Pay Up!

Politicians, when campaigning, routinely promise to make the wealthy pay their “fair share” when it comes to taxes.  This assumes at least two things, 1) that the wealthy do not already pay their “fair share”, and 2) someone else is paying more than their justified burden.  This concept is politically charged, re-affirming to people who believe they pay too much in taxes.  Unfortunately, it fails considerably by asking a few simple questions.  With the tax cuts implemented by former President George W. Bush set to expire this year, this rhetoric is all the more powerful.  Is the middle class and poor picking up the slack in the tax burden the wealthy in this country are skirting?

The first question, “who are the rich?”, is often not directly asked of the one making the claim, and when asked, is often evaded.  Since there is no official definition, the “rich” is defined by the audience to whom the politician is speaking.  Who exactly are the rich?  $100,000 per year, $200,000?  

The next question I have never heard asked, “what is their fair share?”.  If it is so obvious that the “rich” are not paying their “fair share” there should be an amount that is considered fair.  What is the amount?  Apparently, whatever the rich are paying, it is not their fair share according to those making the claim.

So who actually pays taxes?  According to the IRS, its the wealthy.  Those tax payers earning $113k and more a year pay 71% of all taxes paid. For the tax year 2007:
  • Top 1%, $410,096+ paid 40.42% of all taxes
  • Top 5%, $160,041+ paid 60.63% of all taxes
  • Top 10%, $113,018+ paid 71.22% of all taxes
  • Top 25%, $66,532+ paid 86.59% of all taxes
  • Top 50%, $32,879+ paid 97.11% of all taxes
  • Bottom 50%  < $32,879  paid 2.89% of all taxes(1)

Ten percent of the people who earn money pay 71% of the burden.  Sure they pay the bulk, but the Bush tax cuts favored the rich, didn’t they?  While the average family in America whose income was $10 million or more received a half-million-dollar tax cut, the middle class received less than $100 off their tax bill. On its face it looks like most tax cuts went to the super wealthy.

However there was more investing, hiring by businesses rose, and a much stronger stock market. When compared with the amount of taxes paid under the old system to those paid after the Bush tax cuts were implemented, the wealthy are now actually paying a higher proportion of taxes. IRS data showed an increase of more than $100 billion in taxes paid by the wealthy by 2005 alone. The number of tax filers who claimed income of more than $1 million rose from about 180,000 in 2003 to more than 300,000 in 2005. The total taxes paid by millionaire households increased by approximately 80 percent in two years, from $132 billion to $236 billion.

Image credit: chart illustrations by MacNeill & MacIntosh

The dirty secret is lower taxes produces more revenue to the government in the form of taxes collected.  Lower capital gains tax means more people invest more money more often.  For example, if it cost $15 per $100 earned in the stock market, as opposed to $30 per $100, which scenario is likely to encourage investing?  There is more money to be made at a lower tax cost which encourages more investing, which equates to more taxes by volume received by the government.

While the taxes paid by the middle class might be felt more heavily on their budget, they are not the primary tax payers.  The fact remains the wealthiest Americans pay the most taxes, certainly more than what I would consider their “fair share”.  Not because I am among the wealthy, but because of the massive disproportion of burden between the wealthy and middle class, which make up really all the tax payers, the least wealthy Americans pay virtually no federal income tax at all.  Now you may think the rich ought to pay more, which is an opinion many hold, but by no means are they not paying their “fair share”.

Another misconception is further developed by this “fair share” rhetoric, when politicians claim to make plans to tax corporations at a higher rate.  Unfortunately this idea is very deceptive.  Corporations do not pay income taxes, the consumer does.  It is a hidden tax on the people.  Income taxes are an expense to corporations.  Much like the electric bill, property taxes and income taxes are built into the product or service consumer price.  If the tax rate goes up, the cost for the product or service goes up.  For example, if I own a large profitable company producing one million widgets per year, and factoring in all expenses: utilities, labor, insurance, and taxes etc. those costs are built into the product.  Say the actual cost of producing a widget is $12.65.  The cost the consumer will pay might be $22.95.  If my company’s taxes rise by a half million dollars per year, that amounts to a 50 cent increase in cost per widget.  Do you think my company will simply absorb the half million dollar loss in revenue caused by the tax increase, or will the cost of the widget to the consumer rise?  The consumer will see an increase in the cost of the product which in effect pays the corporation’s tax increase.

Do not be drawn in by silver tongued politicians who promise to stick it to the other guy, the other guy is usually you, it’s just not immediately obvious.  I will end this commentary with a popularly circulated analogous short article about taxes, and has circulated the Internet for years, it has been attributed to various professors and economists. Although its original authorship remains a matter of speculation, Snopes.com says it was first printed in a letter to the editor in The Chicago Tribune.

Suppose that every day, 10 men go out for beer and the bill for all 10 comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do.  The 10 men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20.”  Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men – the paying customers? How could they divide the $20 windfall so that everyone would get his “fair share?”
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100 percent savings).
The sixth now paid $2 instead of $3 (33 percent savings).
The seventh now pay $5 instead of $7 (28 percent savings).
The eighth now paid $9 instead of $12 (25 percent savings).
The ninth now paid $14 instead of $18 (22 percent savings).
The tenth now paid $49 instead of $59 (16 percent savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man, “but he got $10!”

