17 April 2010
In 1789, Benjamin Franklin wrote “In this world nothing can be said to be certain, except death and taxes” (Martin 1).
The fairness of death must be taken up with a deity but the fairness of taxes is very much a human issue. The idea of tax fairness is like motherhood or apple pie – everyone is supports it. Yet there is a wide disparity in what constitutes tax fairness. Investopedia offers little clarity with its circular definition: “[Tax fairness is] a tax platform based on an ideal that aims to create a system of taxation that is fair, clear and equivalent for all taxpayers” (Investopedia 1).
The folks at FairTax.org do not specifically define “fair tax” in their support for the Fair Tax Act (U.S. House Bill HR 25, S 296), but they claim:
“The Fair Tax Act is nonpartisan legislation. It abolishes all federal personal and corporate income taxes, gift, estate, capital gains, alternative minimum, Social Security, Medicare, and self-employment taxes and replaces them with one simple, visible, federal retail sales tax administered primarily by existing state sales tax authorities” (Americans for Fair Taxation 1).
Does this match the Investopedia standard of “fair, clear and equivalent”? I’ll readily admit that it’s clear, but it is hard to call it “fair” when it completely abolishes several of the taxes that apply only to the wealthiest classes of Americans – corporations, estate-owners and investors. So, after two attempts, we have yet to achieve a suitable definition.
Should there be an Individual Flat Tax? The Pro Side Introduction While there are a number of different ways to debate the appropriateness of an income tax system, most academicians would agree that there are four broad categories that encompass the basic principles of a good tax system - fairness, ease, minimal interference and conduciveness to economic growth, and adequacy. Is the tax fair? ...
Perhaps asking the question directly is the wrong approach. Perhaps the best way to view tax fairness is to adopt Supreme Court Justice Potter Stewart’s approach to defining obscenity: “I know it when I see it” (Ariens 1).
To look for it, let’s examine the history of the Federal income tax, and then take a look at how the incomes of the top earners have fared compared to the rest of Americans. This comparison will demonstrate how much tax fairness has eroded. I will conclude by endorsing a proposal that may not restore “fairness,” but can at least stabilize whatever fairness remains.
The Federal income tax came into being with the passage of the 16th Amendment in 1913. The U.S. Department of Treasury’s history of the income tax notes that Congress created this tax with a progressive scale, taxing less than 1% for those with the least incomes. The rates increased progressively up to a top rate of 7% for those with incomes over $500,000 (U.S. Treasury 1).
We just stumbled upon the meaning of tax fairness in the minds of those who first created the tax – namely, that those with high incomes should pay a higher percentage of their income than those who earn less.
If we consider this as the baseline of tax fairness – with the highest earners paying seven times more than those earning the least – then the proposed Fair Tax Act, with its single rate sales tax, is in direct opposition to the 16th amendment’s sense of fairness. Describing the Fair Tax Act as nonpartisan is laughable.
In the ninety-seven years since the 16th amendment was passed, the tax rates have changed frequently. Within five years, the top rate was increased to 77% and it reached a peak of 87% in 1954. The top rate was chopped down to 50% under Ronald Reagan, and when the Bush tax cuts are fully implemented, it will be 33% (U.S. Treasury 1).
Those with the lowest incomes who pay taxes currently pay 10%. Compared to the baseline of the wealthy paying at a rate seven times greater than the poor, the wealthy now pay only three and one-third times more. Expressed another way, the system is now less than half as fair as when it started.
106 th Congress 1 st Session H. R. 5 IN THE HOUSE OF REPRESENTATIVES OCTOBER 19 TH, 1999 Introduced the following bill in which was referred to the Committee on A BILL To tax income once and only once at a single rate. 1. Be it enacted by the Senate and the House of Representatives of the 2. United States of America in Congress assembled. 3. SECTION 1. THE TITLE 4. This Act may be cited as the " ...
In 1942, the tax law began recognizing “capital gains” differently. As opposed to wages for work performed, capital gains are “unearned income.” They are “pay back” from owning investments. Currently, the top tax rate on capital gains is 15%, less than half of the top tax rate on wages. Since capital gain income is heavily concentrated among the wealthiest Americans, the result is that the wealthy are paying most of their taxes at the same tax rate (15%) as earners with wages in the 35,000-45,000 range. How’s that for fairness?
