Some recent articles on income and wealth.
high tax rates hit people who are currently earning high incomes — usually late in life, after having worked their way up in their professions over a period of decades. Genuinely rich people who have never had to work a day in their lives — people like Congressman Kennedy — are unaffected by income taxes, except on what they are currently earning, which may be a tiny fraction of what they own.
In looking over the IRS report on the 400 highest-income taxpayers, Bruce Bartlett writes,
although the average tax rate on the top 400 fell, one has to go to the original IRS report to discover that their share of total income taxes paid rose by 50 percent, from 1.04 percent in 1992 to 1.58 percent in 2000. In other words, the richest of the rich paid more and everyone else paid less.
Examining a Fed study that focuses on wealth rather than income, Bartlett notes,
Looking at all families headed by someone ages 44 to 55, only 11.8 percent have less than $5,000 saved, while 20.3 percent have at least $500,000. Almost 70 percent of Baby Boomers have of net worth of at least $50,000.
In a review of a recent book on the history of the income tax, Susannah Camic comments,
Some Americans firmly embrace the ideal of “justice,” the belief that, in the interest of fairness, resources should be distributed somewhat equally among citizens. In contrast, others hold that wealth comes as a consequence of “virtue”—work, creativity, thrift—and that the wealthy are thus entitled to keep the monetary rewards of their own talent and good behavior.
For Discussion. If you support both “justice” and “virtue,” which taxes are the best and which are the worst?
READER COMMENTS
David Thomson
Jul 25 2003 at 1:01pm
Am I suppose to play the role of the Almighty? The issues of “fairness” and “justice” are often highly nebulous and beyond the ability of those not possessing godlike powers to determine. John Rawls attempted to address this conundrum—and failed miserably. He inadvertently caused much harm. Rawls tactility believed that all poor people are victims. The intellectual error of determinism pervades his writings.
We should instead approach these matters in a pragmatic fashion. A flat tax would be best to incentivize all working individuals. The emphasis should be placed upon making the pie bigger. Our current progressive tax system is pure lunacy. The tragedy is that the creators of our income tax system were greatly influenced by economic zero sum socialist nostrums. American tax payers are now caught in a Catch 22 predicament which will not be reversed anytime in the near future.
Eric Krieg
Jul 25 2003 at 1:09pm
Why are government services (what you are paying for with your taxes) any different than any other service?
We don’t pay a “universal haircut fee”. If we get a haircut, we pay for the privelage.
We ALL use government services. We should pay user fees for services that are easily billed. We should pay a poll tax for those not easily billed.
Income and sales taxes make no sense, because they are not levied in any relation to services used.
David Thomson
Jul 25 2003 at 2:34pm
I am sure that everyone is aware of the old saying: “There but for the grace of God.” Unfortunately, it is a very dangerous belief to embrace without serious reservations. This is because we often have little idea whether one is experiencing difficult times due to their own misbehavior or circumstance beyond their control. Playing God, even in a well meaning manner, is perilous to say the least.
Chris Kaminski
Jul 25 2003 at 5:00pm
“…although the average tax rate on the top 400 fell, one has to go to the original IRS report to discover that their share of total income taxes paid rose by 50 percent, from 1.04 percent in 1992 to 1.58 percent in 2000. In other words, the richest of the rich paid more and everyone else paid less.”
This is quite possibly the most ludicrous use of statistics I have seen this year.
The obvious explanation is quite simply that while the rich paid a lower rate of taxes, their incomes grew sufficiently relative to ‘everyone else’ to more than offset that lower rate.
This does not mean that ‘everyone else paid less.’ Simplifying the example somewhat, let us assume we have a nation with exactly two people. Person A is has an income of $200,000. Person B has an income of $40,000. The tax rate for 1999 was 30% for person A and 20% for person B, meaning they paid $60,000 and $8,000 respectively. In 2000, Person A made $300,000, while person B made $45,000. The tax rate for person A declinded to 25%, while the tax rate for person B remained constant at 20%. Person A therefore paid $75,000 in 2000, while person B paid $9,000. Person A’s share of the total tax paid increased from 88% in 1999 to 89% in 2000, even though person B paid exactly the same percentage of their income as tax, and in fact paid a higher dollar amount.
I fail to see what Mr. Bartlett is so happy about. I can find nothing whatever in his article to indicate that ‘everyone else’ is paying one cent less in taxes, either as a percentage of their income or in real dollars.
Matt Young
Jul 26 2003 at 9:44am
Eric Krieg got it mostly right. But be sure to get all the services right. There is an enormous investment in the federal government supporting government services to the wealthy.
Tax trade to pay for the defense of international trade. This would include most of our forward deployed defense, for example. Then there is the hundreds of billions in direct and indirect corporate subsidies which, according to this view, should be paid dollar for dollar by their recipients; essentially nullifying them.
The legal and trade services in protection of intellectual property rights need be paid by the recipients. For example, this government goes to great lengths to negatiate WTO based open trade, but none of the protections thein seem to apply to the rights of free labor organization.
