The Rich Pay Too Little in Taxes, Unless They Pay Too Much

Greg Mankiw, an energetic blogger (you may have heard of him? he teaches econ at Harvard? and used to advise President Bush?) wrote a super-compelling piece in Sunday’s New York Times, whose headline says it all: “Fair Taxes? Depends on What You Mean By Fair.”

It is about taxing the rich, and begins by explaining why Warren Buffett can afford to always complain that he pays a lower tax rate than his secretary: most of Buffett’s income is derived from dividends and capital gains, which are taxed at only a 15% Federal rate, as opposed to a Federal rate more than twice that for ordinary income, bonuses, etc.

Soon after, the article becomes more of a philosophical discussion about the rich and taxation, and it is well worth the read. Even more interesting are the comments about the piece on Mankiw’s blog.

But perhaps the very most interesting thing about the Mankiw piece is the lead: “Do the rich pay their fair share in taxes? This is likely to become a defining question during the presidential campaign.”

This is a classic in winking understatement, for Mankiw was not only an advisor to Bush, but is also (as duly noted in the bio on his piece) an advisor to Mitt Romney on Romney’s current campaign.

I applaud Mankiw, the Times, and Romney for having the courage to produce what is essentially a position paper on taxation in the pages of the Times. As long as everyone’s cards are on the table, which they are here, I see no harm. But I sure would have liked to see the e-mails back and forth between the Mankiw and the Romney camp as the Times piece was being edited; and it sure will be interesting to see how this trenchant piece of tax commentary plays out in Romney’s campaign. I can just imagine one of his opponents whipping out the Mankiw article a few weeks or months from now and waving it in his face — “So the rich pay too much tax, huh?”


zbicyclist

WholeMealOfFood (#16) responds to my suggestion in #11 that the overall tax burden is much more evenly distributed than Mankiw's numbers suggest (once you add in FICA, state tax, local tax, etc.) by putting out a series of numbers that have no relationship to my argument whatsoever.

mathking

The question no one every seems to bring up in discussion of taxes is the services the taxes pay for. Who benefits the most from the government's spending? Who benefits the most from the economic system the government maintains?

Why is it alright to force someone to give their money to someone else just because they have more? I have two answers to this one. The first: If everyone paid the same amount of money, it would have to be a low enough amount that everyone could pay it. So we could afford a couple percent of our federal budget, maybe. The second: The wealthiest Americans benefit significantly more from government services than everyone else.

ih2005

First, excerpts from...

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Where is the outrage over sky-high taxes, regulatory costs?
by Jim Higgins
7/15/07 - New Haven (CT) Register (Fair Use excerpts)

"Reports last week from two nonprofit groups should serve as a wake-up call to Americans to start agitating for tax reform . . .

"On Monday, the Competitive Enterprise Institute reported that the cost to consumers of complying with federal regulations exceeded $1 trillion in 2006 . . . almost 10 percent of the nation's gross domestic product. It's nearly half the amount of government spending.

"Even more worrisome, the cost of complying with these multitudinous regulations exceeds the amount of individual income tax paid in 2006, about $998 billion, as well as corporate incomes taxes of $277 billion.

"According to the Washington, DC-based advocacy group [ Americans for Tax Reform ], the average American had to work through July 11 this year just to pay all federal, state and local taxes, as well as regulatory costs including workers' compensation and unemployment benefits.

"Congress should take one of two paths: Either cut tax rates and government spending drastically, or adopt the FairTax, an innovative proposal that would involve abolishing the Internal Revenue Service and its income tax and replacing it with a simple national sales tax."

Full article here: http://snipr.com/wherestheoutrage

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The U.S. income tax system and the U.S. economy are inter-related, and are in DIRE trouble. If we, the citizens of these United States, do not act aggressively to spread the FairTax plan with family, friends and associates - our "nest eggs" stand to be devastated through a coming economic meltdown (see Kotlikoff interview, below).

Politicians are putting demogoguery and pandering above responsible governing - and they're able to do it because Americans do NOT understand - at the "get go" - politicians' / bankers' hunger for ever-increasing shares of the working person's bi-weekly paycheck; Americans do NOT understand the totality of taxes they pay. The FairTax shines the "light of day" on this, putting citizens back in charge to forcefully demand spending reductons.

