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Blue Light Special

April 14, 2010

Tax day is upon us, and thanks to the diligence of my dear wife, my family has finished our taxes, just in the nick of time! Woo hoo.

One thing that’s been irking me, however, has been the recent observation by many outlets that 47% of America doesn’t pay any federal income taxes. For reasons that escape me, and for reasons that escape John Stewart, this topic has become a talking point of the right wing punditocracy. I’d like to assess the claim a bit below. For now, however, watch as Stewart masterfully disassembles it.

Like Stewart, I guess I see things the other way. I agree that 47% is a terrible number, but not because the poor aren’t taxed enough, nor because we should tax the rich less; nor even because we should tax the rich more, at a more progressive rate… but rather because it is a reflection of an outrageous wealth discrepancy. People should be making more money in this country — not necessarily because they deserve to make more money, but because there’s a lot of money floating around here. Many of the people in that 47% range are hardly making any money at all. 50% of the US population holds only 2.5% of the wealth. The other 50% of the population have 97.5% of the money. The top 10% have 70% of our wealth. The top 1% have 34%. Here, check out this chart:

Think about that.

That’s not unfair. That’s ridiculous. So yes, the wealthy pay more in taxes… because they have almost all of the friggin’ money. More importantly, they are enabled to have all of that friggin’ money because there is a massive apparatus enabling them to retain that money. Even if we were to tax the bottom 50%, we wouldn’t collect very much.

Since my wife recently quit her job and has returned to school, we’re a one income family this year. As a result, we paid a very small sum in federal and state income taxes. It wasn’t zero dollars, but it wasn’t very large either. It works out to less than $100/month.

For that I get a standing military, a police force, a fire department, a public education system, a system of libraries, a space agency, a federal highway system, an enormous management infrastructure, an educated workforce, peace of mind, and quite a bit more. For $100/month? I’ll take it. Sure, there are property taxes and sales taxes to factor in too, as well as medicare and social security, but all around, I’d say it’s a pretty good deal…

Though counterintuitive, taxes aren’t in place to take money from the wealthy, but rather to secure wealth that the wealthy have been able to accumulate. As soon as my wife is done with her schooling, we’ll once again re-enter a higher bracket. When that happens, we’ll once again pay our heavier taxes, grudgingly, but knowing that it goes to enable us to live our exceptionally lucky lifestyle.

Which leads me to ask, what the hell are those in the tea party so upset about?

More after the jump…

Judging from appearances, a good majority of the tea party aren’t making enough money to be in the upper income brackets. Turns out, however, that those in the tea party tend to be wealthier than the average AmericanI’d venture a guess, however, that many of them are still not in the position of paying the bulk of federal taxes. Most of our taxes come from the super wealthy (though obviously there are loopholes, and those should be closed).

No, it appears that the overarching concern of the Tea Partier is primarily over the perceived fairness of taxes, possibly stemming from the fact that people making slightly less than they are — like me, this year — are paying very little, while they’re still struggling to get by.  Tea partiers appear not to like the progressiveness of the system, for one thing (even though it is likely that a more progressive system would possibly benefit them greatly) and they also appear not to like the redistributive aspects of the system. It’s too socialistic (or fascistic, depending on how confused you are about political and economic theory — and many Tea Partiers appear to be very confused about political theory).

Maybe, then, I can defend the progressive tax structure a bit, and in doing so also defend (at least some) aspects of redistribution. Before I do so, I should also mention that simply disagreeing with a specific line-item of a budget, or maybe a specific deduction, or heck, even the largeness of the budget as a whole, is not and cannot be an argument against taxation in principle. Moreover, I’m not a tax person, so the intricacies of tax law are extremely opaque to me (as to many people), so take this for what it’s worth.

First, on fairness: the same rules apply to all citizens. In principle those on the lower end of the pay scale are advantaged only as much as those on the higher end of the pay scale. Their apparent advantage “evaporates” as they climb higher and higher up the pay scale, but it’s fair all the way up. This is by design, and arguably for good reason. Most people recognize that it’s hard to get started at making money (barriers to entry, startup costs, and other such things, make this a reality). Moreover, some people hypothesize the diminishing marginal utility of wealth, that an extra dollar to a person with only $50 to his name is worth a lot more than an extra dollar to a person with $50 million to his name. (DMU is a questionable proposition, to be sure; but there are many ways to cache it out, none of which I will cover here.)

