Wednesday, April 14, 2010

Forty Seven Percent

Tax day is upon us and the big news is the 47% of households have incomes which fall below a threshold which means that they will pay no federal income tax. That has raised a hue and cry in all directions, from incomes being too low, to people getting “free rides,” to tax rates being fubar, to the rich being overtaxed…

Bob Somerby and David Leonhardt both “debunk” the outcry by saying that it’s okay for those households to pay no income taxes because they pay other taxes. Leonhardt even talks about capital gains taxes, which strikes me as a little odd. I wonder how many people whose income is so low that they are not paying income taxes have capital gains.

So what if they are paying other taxes? The topic is income tax and the cost of government. Again we have a situation which may not be altogether wrong, being defended by non sequiter arguments which are utterly spurious. Leonhardt claims,

But the picture starts to change when you look not just at income taxes but at all taxes. This average household would have paid 0.8 percent of its income in corporate taxes (through the stocks it owned), 0.9 percent in gas and other federal excise taxes, and 9.5 percent in payroll taxes. Add these up, and the family’s total federal tax rate was 14.2 percent.

Corporate taxes through the stocks it owned? Taxes are not paid on stocks one owns; taxes are only paid on the gain one realizes from selling stocks. How many low income families are buying and selling stocks and making profits on doing so today?

Federal excise taxes on gasoline are dedicated to pay for highways.

The “payroll taxes” are Medicare and Social Security and they do not contribute to the general revenue stream for operations of the government. Leonhardt’s claim on payroll taxes is particularly weird,

People do not receive benefits equal to the payroll taxes they paid. Those who die at age 70 will receive much less in Social Security and Medicare than they paid in taxes. Those who die at 95 will probably get much more.

The different kinds of federal taxes are really just accounting categories.

That’s like claiming that people who stay healthy and receive no benefit from their health insurance should not have to pay for the gasoline that goes into their car. They paid all of that money into one program and received no benefit from it, so they should receive unpaid benefits from an entirely separate program.

Social Security and Medicare taxes are set aside in trusts to fund those programs. The government borrows that money to run the government, but doing so does not decrease the deficit; actually increases it, since interest is paid on the loan. Social Security and Medicare are programs specifically separate from general government operation. To claim that they are merely “accounting categories” is absolute nonsense.

In terms of individuals paying for things like national defense and the National Park System, for the individual only the income tax does that. All other federal taxes are dedicated revenue, and the funds are allocated to specific programs. So that 47% whose deductions eliminate their taxable income and who therefor pay no federal income tax are, in fact, benefiting from the things provided by the federal government and are not paying any part of the cost.

There may be nothing wrong with that. The idea that the wealthy are bearing the cost of operating the government is by no means an unreasonable one; it is why we instituted the progressive income tax. The degree to which that has shifted, and the desirability of it, can certainly be argued, but let’s not pretend that such a shift has not occurred.

Have the courage of our convictions and defend the progressiveness of income tax. "Yes, the wealthy are bearing the cost, and it is fitting and proper that they do so. When the economy improves, then more people
will participate in paying the cost."

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