to receiving it, you've lost all touch. It's time to be reminded that you're behaving like a spoiled child and to be told that you should be ashamed.
Proportionality doesn't work without exemptions for the low end. That's why we have a progressive tax system.
And sharing the pain equally is meaningless because we're not all in pain. If you're making enough, at least have the courtesy to acknowledge the fact. You're not showing yourself in a flattering light when you behave like you're hurting if you're not. The world has bigger problems than your imagined pain.
Enough of that.
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Veblen wrote about how with progress, "enough" rises, like it or not. Of course, if resources became scarcer, then you have a problem, although human ingenuity keeps seeming to overcome that, and that mentality, resources are now scarcer, can have bad effects, like fighting over the pie, instead of growing the pie. I liked it, although I don't agree with it, except to the extent that there is a subtle bullying sometimes, but not always, of the wealthy, but, what the poor forget sometimes I think is that they are projecting onto the wealthy something that not all wealthy feel, although snobbery and envy of course go together.
But of course, it's an over-simplification. In particular, the concept of "enough" isn't a boolean. As you've drawn it, it's an arbitrary degree of comfort (or discomfort), but the only real boolean is "lived/died".
If you didn't die, that's "enough". Well, we know we want more than that, for ourselves and our fellow citizens, so "enough" will always be a topic of debate. And there's good reason (in terms of incentives) to not want to make it a hard cutoff.
A refinement of your presentation (an "advanced course", if you will), would be to graph "pain" against income, and "induced pain" against taxation.
If you define "fairness" as "total pain induced by taxes", you can construct a fair argument for a 100% marginal rate, once you have "enough". I think that really points to either "total pain" not being a good model of what's fair, or "fairness" itself not being the right criterion in the first place.
And then there's "too much". :)
Bob, yeah, there are a lot of other things I could have mixed in. The original draft used a lot of numbers and made a lot more points. I figured I could do more another time. I appreciate your thoughts and suggestions there, though. It shows we were thinking along similar lines.
Well thought-out and laid-out post.
In your comment, you got to the crux of it. Some people in the higher brackets cling to the idea that they earned their place there, through meritocratic effort or through ancestral fiat, and that if people in the lower brackets were meant to be there in the upper classes, they could earn their way up the ladder as well. The idea is that the pursuit of happiness, indeed the very necessities of life, aren't rights at all. Think medieval society...
All this is a bit peripheral to your "enough" argument, but I think it's worthwhile for people to think about what "fairness" actually means. It's in the eye of the beholder, and it's certainly not the only criterion for judging taxes.
One of the saddest days of my life came years after my income had finally climbed past the point of qualifying for the Credit. Over the years, my income from an employer with whom I was associated for much of my career did not keep pace with inflation and I found myself once again being eligible. Frustrating? Yes. But I did have the "luxury" of knowing that our tax code would not leave me in penury.
Subsistence is a roof over your head, even if you have to share it with someone else. It's at least one full meal a day. (The three meal concept is a western extravagance couched in nonsense about good nutrition; half the people on this planet get one meal - if they are lucky. It's a change of clothes, a decent pair of shoes on your feet, and something to do with your time other than to stare off into space.
Where I live right now, it costs around $700 a month to rent an apartment. My health care costs - because I am under 65 - are currently $450 a month. My connectivity costs - phones, cable, television - are around $250 a month. That comes to $1400 a mont. My social security check comes to $1345 a month because I took early retirement.
Rather than working with percentages, it might be interesting to determine what it really costs for an individual or a family to live in America in a working class environment. A lot of us here know these numbers from anguished personal experience.
What you are saying here, in a roundabout manner, with great emphasis, is a very simple fact. When it costs all you are making to cover the basic necessities of your life, you have no money to do anything else, such as providing education for your children, or saving for your own old age.
Social security has been a cruel hoax, the biggest Ponzi scheme in human history....and the one that is going to sink this civilization either way. If we keep the commitment we made to ourselves when we voted for Social Security, we will bankrupt the nation. If we don't, we will bankrupt the senior citizens and, sooner or later, we will all be senior citizens.
I guess I did have something to say after all.
In fact, and more strikingly, I think the real problem isn't that there are different places you could draw a line, it's that I think the tendency of many rich people is to want to draw it different places for different people. What is unimaginably poor for them would be way more than they'd admit anyone needed to get on Social Security.
