The "Fair Share" Question

President Obama finally said something that many tax reformers have long advocated for: millionaires should pay the same share of their income in taxes as the middle class. Sounds very akin to a flat tax, doesn’t it? Sadly, it is all talk, with no

serious consideration for reform. Instead, the President has proposed a “surtax” on those making over $1 million a year. In today’s speech, he mentioned the words “fair share” at least half a dozen times when referring to this small, privileged subset of the population. But

nobody seems to explain what the fair share should be.

Most on the left think of a “fair” tax system as a progressive system, where higher-income earners pay a greater share of their income in taxes. The president suggested going back to the Clinton-era top marginal tax rates of the 1990s in order for the system to be more progressive, but as NCPA showed, the tax rates under the Bush administration brought more progressivity to the tax code than under the Clinton administration.

A surtax on millionaires will not ensure that they pay their “fair share” of income in taxes for several reasons. First, the tax code still contains 10,000 pages of complicated rules, deductions, loopholes — whatever you want to call them — that various households can take advantage of depending on what kind of income they have (wage or capital income), how many kids they have, what they grow on their land (if anything), what they use to heat and cool their homes, what kind of cars they drive (“green” or otherwise), and many more targeted tax breaks too numerous to list here.

Second, the millionaires the president refers to rely much more on income from assets and investments than they do wage income. Thus, they have some control over when and how they pay taxes: if a surtax on capital gains is slated to be effective — say, in 2013 — taxpayers can sell large assets beforehand at the current lower rate in anticipation of a much higher rate. Likewise, if the federal income tax rate increases but the capital gains rate remains at its current rate, there will be incentives to classify earned income as capital gains. Thus, all the blame on the wealthy for using tax loopholes rests squarely on the tax code itself: a complex web of perverse incentives that punish savings and investments while rewarding those who have the knowledge and wherewithal to reduce their tax liability. (See John Goodman’s column on why taxing capital is a bad idea.)Instead of politicians preaching populist rhetoric from the bully pulpit, why don’t they replace the words “fair share” and “surtax” with words such as “broad-based,” “simple,” “low,” “flat” or “consumption-based.” In other words, how about replacing our current convoluted system with a tax that:

1) Does not penalize savings and investments and, therefore, does not need to differentiate between earned income and investment income; this would eliminate the disparity between capital gains taxes and federal income taxes.

2) Instead, taxes income that is not saved and invested at a low rate; this rate would apply to most everybody but allows exemptions for low income earners.

3) Is low enough that it replaces the myriad of credits and deductions for everything from home mortgages to sheep herding.

Yes, this would mean that cherished deductions enjoyed by high-income earners would go away, and some low-income earners would no longer be in the bottom 50 percent who pay almost no federal income taxes. But if Obama is all about fairness, as he purported in his speech, he should support this type of reform with open arms.

httpv://www.youtube.com/watch?v=Maz9ddxEQnM&t=4m13s

 

Comments (9)

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  1. simon says:

    The President said “This is not class warfare. It’s math”. Is this math for solving our fiscal issues, or math for reelection? Neither really add up to a win in any column.

  2. Brian Williams. says:

    Unfortunately, a growing number of people want to vote benefits for themselves out of the Public Treasury and force “millionaires” to pay for it.

  3. Joe Barnett says:

    It’s not like the federal government would put this money to more productive uses than “millionaires and billionaires.” But under a progressive flat tax, those who earn more would pay more, but no income would be taxed three or four times!

  4. Buster says:

    The bottom 50% of taxpayers paid only 2.7% of personal federal income taxes in 2008. The top 10% paid nearly 70%. The bottom 50% of taxpayers are net beneficiaries of government services, the top taxpayers get back benefits worth only a small fraction of what they pay in. This makes the idea of their fair share a little hard to follow.

  5. Mort says:

    The idea of a flat tax is appealing in many ways but the elimination of the mortgage deduction in one fell swoop will not fly either politically or, more importantly, economically. Mortgage tax deductions need to be slowly eliminated to avoid another, more severe, housing crash. I look forward to the day that the mortgage tax deduction is gone and home buyers are able to pay less for a house.

  6. P.L. Sonis says:

    Down is up. Up is down. In is out. Out is in. Doncha love Dems?

  7. stevereenie says:

    I wouldn’t mind if the President said that he wanted more taxes from Millionaires, etc….. I sort of expect it from a leftist like him that doesn’t have the requisite economic background to make that judgment (nor his advisors that he listens to).

    But it is total “newsspeak” to introduce the language of “fair share.” This is obviously crafted to create division and dissention between groups in this country with the the impact being absorbed by domestic tranquility in order to facilitate the Presidents personal goals.

    Lets argue about the appropriate tax rate to maintain the economy at the optimal level and enhance federal revenues. Then let the politician fight about spending priorities with what they can produce out of this country without damaging the fabric of our economic stability and hence sowing the seeds for the next bust. (Sound Familiar?)

    This is anathetical to politicians who don’t want to make choices and prioritize spending that might cost them a voting block. They must be externally limited in their authority to bankrupt the country in order to facilitate their fifteen minutes in the public arena.

  8. Francine Davis says:

    Please get off the high horse and fix the budget and what??? is “FARE SHARE”. Get me a dollar amount. The Whitehouse needs to start with their budget cut and everyone needs to pay taxes, but the government could give the seniors a tax cut on their SS. What do you think?

  9. scott davis says:

    Anything that would gut the IRS and put all its goons out of work is okay in my book. (Whatever happened to “kinder, gentler”?) Fair Share should be a flat/same percentage paid by everyone — poor and rich alike. Progressive is regressive. Keep the tax rate low and watch the economy soar! Conservatism is the only way to solve this country’s problems . . . and saying NO to the right people at the right time and holding firm.

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