Further, many also recognize that there are a lot of bullshit jobs that provide a great deal of social good for all to use. Cleaning sewers sucks, but it keeps our neighborhoods from smelling. They also recognize that it is much easier to make money once we’ve already gotten somewhere, either by obtaining an education or by acquiring the assets (a.k.a. capital) that enable the further production of wealth. If I am employed doing day labor, it’s gonna be hard for me to climb the ladder. If I am an employer with a factory and machines, I’ve got what I need to make money without doing much of the labor myself. In fact, I can employ 50 laborers to work for me, and share some of the proceeds from their work.

Second, on the personal level: If you don’t want to pay as much in taxes, if it really bothers you, you do have the option of simply making less money. If you’re like most people, you won’t do that. Why? Because more money in your pocket is more money in your pocket. There’s nothing sacred about the unit of a dollar. It’s just 100 pennies. If your 75 thousandth dollar is worth 65 pennies and not 100 pennies, that’s maybe not as great for you, maybe not as worthwhile, but it’s still something to put in your pocket. If you’re rational, you’ll continue to pursue it to the point at which it becomes not worth your while.

What is the point at which it stops becoming worth your while? Hard to say. That’s an empirical matter. From all appearances, however, it’s not 65 cents on th 75 thousandth dollar. People were still quite rich during 80s, during the Reagan administration, when taxes were considerably higher.

The takeaway proposition is that we can’t just jettison the progressive taxation system, but should instead all be trying to find a taxation that works, where wealthy people still can still make heaps of money, but where it is possible for the rising tide to lift all boats. The Tea Party isn’t really doing this. They’re just screaming about taxation, as if it’s all socialistic evil.

Having said this, maybe their concerns really aren’t with taxation per se, but rather with the way in which money is being spent. I stick by what I said before, that ultimately these concerns aren’t arguments against taxation in principle, but maybe it will help to address this concern too.

Certainly, very bad decisions abound in government, but bad decision-making abounds throughout any social organization, whether government or private. I’m no apologist for idiotic spending decisions, and I’d definitely like to see things cleaned up in some areas and subsidized in others, but as Tom Schaller points out, the US government is one of the leanest in the world. It still gets quite a bit done.

The overarching point is that our tax money doesn’t go to nothing. It basically enables all of us to be as wealthy as we are, to enjoy the quality of life that we do, and, at least to my mind, would enable many more of us to be much wealthier and to live better and more productive lives if we made smarter investments in our communities. That starts with investments in our education, environment, and health.

That’s what all other successful industrialized nations do, and that’s what’s so maddening about the bitching from the tea parties and libertarians who think that money magically materializes from hard work and merit. Newsflash: It doesn’t. It is secured by preparing a good infrastructure for wealth creation. No amount of libertarian fairy dust will change that. It is demonstrated time and again in nations with terrible infrastructure. Typically in such nations, the poor are dirt friggin’ poor, and the rich are rich, but only so rich.

The issue here isn’t that government can do everything better than the private sector. It’s that there are some things that are social goods and some things that are private goods. There are issues that the market is particularly ill equipped to address, thus resulting in market failures; and there goods that government is particularly ill equipped to provide, thus resulting in bureaucratic failures.

I would never argue, for instance, that the government is better at providing us with soft drinks or with houses. Those are clearly marketable goods, and there’s a place for the market in determining their allocation and distribution. I would argue, however, that there are perverse incentives, negative externalities, and socially and individually harmful inefficiencies associated with, say, the strictly private provision of medical care. That itself isn’t a socialistic argument — far from it. It supports capitalism right on down to its foundation. It’s simply an acknowledgment that the public sector needs to step in where there are hiccups in the supply and demand curves in order to preserve the integrity of the supply and demand curve in all other areas. We can straighten things out with policy interventions, but we need to have a serious discussion — not a crazy discussion — about what policy interventions will work the best.

Happy Tax Day! Bring your own mug and go get your free cup of coffee at Starbucks.

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12 comments

  1. If you’re going to start talking about wealth and income you’d do well to grasp the distinction between the two.

    Wealth is a stock. It’s the ownership of assets.

    Income is a flow, it’s the earnings in any one year in this instance.

    The US, at the Federal level, doesn’t tax wealth (with the limited exception of inheritance tax). It taxes incomes.