And I don't agree with you about the affordability of Social Security. The only reason it's in trouble is that we've not been regularly taking in revenues and putting them toward our promise. We max out the payroll tax, for example, and why? Because we shouldn't be taxing the rich to make sure the poor survive? We've also lent out the money in the Social Security account, which creates a more nearterm crisis than Social Security deserves. It's convenient for current problems to be blamed on that, but it's not fair at all. Basically, the concept was an affordable concept if the parameters were set right, and it could be put back on a corrected course easily. It's just that a pile of money sitting around waiting to be used at the proper time is an irresistible temptation to a politician wanting to make promises. Putting a mousetrap at the opening of the cookie jar is what's needed more than getting rid of Social Security.
One sure thing: you should add another bar on your long one - "sheltered" - this is the piece that really chaps my hide.
IMHO, your graphical discussion of the progressive vs. regressive income tax and the silliness behind a "flat tax" and how it is really regressive, is the BEST I have ever seen.
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Blue, I think we're on the precipice of going back to such times if we're not careful, yes. And we need to start to confront that issue head on by direct and open discussion.
Rob, there's a whole soup of issues that are very related, so it's fine to mention them. I left some out for simplicity of the piece, but the politics are, of course, more complicated.
Coyote, thanks for mentioning the EIC. It's good to put these abstracts into a tangible form.
Joisey, interesting point about resource consumption. I bet you're right. I don't have the data. But if you get some together, I'd be fascinated.
Keri, I like the issue of sheltered. Although in this chart I was trying to simplify out even the tiering, and that's just an extra bit. But still, you're right it's aggravating. I'll puzzle over whether there's a good way to visualize the sheltering matter. Thanks for the interesting comment!
RW, I don't think a lot of places take already-published stuff. Though I could conceivably expand it and retry sometime. Maybe Big Salon will pick it up? I see that happen sometimes but am not sure the mechanism. Anyway, I'm glad you liked it.
I'd definitely like to see more, but the point I had in my head the other day was that there had to be a relative point and a consideration to what it takes to meet needs, versus having a better class of living in general.
At a certain point, you set up taxation as you suggest, so that the poor and nearly poor don't have to take tax revenues from the coffers, because their vital needs are met and maybe they have a small bit left over that can be put into savings. Once that is met, the folks who make more get a percentage taken of their totals, minus the Enough line and no matter how much they make, if they're making more than that line, they're still going to end up with more.
And the argument about one person being rich and the "cost" to build a road for them, versus the cost of a road for hundreds of middle to lower income class folks is completely fallacious. The road costs the same, no matter how many it's built for. The same holds true for Firemen to stop fires.
One firehouse costs X amount, regardless of whether they serve one rich household or an apartment complex of 300. That is what is called minimum cost analysis and it doesn't work in providing services. A road is a road is a road, regardless of who uses it. I fireman puts out fires, irrespective of where it actually has to be put out. The costs associated are the same and as such, all benefit equally from the social service provided. In a perfect world, this would also hold true for police services, but the truth is that in higher population density areas, the benefit is much less than in those neighborhoods and burgs where the population density is lower in urban and suburban areas.
In truth, this also follows logically for medical response via ambulances, or fire protection via firemen availability. The simple fact that someone making much more money can live in a disproportionately higher quality area alone makes up the difference in what some folks percieve as unequal distribution of taxation.
If a minimum amount of income was sacrosanct from taxation, that would be equally fairly held that there is a minimum subsistence amount of income that all folks require to make a life for themselves in some fashion without true want or lack. Beyond that, a percentage of those totals is still, when all is said and done, an equally shared and distribtued taxation, all other factors of additional income being weighed out in terms of the quality of goods, services, lifestyle and benefits that accrue with that increased ability to provide from that income.
Its not like rich folks won't have any money, they will still have much more than those of lesser income and even after taxations, there will still be more. As long as that "Enough" line can be reasonably and demonstrably drawn, no-one above that line should believe or feel they are being taken advantage of. Instead, they should be able to see that, even after taxations in that scenario, they come out well ahead of those of lesser means.
I would also offer that some, based on a second line drawn (something like, more money than you can reasonably expect to spend in a lifetime of gluttony) from which an additional level of taxation is taken. Not to hurt the super rich, but to tax them according to the extreme wealth they generate, which ultimately comes in some fashion by profiting on the rest of society to generate that extreme wealth. I see that as sort of a "just compensation" tax for the fact that, beyond that second line, it's all gravy anyway and it's not really going to do anything but allow the tax revenues to provide an overall higher quality of things like roads, fire services, ambulances, etc. to which, even those super wealthy stand to gain in greater proportion to those of lesser means in the first place.
rated and regards
Too many interest groups of different persuasions cancel out cutting the Gordian Knot solutions. And I imagine that even if a "flat tax" were enacted, the rich and powerful would somehow quickly find a way to get an exemption here or a tweak there. So in the end, the flat tax would ultimately wind up being more unfair than what you show on your graphs.
