Monday, April 13, 2015

What Is A Fair Tax?

April 15 means one is tax time.

I recently came across a paper on "Fairness and Tax Policy" that was prepared by the staff of the Joint Committee on Taxation that provides data on the current and historical distribution of income and taxes in the United States.

Fairness is an elusive concept that means different things to different people. One's view of fairness has a lot to do with an individual's perspective. 

If you have something that I don't have, I see that as unfair.

However, if I worked hard for something and you did nothing, it seems imminently fair to me to not share anything with you.

Then again, if you were unable to contribute because of an infirmity or disability, I might consider it fair to share some of my hard work and good fortune with you.

When it comes to taxation, two broad principles of fairness have generally been recognized over time by economists and political philosophers.

The Benefit Principle-taxes are levied in relationship to the benefits received by government. The gasoline tax is an example of this. The more you drive, the more you use in gasoline, the more you pay in taxes to assist in supporting highway construction and maintenance.

The Ability to Pay Principle-taxes are levied on those with the greatest ability to pay. The income tax is the most obvious example. However, sales taxes are also based on this principle with the ability to pay being based on a measure of spending rather than income.

Let's look at "Ability to Pay" under the federal income tax system based on the distribution or income and taxes (and average tax rates) for the 2015 tax year as estimated by the Staff of the Joint Committee on Taxation.

A few observations about the data.

  • Those making $50,000 or less earn amounts equal to 16.2% of all the income generated in the United States but their share of the income tax burden is -5.7%. Through refundable tax credits they not only pay no income tax but are actually receiving additional income through the income tax! 

  • The net income tax burden for those making less than $50,000 is actually a negative $76.5 billion. Of course, that money has to come from other taxpayers.

  • To put that in perspective, that is over half of all the income tax paid by those making between $50,000 and $100,000. Those middle class taxpayers probably think that their taxes are going to pay for federal government. The reality is that more than half of what is withheld from their paycheck could be viewed as a direct payment to another individual. That is what I mean when I write about "The Redistribution of America".

  • 26.7% of all income comes from those making $100,000 to $200,000. These taxpayers are also roughly paying the same share of all income taxes (23.1%). When the general public is polled on this subject, this is what most people consider as "fair". Your income taxes should roughly equal your ability to pay. No more or no less.

  • At levels above $200,000 in income that tax burden becomes very progressive and, some might argue, punitive. Tax burdens are much, much higher than income shares beginning at this level of income and higher under our income tax system.

  • 574,000 Americans file tax returns showing more than $1 million in income. This is 13.7% of all income earned but millionaire earners pay 37.1% of all of the income tax. Thank goodness for them!

Another interesting fact from the report is that the top quintile of taxpayers in 2011 was paying an incredible 88% of all federal income tax liabilities. In 1980, the top 20% was paying just 65% of total federal income taxes collected.

What is fair?

All I know is that you probably think you paid too much or your refund was not big enough this year.

Your view is influenced first and foremost by you.

If you are one of the 20% of all taxpayers who are paying 88% of the total income tax burden, I feel your pain.

If you are one of the 80% who is carrying the other 12% of the total tax burden, you might want to consider the facts above. And say thanks to someone who makes a little more hay.

Especially on tax day.

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