With the creation of the Social Security system, a new tax was levied against wages. These taxes are not progressive – everyone pays the same rate, 7.65% of wages. (Note: since capital gains are not wages, they pay 0% of this tax).
One more thing: a wage cap was placed on Social Security taxes. The tax stops when one’s wages exceed $106,800. Curiously, the National Taxpayers Union identifies $113,000 as the threshold to enter the 10% of income earners (National Taxpayers Union).
So, let me correct what I wrote earlier: not everyone pays the same Social Security tax rate; the richest pay less. How does this compare with the sense of fairness established in the16th amendment?
While the Federal income tax still has a remnant of progressivity to it, since 1981 the clear trend has been to reduce the percentage that the highest earners pay. A further investigation of the fairness of the tax system demands that we look at the incomes Americans earn. Pat Garafalo compares how incomes have changed:
“The income gap in America is at an all-time high, with the wealthiest 10 percent of Americans earning 11.4 times the amount made by those living near or below the poverty line in 2008. And most of that wealth is concentrated at the very top, as between 1979 and 2006, the inflation-adjusted after-tax income of the richest 1 percent of households increased by 256 percent (compared to 21 percent for families in the middle income quintile and 11 percent for the bottom)” (1).
... income tax now starts with a zero effective rate on lower income families (families of four currently earning up to about $23, 200 pay no income taxes) ... exempt. Businesses would deduct necessary goods and services, wages and benefits, and investment purchases from gross revenue. ... Economists judge fairness by horizontal equity, the equal treatment of people with equal income. The U. S. tax system ...
As I have demonstrated, at the same time that an increasing share of the total income is going into the pockets of the wealthy, the rate of taxes they pay has declined sharply. In the current mini-depression, there is a greater need than ever for tax revenue to provide a safety net for the civic good, particularly the economically disadvantaged. Instead, the government is forced to run massive deficits that are limiting economic recovery and will require future generations to pay for today’s spending. A measure of tax fairness could be reinstated with a proposal developed by economist Robert Shiller, which Garafalo describes as “[…] the government should index the tax system to inequality” (1).
Shiller’s idea is to raise the top tax rate when the earnings of the wealthiest ten percent exceed that of those near poverty by more than tenfold. While many in Congress would object to this as a tax increase, Shiller’s proposal would automatically reduce the top rate again if and when the income disparity between the top and bottom returns to a gap of tenfold, and reduce it further if the gap hit a lower point. Thus, the proposal is not a tax increase but rather a stabilizing mechanism that ensures fairness by linking the tax rate to the disparity in incomes between the rich and poor.
I might not be able to define “tax fairness” but I know it when I see it – and I ain’t seeing it now! I know that in the last generation, the incomes of the wealthiest of Americans have been increasing at a far greater rate than the stagnating incomes of the working, middle, and professional classes. I know that as their incomes have risen, the percentage of taxes that the wealthy pay has steadily decreased. However you might define fairness, you must admit that the system has become less fair. The reason that I like Shiller’s proposal is that its built-in mechanism to reduce taxes should inoculate it against calls of “class warfare” that would result in a political stalemate. It assures a continuation of fairness in that dictates our tax system goes and-in-hand with the incomes of all citizens. I know fairness when I see it and Shiller’s proposal seems pretty darn fair to me!
The issue of tax reform is not a new one. It has been debated since the founding of the very first modern government. At the heart of the debate is what the role of government should be in its citizens lives. In the United States the controversy over taxes has been central since the nations founding in 1776. To analyze the issue of tax reform one must first look at taxes and what they represent to ...
Ariens, Michael. “Supreme Court Justices: Potter Stewart.” 2005. Online. 06 Apr 2010.
Americans for Fair Taxation. “About the Fair Tax.” 2009. Online 10 April 2010.
U. S. Department of Treasury. “History of the U.S. Tax System.” Online. 04 April 2010. http://www.ustreas.gov/education/fact-sheets/taxes/ustax.shtml
Garafalo, Pat. “Income Inequality Is A Problem That Could Be ‘Bigger Than This Whole Financial Crisis”. The Wonk Room. Posted online 02 Nov 2009. 04 April 2010.
Investopedia. “Tax Fairness.” Online. 04 Apr. 2010.
Martin, Gary. “Nothing is certain but death and taxes.”2010. Online. 06 Apr 2010.
U. S. Department of Treasury. “History of the U.S. Tax System.” Online. 04 April 2010.