As economists have demonstrated, one flat tax, the sales tax, is purely regressive. If everything is taxed equally, the poor will suffer far more than anyone else.
No, I'm sorry. Progressive taxation on the rich is the only way to go. And we need a combination of fighting exemptions on yachts, private jets, etc. and raising the high income rates of taxation.
By the way, it's beginning to emerge from economic studies that countries with more and higher rates of progressive taxation actually have healthier and faster growing economies.
As far as I know, the last year that this report (with basic family budget data) was produced was 2008, so that would include data for 2007. Do a search on "Oregon poverty report 2008" and you'll find it. Page 309 of the report shows how the "basic family budget" is calculated.
With the basic family budget you can start to do some interesting things. You can use it in your post as an operational definition of "enough." You can look at the gap between the official federal poverty level and what is required to survive with a decent quality of life. And you can compare what kind of hourly wage is required to provide for the basic family budget vs. the average wages for different professions.
For example, the most populated county in Oregon is Multnomah County. In 2007 here are the hourly rates for the basic family budget:
1 parent, 1 child -- $17.09
1 parent, 3 children -- $29.48
2 parents, 1 child -- $9.93 (per parent)
2 parents, 3 children -- $16.10 (per parent)
[children assumed to be from 3 to 5 years old]
So, for the 2-parent 1-child household, "enough" would be wages totaling $19.86 per hour, or $41,316 per year -- in 2007. This is an average minimum figure of what it would take for these three people to have a reasonably decent, self-sufficient life. But the official federal poverty threshold is only $16,689 per year, 40 percent of what it would actually take to get by, again, in 2007. With a COLA adjustment you could bring that figure up to 2011.
With that figure, you can see what happens if one parent loses a job, or if the family doesn't have health insurance, or if another child is born, and so on.
I thought about doing a post using these data, but few people read my posts so it would be a waste of time. But if you're interested, check out the report, because I think the basic family budget is very close to your concept of "enough."
Mishima, thanks for the pointer to that data. That's interesting stuff. I don't know that I meant for there to be any one notion of enough. In a way, making there be a specific number allows people to do the moral equivalent of an ad hominem attack by nitpicking the choice of the value. My point is that it doesn't matter what value you choose, you'll get the same issues. And yet I do think it's a great thing that people are studying what numbers are enough. It's always struck me as odd that there was such a disconnect between the two lines you discuss—the basic family budget and the poverty line. I would naively have assumed they should be positioned at the same point, with maybe a little margin for error, but the disparity is actually huge.
rated with empathy
Gary, I'm always happy to provoke a bit of follow-up thought.
Poetess, that's certainly perplexing. It may partly be that people tend to believe people they see as being successful because of who they are or the position they hold and not because of the logic of their arguments. Especially if they don't have the reasoning skills needed to overcome the arguments being made. The Republicans are not going out of their way to say who they are benefiting; rather, they blur things by saying “we're all overburdened” as if the burden of paying one out of 3 million you make (if it's even that much) is bigger than the burden of paying out out of 3 thousand you make. The former sounds so big, and yet it's the latter that's important for the real pain it causes.
So is paying taxes, anyway you slice it.
As necessary as it is, it still stings ... just a little.
Most get over it quickly and don't whine too much;
Then find some reasonably priced wine and drink instead.
The you get Social Security and still pay taxes on it.
It never ends. They have us from birth to death.
Boo hoo.
Great article. (R)
Great post.
There is an incentives effect per your argument, but that cuts both ways actually, an incentives effect ,as in if you tax people earning a lot, they might work more to maintain the same lifestyle, which as much as anything is a matter of social differentiation, a is a real consideration among those who are entrepreneurs and who are overrepresented among "the rich," and there is also a risk aversion argument embedded in your post's "Enough" idea against Rawls made by Arrow, which is one version of this, although you can clearly go too far the other way too. That is fair to point out as you point out the needs versus wants question. If you think of making the pizza pie bigger, you do end up with more "needs," if also more wants: do you need a computer if the library is maintained, maybe, maybe not, although if you were used to it, it wouldn't be fun, and you don't have to watch television, although once you are used to it it feels like a need.
