Taxes

A friend of mine posted the following on her blog:

"I still don't get the whole spread the wealth around bit, I've asked a number of people and I haven't found any reasons that seem fair for taxing the higher income brackets." I'm pretty sure she meant taxing the higher income brackets at a higher rate, but I haven't clarified that. (The references to Texas are because that is where she lives.)

I've thought about his issue a lot, and my husband and I have talked about it a lot. I'm not aiming to turn this into a political debate, I'm just trying to pass along information and thoughts that I have had on the issue. Please don't call anyone names, you are more than welcome to disagree, just do so respectfully.

Here is what I posted on her blog:

I guess that depends on what you define "fair" as.

If fair is a flat tax, then everybody pays the same percentage of what they make, okay that seems fair. In the most fair case, you would have to have no loop holes, no exceptions for children, or small businesses or purchasing a home, or investing money for retirement, or going to school, or a myriad of other major things that drive our economy. There would be no advantages to donating money to charity.

Here is another scenario that seems fair. Have the government figure out how much money they need to function, then divide it by the number of people in the country. That would be how much each person would owe. Multiply that number by the number in your family, that would be how much you owe. Everybody pays the exact same amount, fair, right? Lots and lots of poor people would end up in jail.

How about a property tax? Usually as your income goes up, so goes your property tax, right? Well what about the old lady that bought her house for $6,000 in 1959 and it is now worth $300,000? Should she be forced to move because she can’t pay the taxes? Or the small businesses in similar situations that has to shut their doors because they can’t pay their property taxes. Both of these scenarios have happened in Texas.

An argument I’ve heard against the current way of doing things is something like this: 5% of the highest paid individuals pay 60% of the taxes (I didn’t check numbers, I’m just illustrating something) So that’s not fair right, okay, well let’s make it fair, let’s have the top 5% pay 5% of the taxes, and the bottom 5% pay 5% of the taxes. What happens to the lower 5%? They get a go directly to jail card because the tax burden is too much. While the extreme rich get to buy a third home in the south of France (okay that was hyperbole, but this was getting way too serious and it makes my point).

So what should we do? Many of the scenarios would land a fair portion of us in jail, just because we are poor, or force us from a home that we could afford when we bought it, but the taxes have become overwhelming. I don’t think any of that is fair.

So, why is it set up the way it is? Let’s start with the flat tax (option #1 above). Many of the poor don’t make enough to get by, so, let’s make the taxes they pay 0% of their income so that they have as many resources as they can to get by. Then, we have to tax every body else higher. So what about the middle class? If the tax rate is too high, then they don’t have enough to get by either, so we lower the tax rate for them a little bit at the lower end of the middle class and have it go up towards the higher end. Ultimately, shifting the burden once more towards the people that have more resources. We are left with what we currently have, a progressive income tax.

The Alternative Minimum Tax was created to stymie abuse of the tax breaks. Many upper income people were working the tax breaks so well that they were paying a far less amount (amount not percentage) in income taxes than many of the poor and lower to mid middle class. So, an alternative minimum tax is the level at which you can’t go any lower. Granted the law should have included a link to inflation, but congress seems to pass a patch every year, making it so that only the high end of the middle class and the extremely wealthy are affected by it.

Then there are the regressive taxes (where high income people are taxed at a lower rate than people who make less): FICA and sales tax. FICA is figured at 15.7%, but only up to $92000, then the rate drops to 2% for everything above $92000. The sales tax. Lower income people end up paying a much higher rate of their income in sales tax. A higher percentage of their money is spent on goods and services. Many states don’t tax food (Texas being one of them) to try to alleviate some of the tax burden on the poor. (I don’t have time to verify these rates, I’m pulling them out of my memory, but I think they are pretty close to accurate). Correct me if they are completely off.

Capital Gains is another issue.
Many of the rich make a large chunk of their income in the Capital Gains category. Currently the capital gains rate is 15%, which is much, much lower than most of these people would pay if the income were received on a W-2.

As long as we are talking about fairness, is it really fair to be poor? Our incomes, just like everything else are driven by market forces, supply and demand. A history PhD has a hard time finding a job because we have more of them than we need, and when they do find jobs they don’t make much. But math PhDs have many job choices and much higher salaries than the history PhDs. Education is not the issue, more mathematicians are demanded, so their pay is better. There will always be cases like this in a capitalistic economy, that is just how it is. There are of course more examples I could give, like the teachers that qualify for WIC and medicaid, but I’m sure you get the idea.

Redistributing the wealth is all about people that don’t have enough getting what they need to survive and people who have way more than enough giving of their excess. It’s sucks that it is forced, but the market isn’t good at distributing wealth, it has to be helped and many people wouldn’t give otherwise, forcing the care of the poor more onto the people who really care. Again, is that really fair? I think that it is in our best interest to take care of the poor. I think the government is a good way to do it. It helps people maintain anonymity. I can go apply for medicaid or WIC or get EIC or whatever and very few people have to know about it. It is embarrassing for many people to admit that they need help. Many poor people don’t feel that they can ask a religious organization to help them. The LDS Church for example will only give the kind of help these other programs provide to its members. The Church does do other humanitarian work, but there are guidelines to determining how church funds are used. Using the government also sets up places for people to go, half of the struggle is knowing where to get the resources you need.

I can’t begin to imagine using all of the money that my husband makes, just to live on. Even though we live in an area with a high cost of living, our living expenses are a little more than half of what he makes. Why shouldn’t I be taxed more and have it go to help people who don’t have enough?

When we were in graduate school, we were about 20% short every month. I was extremely grateful for those programs, my kids needed health care and there is no way that I could have afforded the premiums that Rice was asking ($1000+ a month plus 20%). We simply couldn’t get enough loans to cover it, and at the time we were planning to get a job that pays way less than the one we have. I’ll gladly pay taxes because the government provides a lot of services, roads, schools, etc. that we all need. I’m pretty sure that you personally know people that have benefited from these programs, besides me.

Personally, I don’t like the stair step approach that we have now, but I think the idea is okay. I would rather there were some mathematical function that increased your tax rate as your taxable income increased. It would be a difficult thing to work out, but I think it could work.

People will always take advantage of such programs, I don’t think that will ever change, and you can’t legislate all the abuse away because then you start cutting out people who really need help. I’d rather help those that really need help and accept the fact that there are dishonest people who take advantage.

addendum:
Something I forgot to mention about the flat tax is that it would cause the situation for low income persons to be even more dire than it is now as they would suddenly owe, I think the estimate is around 15% of their income in taxes. The 15% is the amount the government would have to tax everyone to maintain current revenue values. Once again, I haven't checked the numbers in a while, they might be different now.