The rich pay more than their fair share

Let me start by citing a paragraph from my post from a week ago, 28 September 2021.

Were professor Blinder to tax Bezos' stock, Bezos would have to sell it to generate the cash to pay the taxes. Not only would that sale destroy wealth, that sale would also probably reduce the value of his remaining stock, as the price of that stock would also decline, as would the price of the stock of the tens of thousands of other holders of Amazon stock. Blinder would be destroying wealth for every owner of the stock, generating losses that would, at some point, reduce the potential tax revenue coming from more valuable stock. It is pretty close to the concept of "killing the golden goose."

Claims this week from the Biden administration that his $3.5 trillion "Build back better" bill "won't cost anything" or will be "free," is just one more example of progressive delusion as to the dynamic nature of economics, wealth creation and property rights.

Let's start with the lame defense of Biden's "free" claim with the following: According to the IRS, a $400,000 or more annual household income represents America’s top 1.8% income-earners. Per IRS Publication 6292, there were 154 million tax returns filed in 2019, thus approximately 2.8 million people earn over $400,000. So at least 2.8 million people will see a significant increase in their federal income taxes, and this is not considering taxes on wealth, independent of income. Jeff Bezos and Warren Buffet -- tow uber wealthy icons -- may actually earn well below $400,000 in federally taxable income, but their wealth is in excess of $100 billion. It is critical that the pols and pundits quit conflating "wealthy" with "high income." The two are related but nowhere near perfectly related and to causally interchange the two really muddles the issue. Further, federal income taxes are just one of many taxes people pay; for many, social security taxes cost more than federal income taxes and state, city and property taxes take an especially egregious yet unrecognized chunk of one's income. Then there is also the estate tax, the death tax rate on large estates.

Then there is the canard, "fair share," used to claim that the "rich" (high income? wealthy? owners of large tracts of farmland or mega mansions?). Biden's plan is basically an attempt to claim a larger share of the income and wealth of the people already paying much more than their "fair share" of federal income taxes. The facts and tax revenues speak for themselves, as shown in the following table constructed by the Heritage Foundation from IRS data.

The top one percent of earners earn 21% of the income and pay 40% of the federal income taxes. The bottom fifty percent earn 12% of the income and pay 3% of total federal income taxes. When I would ask student teams in my business classes to estimate quintile shares of income and federal taxes, they invariably overestimated income earned at the top and underestimated the share of taxes paid by those same top earners. When asked for their idea of 'fair share' of taxes, their idea of a fair share was much less than what the top earners already pay; these same students also felt that lower incomes paid a much higher percent of federal taxes. They were in disbelief that the bottom quintile actually paid a negative percentage share of federal income taxes, owing to earned income credits and other federal subsidies. Another exercise in class demonstrated how people in the lower quintiles were often better off than those in the middle, once benefits and tax breaks were calculated, things like free healthcare, housing, cell phones, etc. These are 'free' to the lower incomes yet paid for primarily by the top fifty percent of earners.

There is also the highly precarious condition of Social Security funds, money that millions of those who paid into the system believe has been stored or saved in some 'lockbox' or protected account for their retirement funds, not realizing that the federal government spend this money, writing IOUs to Social Security for the funds they 'borrow' from Social Security funds. Thus Treasury Secretary Yellen claims that without a high debt ceiling, the projected shortfall of Social Security funds may not wait until 2034; it could be this month that Social Security has insufficient funds to pay benefits, including mine!

Whatever you do, you need to get past the idea that "double taxation" of income applies simply to dividends paid to rich people. Income is double, triple and quadruple taxed, by multiple entities multiple times, even when it is converted to wealth (i.e., savings, retirement funds, investments, stock ownership), by various entities with an assortment of fees and taxes. There are sales taxes and other consumption taxes. Buy a house? Pay a tax. Own a house? Pay a tax. Buy gasoline? Pay a tax. Spend money on gambling? A large part of that goes to government as payment, effectively a tax on your gambling.

The solution lies in re-examining the entire tax code, from top to bottom and across every taxing jurisdiction, certainly not in Biden's "build back better" sophistry. For years and in scores of pages of papers I have written and published some basic themes or recommendations have emerged:

1. Tax policy should attend to maximizing wealth creation and the general welfare; income and wealth re-distribution is NOT a good use of tax policy. Federal, state, local and other taxing authorities should be aligned with these basic principles.

2. Taxes are best levied on income and 'sin'' i.e., activities that are antisocial and self harmful in their overuse. A carbon tax is an excellent example of an effective sin tax; a carbon tax-based tariff/import system would also be an effective option to assign costs to carbon generation and to encourage local economic development. General sales and excise taxes should be used sparingly, if at all.

3. Taxes on wealth should be based on the income that wealth generates, not wealth itself. All forms of income -- capital gains, wages, interest earned, retirement withdrawals, etc. -- should be treated equally.

4. A flat personal income tax rate, at the federal, state or local level, coupled with a significant annual personal deduction, e.g., $7,500 per household member, should be the primary source of revenue, with sin taxes being the other significant source of tax revenue.

5. Any form of wealth or income re-distribution would best be managed via vouchers, especially for education and medical care/insurance. This would combine universal payer for education and healthcare with personal choice in medical/healthcare and educational options.

6. Replace Social Security with a means-tested pension program, one that continues to expect people to have personal savings to supplement much of their retirement.