What is a need is fairly subjective in our society, in the sense that you can literally live with very, very low levels of things, if you have to, although it is very psychologically dislocating if you had those things before and lose them, and, what the Republicans often miss, hard in another way to, to see others have them and you not. But, if you had peanut butter and bread in sufficient quantity, and potable water in sufficient quantities, and know the right plants, you won't die, and I have gone without food before when I lived in a northeastern city, for several days at a time, picking cigarettes off street, when I was willing to do work that I had already done. It helps to know that you can live off of plants, trashcans, the occasional burglary, and you can make hunting weapons if you want meat.Thorstein Veblen wrote about this the best, along with Gary Becker in Social Economics, as to why if that is technically feasible, it isn't socially feasible.
What Becker points out is the impact of economically based social hierarchy on all this, namely, that if the people in the top one per cent spend more, the people at the 2 per cent spend more, .... and if income is becoming more concentrated, that is a bad problem when that "spending cascade" reaches the bottom percentiles, whose incomes haven't increased. That is an argument for worker ownership of the means of production in individually owned and tradeable shares. People might not like the day to day gyrations, but if you reformed Social Security in a way the all workers had part, not all, but part, of their wealth in equities, and using the corporate form brings you into the system, say at the 40 per cent level, they would not only do what the rich do, and therefore be richer, but also have more of a say; libertarian socialist ideas that the Left and Right will never let in I bet, precisely because it would respectively reduce the clientage of Leftist politicians and the power of Rightist owners. And it wouldn't be heaven, because unless you think "From each according to his need, to each according to his ability," is incentives compatible, or compatible with the argument of Discourse on Davila, you would still have those whose wealth made some things needs, to whom for others they had because of social contagion effects, become wants, and unless we live in a static economy, that would always be true.
In many nations, people are said to have an absolute right to have a job, an education, etc...
Not America, of course.
Flat taxers are like flat earthers - evidence isn't enough to convince them that their ideas don't work in the real world. And as to those who like to point out that a large chunk of society does not pay income tax that should simply inform them that there is a large chunk of society that doesn't make enough money to live. But if they earn any money, they still pay SS and other taxes, and they pay a lot of taxes on the things they buy to meet their needs.
The idea that anyone who makes over $250k is going to "feel pain" by having the portion of their income above $250 pay an additional 3% tax is like the doctor saying "This is going to hurt me more than you" as he comes in with the bone saw.
Nice work Kent. I'll try again to rate it, but it isnt taking for some reason.
Yes, people can nitpick, but many of the estimates and their methods of estimation are widely accepted. For example, the fair market value of rent utilizes HUD's methodology. Food costs are calculated using the U.S. Dept. of Agriculture's "low cost food plan."
"My point is that it doesn't matter what value you choose, you'll get the same issues."
Well, yes and no. A shortfall of $100 in monthly income can be overcome by a little belt-tightening. A shortfall of $500 a month can't, and at that point you're talking about things such as missing meals, living in a cold apartment, disconnecting the phone, and so on. So it is important to know with some degree of accuracy what that shortfall is, in my humble opinion.
For example, make it easier for people to form unions, teach financial literacy in schools, institute policies that promote full employment so wages stay high, etc.
We need policy makers who understand the dangers of grossly uneven wealth distribution and will find ways to avoid it. I don't think its good policy to allow wealth to flow so much to the top and then redistribute it. We need to think about getting wealth flowing more evenly initially so that it does not have to be redistributed afterwards. Better minds than mine will be needed to figure that one out.
Cathy, yeah, it's a treadmill for sure.
Don, you might enjoy my article What is a Right? where I talk about the issue of budgets vs. societal goals. There are some complex issues there. It can legitimately be that a society can't afford to do all the things we might wish to call rights, but there are ways to procedurally finesse that to not go bankrupt. I don't really think that's the situation we're at now. Right now we're at the place where there are a number of variables that can offer control but that are not being used because we're leaving too much to capitalism. I think capitalism can work well for things that respond well to market forces and in markets that are properly regulated to avoid abuse. Some markets can even regulate themselves, but others cannot. I'm for using capitalist solutions where they work and socialist solutions where capitalism lets us down and we nevertheless need a solution. It's been in the news lately that all of the nations rated AAA by the S&P (now that we're not among that mix) have socialized medicine. Maybe something we could learn there. It can't be that fatal to one's economy... Personally, I think it could be great for business.
RW, thanks for the note on positive vs. negative rights. That's useful.
Tim, yes, some good points in your comparison with flat earthers. Some issues are truly multidimensional and don't do well when the extra texture is compressed out. Glad you enjoyed the article. Thanks for your support and for giving the ratings button a try.
Pedant, your comment reminded me of various disparate remarks I've heard over the year. One is that the reason people like local taxes better then state, and state better then federal, is because the locality leads to better oversight. That's why many think it's best to manage charity personally because they can oversee it. And yet, a tax advisor chided me once that friends make terrible charities. And yet, one has a great ability to oversee how a friend uses the help you might give them. Kind of sad that tax policy can't somehow give us credit for helping friends or family. That money is probably well-supervised, is probably locally spent, and certainly helps reduce stress on the government.
