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Bernstein writes: "'What's fair?' seems like an excellent question, especially given how often the concept of 'fairness' has been thrown around in discussions of Obama's proposed 'Buffett rule.'"

File photo, tax forms. (photo: Getty Images)
File photo, tax forms. (photo: Getty Images)



What a Fair Tax System Looks Like

By Jared Bernstein, Rolling Stone

18 April 12

 

his being tax day, "What's fair?" seems like an excellent question, especially given how often the concept of "fairness" has been thrown around in discussions of Obama's proposed "Buffett rule." (The president says it's unfair that some millionaires pay a lower effective tax rate than middle-class Americans, as they currently do; Republicans, that it's unfair to burden the rich with higher taxes.)

I've got five answers.  A fair tax system is:

1)      Progressive: those with more income pay a larger share of it in taxes;

2)      One that doesn't worsen inequality by giving preferential treatment to the wealthy (e.g., by favoring capital over labor income);

3)      One that doesn't disproportionately benefit those who are already doing the best at the expense of the rest;

4)      One that raises enough revenue from those with lots of resources to provide a leg up for those at a disadvantage;

5)      One that does not rearrange the pretax income distribution, as in a confiscatory, highly redistributive system that turns the poor into the rich and visa versa; 

Conservatives invariably counter that it's not fair that almost half of American households, because their income is too low, pay zero federal income tax.  (And not just conservatives--I got a pretty moving note from a guy who said he didn't think it was fair that, because he didn't make enough money, he didn't get to pay federal taxes.  He wanted to contribute!)

Liberals have two comebacks:  First, while it's true that 47 percent of households pay no federal income tax, most Americans pay payroll taxes as well as state and local taxes, as the figure below shows. In fact, when it comes to payroll taxes, the middle class pays a higher effective rate than the wealthy (9 percent vs. 2 percent), because those taxes cap out at around $110K.  

chart 1

 

Second, as the next figure shows, the actual effective tax rates of the wealthiest families (taxes paid as a share of income) have fallen quite sharply, because a) they've benefited from generous tax cuts courtesy of Reagan and George W. Bush and b) their pretax income has grown so much more quickly than their tax liability.

chart 2

 

A key factor here has been the large decline in the rate of taxation on asset-based income, like capital gains, and the much-increased concentration of that income among the wealthiest families.  Those changes are related - once you advantage a particular income type, you're going to see more of it.

Anyway, that's the rationale for claiming the Buffett rule increases fairness: it returns some progressivity to the tax code.

Now, you might object to progressivity on principle, but I'd argue you're starting from a different place than most of us.  Sure, you'll find folks to agree with you - advocates of the flat tax (where everybody, rich or poor, pays the same rate) might join you, for example.  But those of us invoking fairness have on our side the fact that progressivity has always been a bedrock feature in the federal income tax.

And that is as it should be, particularly in an era of so much pretax income inequality.  The fact that tax code has become less progressive in a period of rising income inequality is another dimension of unfairness–a violation of principle #2.

I won't go through the rest of the above principles, other than to say that #4 is clearly in trouble - we're obviously not collected enough revenue, and "no," we can't cut spending enough to offset this.   And this redounds to principle #3.  Were we to follow the roadmap in the House Republican budget - for that matter, any Republican, supply-side, trickle-down tax plan–we would very much be violating those two principles, as these reverse-Robin-Hood schemes redistribute upward.

It's not simply that the GOP plans lower taxes on the wealthy much more so than they do on the poor.  It's that they leave us with too little revenue to help offset the disadvantages that block the opportunities of the least well off, that provide them a safety net in hard times, that help them meet basic needs of food and shelter.  It is not at all hard to connect the dots between regressive tax changes and cuts to programs that benefit the less well off.

Finally, despite all the predictable caterwauling, the only tax fairness principle that seems intact is #5.  If you were rich or poor before tax day, you'll be so again tomorrow.  Of that, you can be certain.

You can email me at This e-mail address is being protected from spambots. You need JavaScript enabled to view it . I look forward to your feedback.

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities. From 2009 to 2011, he was the Chief Economist and Economic Adviser to Vice President Joe Biden, executive director of the White House Task Force on the Middle Class, and a member of President Obama's economic team.

 

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0 # pres 2012-04-19 01:13
I agree, capital gains taxes are unfair.
They should not be 15%
They should not be 35%
They should be at least 50%
-because it comes from doing no labor or actual production of anything -other than profit!
Simply sit back and let somebody else do the work and you reap a big benefit.
The tax rate should be above 75%.
 
 
0 # BradFromSalem 2012-04-19 09:05
I have been calling it Legalized Money Laundering. Only since the money doesn't actually get laundered into something productive, I guess I should call it Legalized Dirty Money. What a racket!
 