I find it odd how the direct recipients of government paid research to universities benefits existing corporations, perhaps the government needs to exit the research subsidy business.
So get Eric’s suggestion implemented to its fullest and get back to me on the rest.
Frank Young
Jul 26 2003 at 11:16am
The current system does not place a disproportionate burden on the wealthy, it places a disproportionate burden on those of us “striving” to be wealthy.
But what a loaded question! Does anyone NOT support virtue and justice?
Let’s add efficiency to the list of criteria and it becomes clear that the current income tax is the least preferable while the flat tax is the most preferable.
The creation of a national sales tax will doom future generations to both a sales and income tax. Does anyone really believe that the creation of a sales tax will end forever a national income tax? It will only be a matter of time before some part of the population will be saddled with both a sales and income tax. And that portion will then grow over time.
Bruce Bartlett
Jul 26 2003 at 1:30pm
The entire population pays 100 percent of all income taxes. Therefore, if the 400 richest of the population increase their share of total income taxes paid, then everyone else must necessarily pay less. Why is this is a misuse of statistics? It is simple logic.
Tom Dougherty
Jul 26 2003 at 10:18pm
“Some Americans firmly embrace the ideal of ‘justice,’ the belief that, in the interest of fairness, resources should be distributed somewhat equally among citizens.”
If “justice” holds that resources should be distributed equally, why stop at the national border? Wouldn’t “justice” hold that all resources be distributed equally among all people of the world? Shouldn’t resources be taken from Americans and give to all the poor people of the world?
Why stop at just physical resources? Some are endowed with greater human resources than others. At least half of the people have above average intelligence. In the interest of fairness and “justice”, shouldn’t these people be penalized in some way in order to ensure that they do not end up commanding an unfair share of resources at the expense of the less intelligent?
What about the skilled vs. unskilled; beautiful vs. ugly; thrift vs. spendthrift; strong vs. weak; lucky vs. unlucky; energetic vs. lazy? All of these advantages and disadvantages might lead to an unfair distribution of resource. The mere fact of possessing an advantageous characteristic might be considered an unfair distribution of resources.
Dictators, bureaucrats, comrades, Fuhrers, strongmen, el Duces of the world, much work will be needed to be done in the name of “justice.”
Andrew Martin
Jul 27 2003 at 8:58pm
Bartlett’s statement about the top 400 earners paying more in taxes than everyone else is completely misleading. He even acknowledges that their average tax rate fell during the period. If they paid a larger portion of taxes, that means they had MUCH higher earnings growth than the rest of the population.
Andrew Martin
Jul 28 2003 at 5:42am
The main concern I have against the institution of a usage tax is that simple logic sometimes befuddles Congressmen and therefore, I don’t believe they would be able to come up with any sort of tax that would charge fairly for those who benefit from services. For example, it would be easy for Congress to institute a law allowing the wealthy not to have to pay taxes to support public education if they send their kids to private school. “Congressman A. Dick” would see that this makes sense. However, he would fail to realize that though the wealthy do not benefit from having children who use public education, they may certainly benefit from having an educated workforce. Not only would they benefit from an educated workforce, but an educated citizenry leads makes our country much safer.
Another hypothetical Congressman would think it would be a fantastic idea to erect toll booths to pay for the upkeep of our highway system. Another great idea, right? Transportation costs would skyrocket and believe me, these costs would be passed on to consumers in higher prices for just about everything but what you can grow in your backyard (assuming you have a backyard). Thus you would see the collapse of interstate commerce.
Since Defense Spending is always such a contentious issue, I saved it for my last example. It would also seem easy and undoubtedly fair to allow all pacifists the ability to have a huge rebate and not have to pay their portion of the Defense budget. Since that could amount to a savings of over 40% on taxes, I see an entire generation of Libertarian pacifists in the making. But everyone obviously benefits from the protection our armed forces provide. However, is it fair to force pacifists to pay for the war in Iraq, or any action in Liberia, etc.?
Lets face it. Our Congressmen, even though they are elected by us, are not always the most clear headed of individuals. I truly fear the tax system that would be created if Libertarians were suddenly in the majority. Can you imagine the outrage if policemen actually sent out bills for their services?
As it is, though we may not directly use all government services, we do benefit from their existence in ways that I, quite frankly, don’t trust our elected officials to notice (at least until we do something to curb contributions they receive from special interests). Unemployment offices, for example, do benefit the employed by keeping people off the streets and providing peace of mind that if you were to lose your job, you could get help when you need it. I guess my message to those who don’t want to pay for all these programs they don’t use is that even though you may not use it, but you do benefit from it.
Eric Krieg
Jul 28 2003 at 7:16am
Actually, tolls are exactly the user fee I was thinking of. Why should the interstate highway system be free? (for the most part)
Most of the highways in the Chicago ‘burbs are already tollways, because they were built before the interstate system. People here pay double taxation: tolls and the gasoline tax. So going to an all toll system with no gas taxes is appealing to me. Maybe not so much to Southerners, who don’t have any tollways.