Steve, thanks for stopping in. As to the question of what right you have to tax, that's of course the basic inductive step on which society is founded. I'll write about that and explain my point of view sometime. The answer isn't trivial. But I can sort of hint at the answer by saying that no one makes money in a vacuum, and the notion that all money is earned in a moral sense is quite a contrived and definitional one that admits a fair amount of philosophical prodding, or will before I get done with it.
Mishima, my remarks about avoiding numbers were not really intended to span the cases you're talking about. I was talking more about not attaching numbers as a way of debunking this since there are actually many different numbers you might want to attach, depending on context. So I think your example is one of those many different numbers one might want to attach. I liked your doing that worked example—very instructive.
"I never knew anyone who needed more than a thousand bucks a week. NEEDED, you understand. That's the key."
Telling from his experience, the ones he knew who were at the upper limit were heroin users. But, in more general terms, society has lots of those today. We call them financiers...
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An example of additional taxation that causes families to not have enough is well-illustrated by property/school taxes. A family may have enough to cover the basic bills, including a mortgage and insurance, but an increase in property/school tax--as we in NY continue to see--pushes them over the line to "not enough"; the family can [and many do] lose their home as a result.
I often wonder why Americans don't turn to the most logical solution. Rather than just taxing the wealthy, why not place the burden on the entities responsible for maintaining that 50% of Americans at an income too low to tax? We need to either mandate corporations to pay every adult employee a living wage, or offer substantial tax considerations to corporations that voluntarily do so. This would improve the financial situation of adult Americans, who work hard but don't have high-paying positions, to a level at which they COULD reasonably be taxed. America gains additional tax revenue, spending on entitlements and social programs could be slashed dramatically with no ill effect, and the expense is indirectly but ultimately applied to the wealthy, who own or hold stock in these corporations. Exceptions could be made for small businesses, possibly based on number of employees and annual profit.
For the above to work, we'd need to first develop a new and accurate cost of living [CoL] measure, customizable to locale. That way, real, necessary and widely varying costs would be taken into account, such as the cost of owning, maintaining and insuring a vehicle in rural areas, using public transportation in urban areas, and the vast difference in housing costs between the two. This CoL could then be used to determine a Living Wage [LW] for each locale. The LW would include items our government tells us are necessary, like health insurance, retirement funds, and emergency funds that cover at least 3 months worth of expenses.
Our government and its citizens need to face the facts. We can either ensure that corporations pay our citizens enough to actually live on, or we can ALL bear THEIR burden, and fund health insurance programs, retirement programs and assistance programs. Corporations aren't hurting; the record profits they continue to post proves that. In essence, working class America is paying for those profits, not just via ridiculous tax breaks and subsidies, but also by funding these programs that are necessary BECAUSE corporations aren't pulling their FAIR share of the load. We can all be a part of changing that, just by passing on the facts.
http://open.salon.com/blog/sickofstupid/2011/07/31/social_security_truths_politicians_dont_want_you_to_know
I heard the expression "nouveau poor" used this week, maybe in a blog and it made my heart constrict. Yes, the nouveau poor and the already poor so much poorer, even. I don't think you could graph my disgust with our government. The website isn't that wide. libby
By the way, two among several of my other articles of mine that you might like are: Sociopaths by Proxy and Credit Cards: A Tax on “Being Poor”.
quite unnecessary, nowadays. electronic money and a percentage fee for the use of money means that everyone supports society in exact measure as they get benefit from it.
but politicians could not exist if they could not bribe and be bribed, the rich could not get relief from taxes, nor could the poor. that only leaves the working majority who get screwed and they are the last to benefit.
so there will be no fundamental change in the guerrilla warfare of american politics. but the water is rising, literally, the wealth is shrinking, the battle gets fiercer and less productive.
gossip all you want, but without citizen initiative, it's just gossip. and the water is rising, and the temperature, and inflation...
(More accurately, when one becomes rich, empirically, it seems one becomes a jerk.)
I dont disagree with any of your analysis or graphs for a flat tax.
But I thnnk it is incorrect for you to say that althought we have a progressive system your examples of a flat tax make no difference
to the point and examples.
It most certainly does; as a piratical matter and an ideological issue.
First, the analysis of the pure flat tax you use is not news to anyone that is paying attention. Even as a fiscal conservative, I can recognize that the flat tax you use is definitely painful to lowest income earners. Every time flat tax is mentioned I always think that just is not fair. Period. And I would not support it.