“‘Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got 10 times more than I!”

“That’s true!” shouted the seventh man. “Why should he get $10 back when I got only two? The wealthy get all the breaks!”.

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.  The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.
_________________________
1) ntu.org/tax-basics/who-pays-income-taxes.html

Comments

  1. rautakyy says:

    It is due to the inconsivable gap between the rich and the poor in the US, that the rich get to pay such a great share of the taxes, not because they are paying their “fair share”. That is called progressive taxation, and that is how western democracies function at present.

    Now, I am not saying people should not be encouradged to be enterprizing, but as long as there are millionares at the same time there are people starving, the rich are not paying their “fair share”. Wether or not this inequality is, or even should be, divided by taxes is a nother question.

    People are more eager to pay taxes in general, if they feel the nation and major part of population has been actually benefited from the taxes, like support of social and community projects, or free education, free medical care, or simply better infrastructure. Well, maybe not the richest… How much wealth is one person entiteled to morally, while there are those in need of basic livelyhood?

    • So as long as some people have a lot more than others, they need to pay til everyone’s even, or close? Where then in the incentive to earn, if the majority will be confiscated? It happens every day even with the middle class. In my former employment I was able to work as much overtime as I pleased. But once I hit 16 overtime hours in a single pay period (2 weeks) I wouldn’t work any more. If I worked even 1 more hour over 16, I actually lost money. If say I worked 18 hours, I only saw 14 hours of OT pay because of the extra taxes. It was no longer worth it to put in the extra effort, even though I liked the job and would have been more than happy to do it.

      It’s the same thing with the wealthy. If you keep taxing them more to make up for the ones you want to give the free ride to, they will eventually leave the country for a nation with lower taxes, or they will stay and stop producing. Keep in mind there are very few wealthy compared to middle-class and poor. The progressive tax system is not set up for the optimal amount of revenue, it is set up for the optimal amount voters. If everyone paid federal taxes there would be an overwhelming amount of revenue. Pretty soon we will run out of other people’s money.

  2. See John Barron Jr.,
    Anybody can make the facts sound like they back up their claims. When you soapbox on your IRS tax statistics, you leave out a very important piece of the puzzle. It looks on the surface as though the rich are getting shafted, but lets add some new information into the mix.

    For the same tax year, 2007:
    The top 1% controlled 42.7% of financial wealth in America.
    The Top 20% controlled 93% of financial wealth in America.
    (Edward Wolff, NYU, 2010)

    So now lets plug this new information into your IRS statistics, shall we?
    Top 1% paid 40.42% of all collected taxes on 42.7% of the financial wealth in America. By the definition of “fair”, they should be responsible for 2.3 percentage points more of the total tax burden, no? This amounts to about a 5% hike in their total tax burden.
    The top 20% control 93% of the total financial wealth, yet the top 25% pay only 86.59% of the total tax burden. Just to drive home the point, lets not adjust for your extra 5%, shall we?
    If, as you say, taxes are fair; why should the top 25% pay 6.41 percentage points less toward the total tax burden then the top 20% hold in financial wealth? They would have to see a tax increase of about 7% for those numbers to even match, without taking into account that we are talking about the top 25%, not the top 20%.
    This means that the bottom 80% pay own 7% of the total wealth in America, yet pay more than 13% of the total tax revenue! They should be paying 6 percentage points less! They are taxed at a rate almost double their fair portion!

    This is exactly what is so very wrong about your beer analogy. When you work backwards, and talk about tax cuts, you give the impression that the poor people get a sweet deal and are angry, when $1 in the pocket of someone who only made $1 is a 100% increase in income. It still doesn’t make them wealthy, or proportionally better than the rich.

    If you are going to stick to your guns on this, you ought to change your blog title to “Not Lies In Religion And Politics”, because you aren’t telling the truth, but you aren’t lying either. You are selecting facts to suit your conclusions and hiding the ones that prove it blatantly false.
    Unless you have some other definition of “fair”; one that means not equal or leveling in any way.

  3. If you took the time to read the study by Wolff, you would find that these numbers are adjusted to remove equity and Capital investments. So no, I didn’t really confuse the two. I guess whether people should be taxed on their dividends from their wealth and whether that counts as income are two different questions.

    You can put as much lipstick as you want on it, a pig is still a pig.

  4. rautakyy says:

    There is a reason, why your OT should not extend a certain limit. By working double time you are actually doing the work of someone who is unemployed. If you can not live on your normal salary it is too small.

    The very richest people are not more productive than anyone else, they simply have found a legal way to grab the value of most of what is produced. The economical power they have to leave a country stranded is not a god given right of theirs, but a liberty they have given them selves by accumulating money (most often through generations, than personal skills, I might ad). It tells us much about their patriotism, though. It also tells how much political power such a small minority has. The problem is, that all the nations in the world are held as hostages to the very richest people in the world, by keeping up the threat to leave a nation with their money. This situation helps only to serve the interrest of them, not the nations, or common people wether poor or the middle class.

    In a democracy it is the majority that control the minorities and not the other way around. I do not think the rich are going to loose their lust for money even, if they are taxed hard.

Trackbacks

  1. […] actual problem is spending more than I earn.  But Liberal politicians like to pretend the wealthy do not pay their fair share is nonsense.  They already pay more than they should, and nearly half the population contribute […]

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