YOU AND I MUST ACT to mobilize public opinion, and get the FairTax enacted, because the signs point to a probable devaluation of the dollar (for reissuance of an "Amero" ? - under a U.S.-sovereignty-busting North American Union? http://youtube.com/watch?v=6hiPrsc9g98 )

[ NOTE: Does this help clarify your understanding of what's going on globally? a) Bush's persistence on rewarding illegal immigration? b) the North American Highway now under construction in Texas (to stream cheap labor into the covertly-planned North American Union marketplace designed to compete with 21st-century China market? c) the gradual increase in value of the Chinese yuan by China corresponding to China's economic growth? (This will result in the dumping of dollar-denominated debt as its manufacturing economy grows stronger - which guarantees devaluing and ushering-in of the Amero.) ]

Keep in mind, this NAU strategy - supported by the "super-rich" (member-owners of the Fed) - together with their politician buddies who want NOTHING to do with FairTax - runs contrary to simply making the U.S. a "tax free zone" for business under the FairTax. Politicians and bankers lose power when the U.S. is returned to a "savings-driven economy" from a "debt/interest-driven" economy).

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Read the summary, "Laurence J. Kotlikoff (*) on Long-Term Fiscal Problems in the U.S.," and download the podcast here: http://taxfoundation.org/news/show/1859.html

(*) Prof. Laurence Kotlikoff (expert economist, and advocate, of the FairTax plan)

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Powerful "elites," members of political and monied-interest "clubs" reaching into the halls of power in Washington, depend on keeping you and me uninformed of their plans. It is up to YOU and ME to ACT - and not live in a state of denial - based on what we now know is clearly happening to our financial futures.

After you consult the Kotlikoff interview (above):

• (If you're a member of your State FairTax organization) Contact your state or local FairTax Director to learn what you can do. Find yours here: http://snipr.com/localftleaders

• (If you're just learning about the FairTax bill) Join FairTax.org here: http://snipurl.com/scrapthecode

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egretman

Oh yes, the dream presidential ticket would be Ron Paul and Neal Boortz. The Fair Tax meets libertarianism and the gold standard.

ronburk

“Do the rich pay their fair share in taxes? This is likely to become a defining question during the presidential campaign.”

It's actually highly unlikely to become a defining question. Like deep health care reform, deep tax reform is an issue in deep stasis. The fact that it is trotted out and the same rhetoric is repeated every 4 years should not be confused with a "defining" question that has any hope of revealing anything unexpected or leading to significant change.

I view both these issues as being frozen in Nash equilibriums. While the nation as a whole might be significantly better off with revised tax or health care systems, such alternative states can only be reached via steps that involve at least short-term penalties for various controlling interests -- especially for any interests that attempt to lead the change, if they find that no one else is following their lead. Barring unforeseen (and probably unforeseeable) events, no large changes in tax reform or health care are possible this election cycle.

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stu4rtm

The big surprise about fair progressive tax rates is that no country seems to treat the top end appropriately.
Current statistics are that the top 3-4% of earners are experiencing massive earnings increases, while most Americans are in fact losing ground. This group is prospering in proportion to its use of political influence, and presumably to the detriment of the greater part of the polity.
The ability of extremely wealthy individuals (or corporations) to influence political decisions in their favor is an imposition on their fellow citizens for which they should properly pay.
In any hypothetical republic, mathematicians would graduate tax rates at each additional zero.
So why not?

DONALD H.LINGERFELT

This has always been one of my pet peeves: rich guys (mostly Democrats) the think that taxes should be raised on the "rich" and lament the fact that they are not paying enough. This, to me, is the most insane form of self flagalation. If they wanted to, they could just donate the ammount of money that they feel they should really be paying and leave it at that. No one is stopping them. But why penalize others for their success? That is all that taxes are anyway: a penalty on success. If they wanted to they could just write laws to confiscate everything over say, $100 million that anyone had, or make it everything over $1M a year. Who's to stop them? Yes, it may be unConstitutional, but so what? So is the current income tax and no one says anything about that because it lays the major burdon on the productive and reinforces the idea that non-productivity is what our polititions want to reward. If Warren Buffett, Barbara Strisand, or Bill Gates really felt bad about having so much money, the prescription is evident. As it is they are merely being hypocritical.