Other notions of a flat tax is progressive brackets like we have now, just minus all the deductions. Forget the kids, mortgage interest etc. Just determine the bracket and pay the tax. A system would not affect most all of the 49% that pay no tax right now as long as
the brackets remain. The lack or deductions may move some people from no tax into some tax.
But I want to specifically comment you your "pain" point and
the "what is enough" point.
I wound like to use my brother as an example. He is 57. At 48 he decided to quit working. He was done. He had a masters in a science area and was capable of earning 70K a year when he quit at 48. He as some money, but it is not near what any financial advisory would have told him it is antiquate retirement at 48. But is is enough for him, because he set his "enough" scale very low.
With house and car paid for (car is getting really old) he lives minimally by choice. He pays his bills, a bit of entertainment
and a night out once a week. He does this on 35K a year.
So far he as managed to preserver the principal he started with at 48. 6% CDs when they were available and a few strategic stock trades. His "enough" is an old car, no cell phone, basic cable, no hobbies other than the gym etc. No thavel. You get the point. Frugal.
Well he chose this. So the first think this tells me is that his level of enough IS enough for everyone. He is not lacking any necessity,
he just passes on luxury. He has a 10K deductible medical policy because it is cheap. He pays for the small stuff. If a disaster happens he pays the 10K. Or course his plan will become illegal under Obama care.
Here is the point. He pays NO fed income tax since age 48. He does by managing his CDs and stock trades so he never makes enough to pay tax for a married couple. If he makes less, he moves
tax deferred IRA money into Roth IRA up to the threshold to still pays no tax. So now he is essentially getting that IRA money moved to a tax free Roth while never paying the taxes. Perfectly legal.
So here is my brother. Masters educated, contributing nothing to society and getting all federal resources for free and many local as well. We have no state income tax in TX and food is not taxed.
So he pays sales tax on the little he spends on.
His big burden is property tax in TX. Cant do anything about that.
So here is where the pain comes in. Not his. Mine and other people. He drops out because a saved , as I said a minimal retirement amount, and got fed up. So he no longer contributes
to his ability.
The pain is mine and yours. He is now effectively a moocher who is
capable of earning an income and paying some taxes. But he will never pay again.
Is it painful to me because I am still ambitious and earn 100K+
for 60 hr weeks. And I (and you) are paying for all the things provided to him from feds and some state stuff as well.
When I work 60 hr weeks under high stress and he does not, and I pay for him to have infrastructure,defense, law enforcement and many other fed programs he benefits from, it is painful to me.
My finances are near equal to his. I could quit to but my "enough"
is higher than his. As a result I have to pay him before I get my above "enough " line.
This is an example of how the current progressive system
has demotivated a person with a low "enough" threshold.
He exact reason for quitting was he simply was pissed at the tax rats and refused to pay anymore.
So while the supper rich might not feel any real pain for paying a higher marginal bracket, But I do feel pain when everyone below a certain income, whether the quit or just don't earn it, pay no taxes.
For practical considerations, there are laws that resolve some of these questions. Here, though, I'm asking the moral/ethical question about what *should* constitute ownership.
After all, libertarians question, on moral/ethical principles, the laws that allow income tax. By questioning those, they are saying that legality is not sufficient to imply moral/ethical rights. Well, that holds with respect to establishing the ownership that they so fervently desire to protect: their simply stating "The law says I own X" is not sufficient to establish their moral/ethical right to own X. If they claim that ownership under the law is the definition of ownership, then they should embrace paying taxes. The law says that taxes are the government's right to collect, and they say that laws are sufficient to establish rights, so they should agree that it's the government's right to collect taxes. But if they reject the government's attempts to tax on the basis that taxes are somehow immoral/unethical despite the law, then they must apply the same standards to how they established the ownership in the first place.
On redistribution: capitalism of late has been redistributing wealth. To the extent that it is the product of merit, good and fine. But the allocation of the resulting profit between "capital" and "labor" is determined solely by capital. And who are they going to give it to?
Take Old Coyote. She said that the saddest day of her life was when she topped out of Earned Income Tax Credits. It was also, probably, the highest marginal tax rate she will face in her life, even if she wins the lottery and higher than your proposed rate for the rich.
When you have this convoluted system of tax expenditures, you have relatively little oversight. Take for example, a friend of mine who is building a new house. She pointed out that her heating system is free because she is putting in Geothermal and can take a tax credit. The government is subsidizing her luxurious (and it is luxurious) heating system, because she is rich enough to find the tax credit valuable. She has a choice of paying Uncle Sam or taking a tax credit and getting radiant, underfloor heating. What would you choose?
