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.  

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.

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.