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egretman

If they wanted to, they could just donate the ammount of money that they feel they should really be paying and leave it at that. No one is stopping them.

This is one of my pet peeves. Conservatives who think liberals should voluntarily pay for not only their share of guvment but pay for conservative's share also.

Why the heck would liberals want to pay more than conservatives? Especially since conservatives have so royally screwed up guvment in these last years.

I have an idea. Why don't liberals and conservatives pay their fair share? Wow. What a novel idea.

wtanksleyjr

"The ability of extremely wealthy individuals (or corporations) to influence political decisions in their favor is an imposition on their fellow citizens for which they should properly pay."

But this is a political decision, which is influenced by the extremely wealthy individuals. (Per your premise, which seems correct to me.)

The influential rich will accept taxes on "the rich", so long as they can define both "taxes" and "the rich". One common outcome is that the terms are defined to protect the existing wealthy people and hinder newly wealthy people.

MCrawford

Why does nobody ask the question: what exactly is it that government does for rich people?

Once that question is asked, I think it becomes very obvious -- government ensures continuity of wealth. So long as a government survives without major upheaval, the rich remain rich.

Government, at its best, has the job of protecting property. Nobody has more property to protect than rich people.

Personally, I'm not sure there should be such a steep (progressive) income tax curve. I think it would be more just to levy a wealth tax on rich people to make up the difference.

Without thinking too hard about it (I'm not an economist), I suspect that the reason wealth taxes aren't levied is that rich Americans would start exporting their wealth to avoid taxation -- so this kind of tax would need to be instituted pretty much worldwide in order to work.

But why is this idea not part of the public dialogue to any serious degree? Surely there are plenty of people like me who think that government is designed best when people who can pay for all their services...pay for all their services?

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zatavu

Always ben suspicious when someone is trying to be generous with your money. It's easy to be generous with other people's money. Liberals aren't interested in generosity -- it's power they are interested in. If they were truly generous, they would give their own money away, and not try to take mine or anyone else's.

This is undoubtedly why all studies to date show conservatives and libertarians are far more generous (with tips, donations, etc.) than are liberals.

Independent

A few people have said that the CBO numbers can't be right because the low quintile tax rates they show are below the FICA 15.3%. If you look at the report (the link is at the bottom of Mankiw's NYT article) you'll see the CBO rates for each of four tax categories.

The "payroll" tax is there, but it is below 15.3% because some low-income people have income that's not subject to FICA (pensions, social security). The FIT rate is negative in the lowest quintile, because the CBO includes the Earned Income Tax Credit as a negative "Tax". So adding them together gives a low rate.

You will also see that the CBO assumes 100% of the corporate income tax is borne by owners of capital. This means that 59% of CIT goes to the top 1% of households (a truly interesting result). The CBO acknowledges that this allocation is debatable. If you allocate some of CIT to consumers or workers, you will get a noticeably flatter set of rates.

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mathking

I stand corrected on the CBO number. Thanks Independent. I do think the way the numbers are reported is, well, incredibly misleading. I am also puzzled by the middle quintile numbers, however. I looked up some other CBO reports, a couple of academic papers and an OMB analysis and they don't seem to agree, or even come close, to these numbers.

zatavu

I agree, taxes should be for services provided for the government. So the question is: what services should be provided y the government? I would argue that it should only be things where everyone benefits (and they should only be things that are proven to be benefits, and are not theoretically beneficial but in fact harmful) directly from the service. Thus, our government should provide us with a military, police, courts, and little else. Roads should be paid for exclusively through gas taxes -- which would act as a users fee -- and gas taxes should also be used for nothing other than roads. I suspect that if we only provided the few things a government can provide well, and better than anyone else, then you would have little if any complaints about taxes. You have complaints about taxes when the money is being used primarily for ideological purposes, such as for subsidies and for the welfare state in general. I object to people being generous with my money, not to people providing me services others cannot with it.

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Kirilius

There is a very thin line between the set of "things where everyone benefits" and the "welfare state".
I guess it is easy to say that everybody benefits from military, police and courts because they have been around in the US for a while and people can see their impact on the society.
But if you had to create this state now from scratch, what would you include in the "good for all" set and what would you leave out as "welfare state"-specific?
For example how would you balance (if you had to) between the need of military and public education? Or between the courts and a public health system?
Why for example public roads benefit everyone and a public health system doesn't?
Now the common mantra is that the health in not a right but a privilege. Alright, but what about the public roads? Are they a right as well? Everybody can use a public road - rich, poor, taxpayers, lazy bums... everyone. Is that a right?