Andrew, I think the biggest danger with user fees is the same danger as a national sales tax. One will be implemented without getting rid of any current taxes like the income tax. All that will happen is that taxes will go up.
Eric Krieg
Jul 28 2003 at 7:20am
Taxes are a zero sum game. The budget is a certain amount of money, and if someone pays more in taxes, by definition someone else must be paying less.
But the same is not the case for income. Just because I make more than you does not mean that it has any impact on you whatsoever.
So the fact that the rich are paying more as a % is a net benefit to me, a non-rich person.
Also, we’re talking 1992 to 2002, right? The top rate was higher in 2003 than it was in 1992. Remember the Clinton tax increase? The one that was the direct cause of the 8 fat years?
David Thomson
Jul 28 2003 at 9:52am
“Dictators, bureaucrats, comrades, Fuhrers, strongmen, el Duces of the world, much work will be needed to be done in the name of “justice.””
Inevitably the government must be granted extensive powers if the goal is to achieve “equality” and “justice.” The latter item is particularly troubling when you do not define justice as the need to deal with law breakers, but instead define it as a desire to spread the goods to everyone “fairly.”
Also, it is almost certain that the emphasis will be placed on harming those better off than helping the hoi polloi to improve their lot. What do I mean by this? Michael Jordan possesses far more basketball talent than myself. It is virtually impossible to bring me up to snuff. You could spend billions of dollars trying to make me Jordan’s physical equal and still fail miserably. Thus, to achieve true equality—it is far easier to damage Michael Jordan! I might have half a chance if you chop off one of his legs and tie one hand behind his back
dsquared
Jul 28 2003 at 9:55am
>>Taxes are a zero sum game. The budget is a certain amount of money, and if someone pays more in taxes, by definition someone else must be paying less.
This isn’t true for any one year and even in a timeless framework I doubt it can be considered true as a matter of course. The budget is set before the taxes are raised to pay for it, but the residual between the budget and the taxes collected is the surplus or deficit.
Andrew Martin
Jul 28 2003 at 10:14am
Eric, year-to-year taxes are not a zero sum game. If everyone were to see incredible earnings growth or if Congress were to raise taxes, everyone would pay more. That’s what Bartlett failed to acknowledge. It’s quite possible everyone paid more money in taxes in 2000 than 1992, but the top 400 saw an increased percentage of the tax burden, possibly because their income growth was more than everyone else.
Also, I live in budget crunched North Carolina where they are considering erecting tolls on I-95. The idea is to tax the out-of-state travelers for using our highways since I-95 is used a good bit for that reason. However, this will increase transportation costs and lessen travel, thus decreasing gains in tourism not only in North Carolina, but elsewhere as well. Tolls hurt interstate commerce and they hurt everyone in increased prices for goods and services.
You dismiss the gasoline tax, but what better usage tax is there? You use more gas, you pay more tax, regardless of what roads you use to avoid tolls. My suggestion to you if you want to pay less in gas taxes is to buy a hybrid.
Eric Krieg
Jul 28 2003 at 10:15am
d^2, the Feds can run a defecit, but as we saw during the early ninetees, large defecits create the will to close them, and as we saw from the late ninetees, economic growth and the rich getting richer (and thus, paying much more in taxes) actually closes the defecits.
In neither case were non-rich people in any way worse off. Taxes were raised on “the rich” (really, just those with high incomes from wages) in 1993. In the second case, we shouldn’t be surprised that in the knowledge economy, those with high intelligence, combined with certain marketable skills, rise to the top. They in turn earn higher and higher incomes, and pay more and more in taxes.
This is the logical outcome of the society we have created. With universal schooling, this might be the only outcome, and may be why income stratification is prevelant in many advanced societies, and getting more prevelant.
Eric Krieg
Jul 28 2003 at 10:48am
>>My suggestion to you if you want to pay less in gas taxes is to buy a hybrid.
Lawrance George Lux
Jul 28 2003 at 10:49am
I have reservations about Sowell’s use of Reagan administration tax revenues; he does not credit the alteration of tax placement towards the end of the Carter administration, nor the introduction by the Reagan administration of hidden levies. More relevant data is the totals of Taxable Income, and the percentage paid as actual revenue.
Sales taxes are not a panecea, due to their impact on Consumer Demand. User taxes are not effectively distributable among the User Consumers. Income taxes regulate taxation based on ability to pay, but Progressive Income tax is irrelevant; if there is no attempt to use differing rates to properly apportion tax burden, not did at present. A Bank Deposit tax would be the most equitable tax, but disliked; because of difficulty in tax avoidence. The above being the paramount cause of most condemnation.
lgl
Bernard Yomtov
Jul 28 2003 at 9:53pm
“The entire population pays 100 percent of all income taxes. Therefore, if the 400 richest of the population increase their share of total income taxes paid, then everyone else must necessarily pay less. Why is this is a misuse of statistics? It is simple logic.”
It is a misuse because it ignores the reason these people’ share of taxes rose. It rose because their share of income rose. In fact as you yourself implicitly admit, their income rose MORE, on a percentage basis, than their taxes. Their marginal tax rate was below their average rate.
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