Fairness and US Federal Tax

I keep seeing articles about "fairness" of the federal tax system. In particular, that the wealthiest americans fund most of the government. For example, the Wall Street Journal "As it happens, the top fifth of earners currently pay 67% of all federal taxes". On the face of it, it doesn't seem fair that twenty percent of the population should pay two thirds of federal taxes. To make this even worse, depending on how you work the accounting, somewhere between ten and forty seven percent of households pay no Federal taxes at all.

This blog entry was triggered by an opinion piece written by Glenn Hubbard, a chairman of the Council of Economic Advisers under President George W. Bush. "Left, Right and Wrong on Taxes". In that piece Mr. Hubbard says

When I left my job as the deputy assistant Treasury secretary for tax policy in 1993, I left a message on my office blackboard for my successor. I wrote, “Broaden the base, lower the rates” repeatedly until I filled the entire space. I then had it covered with wax so it could not be erased. (Yes, the government charged me for my bit of vandalism. But it was worth it.)

I think all of this is nonsense. It seems to be based on the simplest possible notion of "fair" and a deep misunderstanding of wealth, taxes, and spending.

Anything to do with taxes and finance is complicated, but this note is not. I am using a very broad brush, but in data I use the numbers that argue against my point of view. For example, I use federal spending numbers from 2000 when the government spent much less than it does now. The income figures come from 2005, which gives households a higher income than in 2000. I did this because it is hard to get a consistent data set but I wanted to make sure I could not be accused of cherry picking data.

The gist of my argument is that the wealthiest must pay most of the burden because, frankly, they are the only ones that have any money. The federal government goes after them because they cannot get the money anywhere else without having people starving in the streets.

In 2000 the federal government spent about 1,789 billion (about 1.8 trillion) dollars. See: Government Spending Details, Federal Spending by the Numbers 2010, Table 1.1 — Summary of Receipts, Outlays, and Surpluses or Deficits: 1789–2009 . In 2005 there were about 110 million households . Dividing federal spending by households gives an "average" federal tax burden matching taxes to spending. In billions, this is: 1,789/.11 or $17,890/household

In 2005, twenty percent of all households had an income less than $18,500. That means for one out of five people to pay their "fair share" we would have to confiscate all their money leaving them nothing for food, shelter, heat, water... Looking at income breakdowns, the poor are disproportionately young and have less education. This group has more households headed by single women. My own experience and the fact that they tend to by younger indicates there are often children in the households. Children have no say in when or to whom they are born.

My earlier post discusses how, in virtually all societies, wealth is concentrated in the hands of a few. If you compare the wealth curve to the tax curve. you will find general agreement. Compare "But by 2005, the top 10 percent accounted for nearly 55 percent of all federal tax revenues, while the rest of the population paid about 45 percent." with the fact that the top ten percent has about 71% of the wealth.

The federal government taxes the rich for the same reasons Willie Sutton robbed banks. That is where the money is. If you look at capability to pay taxes (percent of wealth vs. percent of tax burden), the top ten percent are getting off easy. In terms of power politics, that makes sense. The wealthiest have the greatest ability to influence government policy and public opinion. As Warren Buffet famously said, "There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning."

We have income redistribution in the United States, as does every industrialized country in the world. We do this because the alternative is having malnourished children and a huge homeless population.

It would be impossible to argue in favor of the current federal tax system with its arcane rules and special deductions. Eliminating many of the current deductions would allow stated tax rates to go down and would make the stated rates closer to the actual rates. But calls to “Broaden the base, lower the rates” are another salvo in the class warfare already going on. If we look at Mr. Hubbard's specific proposals we can see where he stands.

Broaden the base lower the rates.

Reduce taxes for the wealthiest americans (softened by removing deductions).

Cut corporate taxes.

Increase income mostly for the wealthiest americans. The evidence that this spurs economic growth is sketchy at best.

Shift from income tax to a consumption tax.

This disproportionately affects those who must spend all their income.

The United States is the wealthiest nation that has ever existed. Even with our debt crisis we can afford to support those among us who are the poorest and most vulnerable, but it will require taking some wealth from those who have the most.