Tax fairness

There is a lot to be said for fairness, a concept historically employed by children.  We feel better when we know things are fair, depending on what you mean by fair that is (See: Fair Enough?).  My problem with fairness is the direction people want things to go when they demand things to be fair.

For example, I remember hearing about a survey years ago which asked people: “Which scenario is more preferable: A) You get a 400% raise at your job, but all your co-workers get 600%, or B) everyone gets a 200% raise?”.  By a wide margin, two or three-to-one said they prefer option B.  This speaks volumes to how jealous and spiteful people can be.  I can honestly say I’d prefer scenario A, because as obvious as it sounds, 400% is more than 200%.

(NyPost) — Obama is expected to hammer the theme [The Buffett Rule] in the coming months, particularly as  Mitt Romney — his likely challenger in the fall — is a prime example of  someone whose investment income is taxed at a lower effective rate than many  middle-class Americans.

Earlier in the Republican primary process, Romney responded to pressure by  his GOP rivals and released his 2010 tax return, which showed he paid about 14  percent in taxes on yearly income of approximately $21 million.

While the nation’s top income tax bracket is currently 35 percent, wealthier  individuals such as Romney and Buffett earn their income primarily through  capital gains and dividends, which are taxed at a 15 percent rate.

While critics have said the tax hike would harm job creation while only  adding $47 billion to federal coffers, administration officials have argued the  measure is not intended to be a revenue-raising mechanism. Instead, they argue,  it is an attempt to build a more progressive [“fair”] tax code.

I say if the administration were truly concerned with fairness, why not propose everyone — and I mean everyone — pay the same rate.  That would really be fair.  But rather than raise the wealthy to a rate that of the middle class, why not lower the middle class to a rate that of the wealthy?

The truth of the matter is dividends and capital gains are taxed at a lower rate than income taxes is the risk of loss, not every investment makes a profit.  The lower rate encourages investing and helps offset losses.

So here we have a President whose plan to raise taxes on the wealthy is rooted, not in revenue generation, but how it makes voting blocs feel — and by admission no less.  Not that we needed an admission, the numbers tell it all.  The deficit expected this year by White House estimates will be $1.65 trillion, or 1650 billion.  The Buffett Rule (See: All You Can Eat Buffett) is expected to generate 47 billion, leaving the U.S. 1600 billion in the hole.  Can you honestly tell me the Buffett Rule is nothing short of a political witch hunt?

Comments

  1. Marshall Art says:

    I came across something that said a 1% tax rate decrease would accomplish more than what the Buffet rule hopes to do. If I find it, I’ll link to it. If I can’t find it, all are free to assume what they want.

    As to capital gains, it has been my understanding that the lower rate is due to the fact that the money used to invest in these vehicles was income already taxed. Thus, this money, the capital gains, is a case of being taxed a second time. If this is the case, then anyone who cares to invest a portion of their income would receive the same treatment, which would be fair. The problem is that most people don’t plan for investing, with some not even taking advantage of their employer’s 401K offerings. Too few people think in terms of delaying self-gratification in order to put away a portion of their take-home pay for that time when they have studied investing enough to get involved in some investment vehicle. With this in mind, and unfortunately so true, the best thing we can do for the country in general is to push the idea upon our children the importance of putting aside a percentage of whatever income they are able to produce for the purpose of investing. After all, it is how the wealthy do things. Why not adopt the practice?

    Fairness in taxation is not possible with a graduated tax system. Two or three rates is by definition not equal and thus not fair. Only flat tax rates are fair. I’ve alway felt that the only fair system would be one rate for all, no exceptions and no deductions. But as we are loaded with all sorts of tax deductions that people are used to receiving, no one would dare suggest it politically, and far too many people would whine about its implementation. Yeah, it would take some getting used to not having mortgage interest deducted. But if my rate was lower, it wouldn’t matter. Plus, it would really only mean that I must adjust my spending to account for th change, just as one must when one loses a job, takes a pay cut, or is met with unexpected expenses.

    The biggest complaint about such a change, and it isn’t much different when others suggest replacing the income tax with a national sales tax, is the poor. But fairness must include them as well, and if they are going to vote, they need to have skin in the game.

    • Marshall

      Just for clarification, the tax is lower because you are investing your money (which has already been taxed) with a chance of losing it. So say you invest $100, and make $50, the 50 is taxed at a lower rate. By lowering the capital gains tax rate would encourage more investing because the taxes on returns is less, leaving more money in the pocket of the investor. So at least in the short term lowering the rate 1% would likely generate the Buffett Rule amount. But again, this is about penalty, making the rate “fair” not increasing returns.

  2. Marshall Art says:

    I don’t disagree. I merely focussed on the money that was already taxed. Those that have a hard time with the rate don’t generally acknowledge that.

  3. But dividends and capital gains not.

  4. Lowering the capital tax rate is order to encourage investment is not a good idea because the shares will raise artificially making more dificult to invest and discouraging investment.

    Lowering taxes encourage consumption and thus activate economy. Lowering taxes to people with less income is more beneficial to economy because they will be able to obtain more common goods and services which are the most.

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