A few months ago a few of us had a discussion regarding the taxes in the United States. We both feel that taxes (corporate and income) need to be reduced for a number of reasons, one of them to stimulate the economy. A friend of mine, who is a Libertarian, feels exactly how the author discussed in my last post feels: the rich don’t receive any more benefit from their government than the poor so why should the rich have to pay so much more in taxes?
I can understand that reasoning a little bit. However, if everyone is going to pay the same fixed dollar amount (not as a percent of income but as a fixed amount) what would be a “fair value?” $5,000, $10,000, $50,000, or more in annual taxes? What if you make just over $10,000 and have to pay everything to the government. And with any of these amounts, the very rich would go from paying way over $200,000 in taxes a year to substantially less. The argument that the government would not be able to function on this significantly lowered tax revenue causes the Libertarian to suggest that then the government is doing too much. The government should only be doing the things that it can do better than private enterprise, namely defense of its people. And further, more money in the hands of private persons means more investment which means more money to be loaned out and more jobs created. This means that the money eventually “trickles” down to the average person. So then the argument goes back to the person or family making slightly more than the fixed tax. Since a fixed tax is inherently non-progressive, what do you offer? Does everyone making less than $X not have to pay taxes? Unless you start rich, then how does anyone “move up” in life when a huge percent of income is given to the government? Rather than the tax cuts being unfavorable to the rich, a fixed dollar amount tax would be like paying with loose change to the rich but significantly prohibitive to the poor and middle class.
TO THE RICH.
This article, Bush’s Tax Cuts Are Unfair … To The Rich, is from October 2004, but I feel is still relevant today. (Especially with the Democrats thinking about repealing the tax cuts.) I found this while looking for data regarding the federal tax rates and revenue and the effect it had on the poor, middle class, and wealthy. And for those of you that feel that the middle class pays a disproportionate amount of taxes, consider this data: The top 10% of income earners paid 70% of the federal income tax. And, as Steven E. Landsburg in the Slate article writes, “it seems patently unfair to ask anyone to pay over 30 times as much as his neighbors (unless he receives 30 times as much in government services, which strikes me as implausible).”
Select quotes from the article below. Please visit the site to see the rest of the article and the charts/graphs.
The Bush tax cuts (which Congress just voted to extend) are an affront to the most fundamental principles of fairness. They are skewed in favor of those who already pay less than their rightful share of taxes and shift the burden even farther onto the shoulders of the most overtaxed. In other words, the Bush tax cuts are unfair to the rich.
I know there’s a lot of hype to the contrary, but look at the numbers. If you and your spouse have a taxable income of $60,000 a year, you’ve had almost a 24 percent income tax cut since President Bush took office. (And ditto if your income was just $20,000.) Meanwhile, the folks who make $350,000 a year got a cut of only about 12.5 percent; those who make $1 million a year got an even smaller cut.
My own opinion is that the rich already pay too much—it seems patently unfair to ask anyone to pay over 30 times as much as his neighbors (unless he receives 30 times as much in government services, which strikes me as implausible). If you share my sense of fairness, you’ll join me in condemning the president’s tax policy.
(the bolding is mine)
Above the Law figures just how much an Obama presidency will cost you (that is, if you are making over $164,000):
The effect is enormous. Betsy’s marginal tax rate goes up from an already ridiculous 42.5% to 51.4%—not including the new 6.2% marginal tax on your employer. Subject to how she structures her withholding, Betsy’s take home pay drops an average of $515 a paycheck—less in the early months of the year, but much more in the later months of the year. Add in the effects on her bonus, and Betsy loses nearly $20,000/year in take-home pay.
I added a third column: how big a pay cut would you have to take to receive the same take-home income? The answer is that Obama’s tax increases have a bigger effect on your income than a law firm cutting New York salaries by $34,000.
Now, I’m not anywhere close to making that kind of money right now. I still have another 2 years of medical school to pay for and then another at least 5 years of around $40,000 a year during residency. So the earliest that I’d start earning this income would be around 2015. However, I still feel that the best stimulus for the country is to reduce taxes and limit spending of the non-essential federal programs. Here’s a good article called Ten Myths About the Bush Tax Cuts that explains how the tax cuts stimulated the economy and promoted growth. The key balancing point for the correct tax rate is theorized by the Laffer curve: “This curve illustrates ‘taxable income elasticity’, which is the idea that government can maximize tax revenue by setting tax rates at an optimum point and that neither a 0% tax rate nor a 100% tax rate will generate government revenue. At one extreme, a 0% tax rate means the government’s revenue is, of course, zero. At the other extreme, where there is a 100% tax rate, the government collects zero revenue because (in a ‘rational’ economic model) taxpayers presumably change their behavior in response to the tax rate: either they have no incentive to work or they avoid paying taxes, so the government collects 100% of nothing. Somewhere between 0% and 100%, therefore, lies a tax rate percentage that will maximize revenue.”
Here’s something interesting. National defense spending (including the wars in Iraq and Afghanistan) as a percentage of the GDP is actually 1.5 percentage points below the 45-year historical average.