    So, comparing the wealth, ownership of assets, with the portion of taxes paid on that entirely different thing, incomes, doesn’t make much sense.

    From eyeballing the Wikipedia entry I’d say that the bottom 50% of households get around 25% of total income. And you’re right, they don’t pay much if any income tax on that. But there’s certainly a reasonable amount to be found there if you really wanted to.


  2. I’m well aware of the difference between the two, which is why I called one ‘wealth’ and the other ‘income’. To some extent, you’re right that the comparison isn’t perfect, but to another extent, it’s (at least theoretically) true that wealth has been already taxed.

    Moreover, when we talk about those in the lowest income brackets not paying taxes, we generally are not talking about the wealthy. We’re talking about the poor. The income discrepancies parallel, in many respects, the wealth discrepancies.

    True, some very wealthy people have no income, and thus pay no income taxes — and the capital gains tax is a beast for another day — but we can generalize about the fairness of the income tax regime based on where people are in the wealth ladder. At minimum, someone who pulls in $1M in one year, but nothing in all of the years prior, is still in a much better wealth position than someone who pulls in $10K in that same year.

    Again, I’m not a tax person, but your point is taken.


  3. Tim Worstall makes an excellent argument for taxing wealth.

    However, when discussing these issues it is vitally important to NEVER say that the lowest income brackets are not paying taxes, they are, just not INCOME taxes. Ben, don;t play Tim’s game. The total tax burden on the lower brackets is percentage wise, roughly the same as on most of those above them.


  4. I’ve got a great idea. Why don’t you wander over to the economics department and ask someone what the rationale is for keeping taxes on the rich from getting too high. There are actually decent people who study these things and could explain it to you.


    • That, of course, is always a possibility… but they’d presumably only offer an economic rationale. That’s interesting, but fairly limited. Among other things, “too high,” doesn’t say anything about how high. For another thing, there may be good economic reasons to remove the minimum wage, for instance, but we don’t want to do that for non-economic reasons.


      • So you think that your colleagues in the economics department could “only offer an economic rationale”. Maybe they have thought longer and harder about these things than you and could expound at some length on what you mistakenly call “non-economic reasons”.


      • It’s not that they could only offer an economic rationale, but that they’re likely to offer such a rationale. Could be, as well, that they’ve thought longer and harder about these issues. Certainly a possibility. I don’t claim to specialize on issues of optimal taxation rates. At the same time, I do have more than a passing interest in issues at the intersection of policy, ethics, and political theory, and those questions are precisely these.


  5. “The income discrepancies parallel, in many respects, the wealth discrepancies.”

    Not really: wealth inequality is almost always very much larger than income inequality. As in the numbers above. The bottom 50% get 25% of the income but have only 2.5% of the assets.

    “ut we can generalize about the fairness of the income tax regime based on where people are in the wealth ladder.”

    Not really. We should talk about the fairness of the income tax regime with relation to income distribution. The wealth tax regime with reference to the wealth distribution.


    • They may not isomorphically map onto wealth discrepancies, but they do parallel them in some salient respects, as there is a wide discrepancy in both cases. It’s also true that a carpet sample isn’t actually representative of the carpet that you’ll be installing on your floor. Among other things, it’s much smaller than your floor…. but you’d be a fool to say that the carpet sample somehow isn’t a reflection of what you’d be putting on your floor.

      Moreover, in the case your present, remember, we’re looking at the reasons why 47% of Americans aren’t paying any federal income tax at all. True that some very wealthy people make no income, and so pay no taxes, but more or less, people who make more money are wealthier than people who make less money.

      Also, remember that wealth considerations are partly _built into_ the income tax law. _Even though_ maybe 50% of Americans earn 25% of the income, there are credits and deductions associated with expenditures and wealth factors that interrupt assessment of the tax schedule on the strictly graduated basis.

      One of the reasons that my taxes are lower this year than in past years, for instance, is that I was lucky and wealthy enough to purchase a home, but not lucky and wealthy enough to purchase a home without a mortgage. My mortgage interest isn’t taxed. Someone wealthier than I may not have purchased a home with a mortgage, and so wouldn’t have that deduction, which is substantial. Regardless of how you feel about the mortgage interest deduction — and even though it benefits me substantially, I think there are reasons to object to it — there are some asset related factors that determine where one falls on the income tax schedule.


  6. hi, good day. i was just reading about this on our local website



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