Tuesday, October 9, 2007

The rich paying their "fair share"

Over at Rabid Sanity, Steve makes a point about how much personal income tax is paid by the top 1% of earners. According to the link given, the top 1% of taxpayers earn 21.2% of the nation's income, but pay39.4% of the nation's income taxes.

In response, Wulfgar contends that Steve should take payroll taxes into consideration -- and MH musings on the subject proved lengthy enough to make a post out of it.

First of all, payroll taxes shouldn't be considered to be "government income" in the ordinary sense -- after all, Congress can't appropriate these monies at will.

Social Security can be thought of as a pension plan contribution to a defined benefit pension. That this is so is reflected in the fact that there is an income cap on which SS taxes have to be paid.

Medicare taxes can be thought of as pre-paid health insurance premiums for a plan that pays out only in the event of disability or old age. These really aren't particularly fair, since there is no income cap, and since the cost of paying for an ER visit for an 80 year old with a heart attack is the same, regardless of whether the 80 year old made $20K a year or $200K a year when working.

Imagine a life insurance policy where there was only one size policy for all -- but where the premium was based on how much money one made, rather than on risk factors and the size of the payout at death. Wouldn't sell many -- unless one was forced by the government to buy it.

In addition, a question that is worth asking of Democrats who believe that the rich aren't paying enough taxes is this: If rougly 40% of the income taxes aren't enough for the top 1% to be paying, then how much is enough? 50%? 75%? 100%?

And how would that number be arrived at? How is it determined that it would be unfair for 1% of taxpayers to pay 35% of income taxes -- but fair for them to pay 45% of taxes?

Taking it a step further, we would point out that simple political calculation should be enough to disprove the idea that the top 1% of taxpayers get 40% of the benefit of government. The perfect situation for politicians would be the 51% solution: 51% of voters pay 0% of taxes and receive 100% of government spending.

Part of this is actually true -- at least since the Bush tax cuts went through. Right now, the bottom 50% of earners actually, as an aggregate, pay a negative income tax rate, thanks to the Earned Income Tax Credit. That's right -- the bottom 50% as an aggregated group not only pays no income tax, but actually gets more money in refunds than is deducted from paychecks.

Now, that 51% of voters doesn't get 100% of government spending -- but it certainly gets a lot more as an aggregate than it pays in (for that not to be true would be impossible, given the negative income tax rate.) Obviously, far more is received than is paid in. By simple math, this would make it impossible for 1% of taxpayers to receive 40% of government benefits and spending. This would mean that 99% of taxpayers would have to divvy up 60% of the benefits of government spending. -- making it nigh unto impossible for the bottom 50% of taxpayers to receive even 50% of government spending and benefits. We can leave such assertions in the realm of hyperbole.

Any group of politicians that dispersed government spending that way would be politically suicidal -- and politicians may be many things, but politically suicidal generally isn't one of them.

And finally, if the argument is going to be made that it is fair for 1% of taxpayers to pay 40% % of income taxes because they receive 40% of the benefit of government, then why not have a taxation system whereby one is taxed in proportion to the benefit one receives from government? One guy making $1 million a year might benefit from a lot of government contracts and services -- thus making his tax rate very high. And another guy making $1 million a year might get little in the way of government spending and services. Shouldn't they have two different tax rates?

Of course not, since it would then just be better to leave money in peoples' own pockets. There would be no political benefit to such a situation. If money returned proportionately to the pockets of those who paid it in, there would be nothing to be gained politically. Political gain only happens when money is taken from a smaller group of people and distributed to a larger group of people.

In other words -- kind of like it is now, where 99% of the population receives 80% of the income while paying only 60% of the taxes.

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