Take the mortgage interest deduction. Households making under 75,000$/year get about $150 off their taxes/year, if they take the deduction at all. Households making over $200,000 get nearly $2,000. The poorest households get no benefit at all, because they don't itemize deductions. In short, it's not helping people become homeowners, it's helping the wealthy buy nicer houses.
The value of deductions goes up as income tax rates rise. If you pay 30% tax, then your tax benefit is 30% of your mortgage interest. When your tax rate goes up to 50%, then your benefit is 50% of your mortgage interest.
Until we rein in the tax exemptions, the nominal marginal rate will have little effect on what the rich actually pay.
When you super tax the wealthy they still don't pay tax. What they do is invest their incomes (or an equal amount) which brings us jobs (if the invest here) and brings the wealthy person or corporation s more sizeable write off.
So, your charts fall short.
The only way to tax the wealthy is with an Alternative Minimum Tax, which I understand, Congress did away with this year.
In two of my posts this week I cann for a tax increase to 90% or more on the wealthy.
That would force them to invest equal amounts to their incomes to prevent the taxation of their incomes. But their actual taxes would remain the same or go down.
Pierre Angiel
of course I've had enough of that way of thinking. your way makes more sense to me.
vzn, that's an interesting idea. (Although it has the problem so many good ideas have: How do you get a politician to vote for it? Especially in the modern environment.) I glanced at your blog and didn't see the article you refer to at quick glance. Maybe you could share a pointer. Thanks.
Stever, thanks for mentioning that article on the psychology of the rich. Quite interesting. I certainly know rich people that have not had this happen to them, but of course they're talking statistical effects, and that may well be the trend or the risk or something like that.
Joseph, I'm not sure that the practical effect is as strong as you expect. He had to save up to get to that place, and did pay some taxes. And at any given time, the system supports some number of such people. In a healthy system, I doubt that the number of people with both that balance of discipline (able to work hard enough to get to there and then able to do “do without” enough to stay there) is not very high. I think we are up against bigger problems in practice, but I still think it's an interesting scenario. It's one I have some issues with as well, but I'd state them very differently than you did and I'm not sure if that makes them different or not. I'll have to think about it. But for now I'm just going to leave it at that and thank you for contributing the scenario to the mix here.
Stever, it's an interesting argument. I'll have to think about that one, too. Lots of thoughtful comments piling up here. Personally, I think there are some legit questions to ask here, and whether they are about ownership or just the lesser issue of whether such ownership is “earned” or “taken” I'm not sure. The point of this latter distinction is that a lot of political arguments come down to what “hard work” these rich people did to get this money. And yet there are people who worked just as hard (and arguably provided as much value) and made much less—they just didn't begin in the right place. The whole Trading Places scenario, I guess.
Malusinka, I might have used a different example than the geothermal one since personally I think there is such intrinsic value in getting us to stop using fossil fuels that I'd like to heavily incentivize it. But I take your point in that other examples with the same general structure would certainly be findable to make your point. As to the tax assistance for expensive homes, yes, I agree that's crazy. (When I was living in Massachusetts quite a while ago, not sure if it's still true, I seem to recall seeing a 50% tax deduction for apartment rentals up to $10K and it used to really bug me, since I didn't really need it, and I'd think “Why not a 100% deduction up to $5K?”)
Pierre, thanks for mentioning the AMT. It's the kind of thing that has been very controversial, and yet it does have some useful properties to keep people from getting out of things they should really owe. I vaguely recall there are some problems with the AMT where it can create taxes where no actual money is in play, so I'd want to go carefully. But there are things that are still good things that do in fact just need lots of details clarified to work right.
Mary, good to see you here. Glad to stir up interesting thoughts for you. And as for shame in your case, I think just the fact that you're wondering about whether you should feel shame gives me a sense of positive. I think the most troubling thing about these folks I was really writing about is how they not only are motivated to push off the same but even to try to portray that it's not a reasonable question. I've often said my working definition of ethical behavior is an attitude of continual self-questioning; it's the people who don't question themselves regularly that I worry about most.
Rodney, I don't know that book, but I appreciate your mentioning it and offering those data points.
dolores, yep, that's it. And they're never guilty of laziness themselves. (And, incidentally, I have some friends who are rich who worked very hard for it, and continue to work hard for reasons that have nothing to do with the quest for riches. So I don't mean to suggest they're really all like that... but sadly, enough are that it's a problem. I don't know if it's that the good guys are outnumbered by the bad, or that the bad guys are just capable of ruining it for everyone.)