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DONALD H.LINGERFELT

I feel the need to reply to those who think I'm offbase in my assumptions of taxes. First, today, taxes are mostly (55% at last I heard) redistribution oriented. That is, most of the money we pay are in turn sent to others to "even out" the average income levels nationwide. Even though the Constitution does not allow for this kind of federal expendature, they do it anyway. Second, the progressive income tax is a penalty as the marginal rate for making the next dollar is much higher than the tax on the first dollar. This is easy to figure out. Even without a progressive rate, any tax is a penalty. Thirdly, what should it matter to Warren Buffett if I pay more or not for him to pay more? And what is "paying my fair share" have to do with anything? Who said that anyone pays their "fair share"? What is a fair share anyway? My gaol is to pay the least ammount of tax I can, and it should be everyone's. I can spend my money far more effeciently that the government can (and so can you) because I buy things I want and thus create the market incentive to fill my wants which, (because I am doing so based on need) whereas the government spends money against human need, creating demand in less effeicent areas of the economy for the purpose of "social engineering". If you believe in the market process, this is what you would believe in. The market is far more efficient than the government at advancing the economy than the government. It should be noted at this point that the government can not invest in anything (they are total consumers) and the effect of transferring demand from you to them is total drag on the economy. The effect of government spending is detrimental to the economy in every way. Fourthly, the top 5% pay 90% of the taxes now. How much more can you squeeze them before they just give up? There will be a point where it is just not worth it to work harder.

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DONALD H.LINGERFELT

Correction: I just looked up the numbers and it seems that the top 10% pays 70% of the taxes paid to the Federa Government. Sorry.
One more thing, Why should the "rich" be responsible for paying more than the "poor"? One's wealth is a function of how well one satisfies the demands of others in society. The better one serves his fellow man, the more he will be rewarded by his fellow man. Why should he be robbed just because he is able to provide goods an/or services better than others? And why do liberals resent him so much? Wealth is not (ususlly) a gift, and if the owner of the wealth is not good at keeping it, he becomes poor rather rapidly anyway. If one has wealth, he deserves it and should not be plundered just because others are jealous. It is immoral.

zatavu

One could make the argument that roads are a public good (certainly not a right). Please note I differentiated between taxes and user fees, and that we could (and should) make gas taxes into such a users fee, as it was, in fact, intended when it was set up. Plus, roads are difficult, at best, for private industry to provide -- especially things like side roads. This should be another criteria, then: is the good something that cannot be provided for by the private sector? National security, police, and the courts certainly fall into this category (though please note that each of those can and do have private-sector parallels). But welfare can and is better privoded for by priavte sector charity groups, and health care is can and is better provided for by private secotr health care (and did so much better, and cheaper, before the government started getting increasingly involved in it with various forms of government and mandatory insurance coverage).

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Independent

Mr. Lingerfelt -

I'm not sure where you looked it up, but I believe you're confusing "Individual Income Tax" with "all Federal taxes". If you go to the CBO report that Mankiw links in the article, you'll see that the top 10% have 39% of total income and pay 52% of total taxes. And, the 52%, assumes that 100% of Corporate Income tax is paid by capital. (A separate CBO report estimates that 70% of CIT is actually paid by labor.)

mathking

What is the basis for "health care can and is better provided by the private sector?" At the very least, the evidence for this is far from clear given most measures of health care around the world. What is the basis for welfare (I am assuming here we are talking about traditional welfare payments, AFDC, Social Security, unemployment insurance, and other such things all rolled into one.) being better provided by the private sector?

I have spent a lot of time volunteering for private groups doing such work. (In parcticular helping them with record keeping.) I also have a parent who spending her retirement doing nearly full time hours worth of volunteering for her church's St. Vincent de Paul Society, which provides a wide range of welfare-like charity services. And I have found that in general private groups are not well set up for wide scale programs. This is not just a matter of money but an artifact of the ad hoc way in which most of them operate. The larger, broad based charity organization like the United Way and the Salvation army are great, but they are a lot less efficient than government run organization in terms of the percentage of money that is spent on administrative and operational costs.

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