 
+1 # Bruce Gruber 2012-04-19 04:18
IF taxation was the governmental funding mechanism for implementing established public policy ... and IF public policy suggested a rational environment for evaluating societal problems and needs ... and IF society was perceived as encompassing all citizens within it ... and IF a better future for ALL was a goal ... and IF shared effort and sacrifice was an underlying principle ... BUT THEN ... how could a clever entrepreneur rig the system, control the mechanisms of power and divert the productive effort to his benefit?

In a FAIR TAX system, military security and infrastructure costs might be borne by the users. Protecting the assets of a billion dollar person or corporation could cost that entity a million times more tax than the person with $1,000 equity or net worth.
 
 
+2 # lobdillj 2012-04-19 05:11
Let's not forget that any nation that does not nurture its geniuses cannot long prosper. The gift of genius cannot be bought and is not distributed based on the wealth of the recipient.

The wealthy should want to ensure the longevity and health of democracy. Oddly wealth seems to create fascists instead.
 
 
+1 # dick 2012-04-19 06:20
"turn the rich into poor & poor into rich" is truly strange wording for #5. I don't think anyone has proposed that. However, I think in the spirit of progressiveness , we should have seen data for the real top, the Masters of the political Universe. One percent is too inclusive. There needs to be a monetary level at which taxation really is a bit confiscatory, because the gains were NOT truly earned & because billionaires are a near & present danger direct & ominous threat to democracy. Remember 90% was once the law.
 
 
-11 # Walter 2012-04-19 06:22
I have some doubts about your definitions of fair as it applies to tax.

Why should a fair tax be a rate at all? Why not every citizen simply pay the same amount? The price of a loaf of bread should not depend on the income of the purchaser, should it?

Or, if some people pay more than others, wouldn't it be fair for them to have a greater voice in what is done with the money?


Or, wouldn't it be fair for the government to have all the money and distribute it equally to everyone?
 
 
+4 # PGreen 2012-04-19 09:53
It is fair to redistribute because we all-- especially those who prosper-- make use of the intellectual, financial and physical infrastructure that we created together. Perhaps when a person lives alone in the wilderness s/he is entitled to all the wealth s/he creates.
Moreover, if your goal is to to share and equalize political power as well as wealth (arguably the form of one leads to the other), then a democratic system is preferable. Is there a democratic system in which a centralized government controls everything? We don't want to substitute government oligarchs for plutocrats. It is an argument for keeping political and economic institutions--e verywhere power is vested-- small enough for easy public participation and democratic access.
Far from creating and maintaining a neo-fudalist structure (to benefit a private oligarchy or public aristocracy), I feel that we should endeavor to ensure a relatively equal society in which we all do relatively well. (The world has enough for everyone's need, not everyone's greed.)
 
 
+3 # RLF 2012-04-19 06:30
The fact is also that the wealthy use far more of the resources of the federal government and should pay for them....and not just the obvious ones!
 
 
0 # wsh 2012-04-19 07:43
All capital gains should be treated like the gains on a home sale: tax-free, if you reinvest the gain in another home within a year; fully taxed, if you choose not to reinvest, or if you choose a different asset class to reinvest that gain in.

Apply the same principle to all capital gains, and you would leave the incentive to stay invested, while removing the windfall of paying a lower tax rate the current system engenders.

This stuff is so simple, why do the pundits make it out to be so difficult?
 
 
+2 # BradFromSalem 2012-04-19 08:00
Nice to see some reasoning and logic put behind tax policy. Unfortunately, most folks will never read this article or any other that makes extended points about tax policy.

To most, or at least to those that need to realize that the Democrats are not about confiscating their money, all this is doublespeak. To those folks, fair means everyone pays the same amount. If I make 1 Million or if I make 10 Thousand dollars, everyone pays the same percentage. That to most folks is fair. So, I resist using that term, because taxes are not supposed to be fair. They are supposed to allow the government with enough resources to ensure that the economy as a whole operates to the benefit of everyone. If the rich are taxed at a higher rate that would be because they have accumulated so much of the country's wealth that it is effectively out of circulation. If the poor are not paying taxes in significant numbers then they will create costs that will also not generate effective circulating dollars.

Extremes at the rich end and the poor end do not improve the general welfare. And of course, excessive military spending siphons off wealth as well.

Tax policy needs to be effective and Congress and the President have the responsibility to pass legislation toward that goal. Do that and fairness will follow.
 
 
+4 # futhark 2012-04-19 08:26
Fair taxes are characterized as being computable by someone with average intelligence and education. The present tax code and its required computations became beyond my abilities a few years ago and I'm a university graduate. No one should have to pay extra money to have his or her taxes computed.

A fair tax system would also avoid complicated schemes for getting people to do things that politicians deem correct. Otherwise taxes become more about intimidation and social engineering by centralized authority than about raising revenue. I don't resent paying taxes as much as I do the time and effort attendant with their computation.
 
 
+1 # BradFromSalem 2012-04-19 09:38
And since the gov has almost all our info, send it to us first, then we fill in the blanks and make corrections.

Every time a tax simplification law passes, the Tax Prep industry's profit goes up. It also happens when Republicans control Congress.
 

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