Here's a suggestion for defining "enoughness:" Similar to the little kids in the peanut butter commercial, where one kid cut the bread in half and the other kid got to pick which half he wanted, let the wealthiest group define how much is just exactly "enough," using your graphs. If they put it too high, it will be painfully obvious that those in the lower-income groups do not have "enough" and should not be taxed at all. If they put it too low, it will be painfully obvious that the wealthy have far more than "enough" and should pay more taxes.
Nobody's going to agree to play this game, of course, but it is fun to imagine the discussion.
Excellent post! I agree with the premise of the post, in that there is a threshold where people can live reasonably. I need to point however that we can also see the payment of taxes a different way. Interestingly, my first post on OS was about a similar topic. As someone who comes from a country with much higher tax rates (see the post), the main issue I have observed about paying a lot of income taxes is related to the proportion of money lifted from people’s pay check versus the work they have done to accomplish where they are in the society (higher tax brackets).
Although people up north are less hostile towards taxes, many are very discouraged to see almost half the pay check going towards income taxes. As opposed to the tax system here, there aren’t as many large deductions, such as mortgage interests. Thus, people get somewhat frustrated when they work long hours and their after-tax income is say $25,000 rather than $50,000. Obviously, we’re supposed to get services with the taxes we pay, including “free healthcare” (by free I mean no co-pays, deductibles, etc.) and generous unemployment benefits for those who need it. In general, many believe rightly or wrongly that they don’t get the services they pay in taxes (a large proportion goes towards the provincial and national debts). It is my understanding that if you increase taxes on more well-off people, you also need to make sure that the money is well spent, which is often not the case both here and up north.
On a final note, I remember reading an economics journalist from a Quebec newspaper who said that if you increased income taxes by 10% on everybody (the exact amount is a little bit murky) for two or three years, you could eliminate a large part of the debt in the U.S. (or something like that – I tried to track down the article without any success). The two points of his article was that the rates in the US were so low that people should stop complaining about paying taxes and that raising taxes could solve a lot of the financial problems. This article was published two or three years ago (before the economy collapsed).
Decreasing tax rates=lower unemployment rate=bullshit!>
He also taught me how to insert hyperlinks in comments, for which I am extremely grateful, though I may annoy others by overusing them until the process is firmly cemented in my head; apologies.
RATED
I don't think we, as a society, are properly prepared to "solve any real problems". My perspective is based on two things: what I see happening in our government AND what I experience in my daily interactions with the people around me who provide a good example of at least 1/3 to 1/2 of our general population.
I posted a new post today that presents an example of this, so I hope you'll check it out, just so you can see why my outlook is as negative as it is.
It seems objectively fair and logically obvious that those who benefit most from living in a civilized society are -- or certainly ought to be -- obligated to pay more than the "fair" share envisioned with a flat tax.
Your graph certainly makes that obvious. But, of course, the willfully blind will not see -- particularly when it benefits their bank account to be blind.
There are two systems of taxation subtracting wealth from the average American.
And government taxation is the least of the two.
Our capitalist system allows for private taxation.
Our capitalist system allows for some individuals to earn or purchase for themselves the right to tax everyone else through industry and commerce.
The wealthy investment class, taxes the wealth produced by the labor of everyone else in America, and the wealthy investment class, taxes all the purchases made by everyone else in America.
That monumental income that they make, is made in the first place,
by doing nothing, but sitting around, and taxing you.
Government taxation is the only means we have to keep the amount of wealth taxed out of the general population by the wealthy investment class in check.
And of course, this is why they don't like it.
So before you feel bad for their pain, before you feel bad about increasing the taxation of their incomes, you have to understand, that they are making their massive, monument and obscene incomes, just sitting around, finding all the ways and means that they can tax all the wealth out of you.
I am new at this whole blogging thing.
But I am developing an individual blog-sight of my own, something a bit more radical and different perhaps from the norm, focused entirely on my own attempt to bring a message of political clarity and economic enlightenment to less aware and involved, but progressively-minded, particularly young, Americans.
If you should ever find yourself with a little extra time on hand, and would like to check it out, it is at:
ourevolt.com
any responses, feedback, reactions or suggestions would be appreciated.
you can reach me back here, or at my e-mail
podoom911@ourevolt.com
I bet your whole story would at least feel a lot different, if you drew the "enough" line at $7K/yr.
It is routinely observed that everyone can't be a millionaire. But the question is how much we think people can and should all be able to have in order to not feel disenfranchised from society. If you're thinking that amount is $7K, I think you're electing yourself part of the problem description. That's not the American Dream I understand.