02 August 2007

Class Warfare

The Objectivist
Dunkirk-Fredonia Observer
July 8, 2007

We are once again being treated to class-warfare politics. Presidential candidate John Edwards declares, "Our tax system has been rewritten by George Bush to favor the wealthy and shift the burden to working families. That is simply wrong." In 1992, Presidential candidate Bill Clinton claimed that it was time to make “the rich pay their fair share again.” Congressional Democrats constantly bemoan tax cuts for the rich. These demagogues keep trying to further the lie that the rich don’t pay their fair share.

A little background is in order. The government is engaged in an all-out war against your wallet. According to a Tax Foundation study, the average U.S. household in 2004 paid $26,738 in taxes. This consists of $17,338 to the federal government and $9,400 to state and local governments. Since average households (middle 20% of households by income) make between $42,305 and $65,000 this is an ungodly sum.

The reason you don’t remember paying that much is that the attack is dispersed and largely hidden. The voracious federal government imposes payroll taxes (Social Security and Medicare), income taxes, corporate taxes (Who do you think pays them?), gasoline taxes, airplane taxes, telephone taxes, alcohol taxes, etc. The greedy state and local governments impose taxes on many of the same things, plus some new and creative assaults such as property, utility, and insurance taxes.

The rich pay through the nose. In 2004, the top fifth of households paid on average $81,933 in federal, state, and local taxes. In contrast, the bottom 20% of households paid on average $4,325 in taxes.

As a side note, it doesn’t take much to get into the top fifth. Any household making more than $99,502 made it. In 2006, for example, 21 Fredonia State administrators and faculty made more than $100,000 by themselves and many have working spouses. I would be surprised if they considered themselves rich.

Despite paying a small fraction of what the “rich” paid, the lowest fifth of taxpayers made out like bandits. They were on average given $31,185 in government benefits above and beyond the taxes they paid. Another way to look at it is that they received $8.21 for every $1 paid in taxes. The lower middle class (second fifth) also did well. On average, they received $18,067 in government benefits above and beyond the taxes they paid. They got $2.51 for every $1 paid. Predictably, the top fifth took it in the shorts. They paid $48,449 in taxes compared to benefits received and only got 41 cents for every $1 paid.

Consider the different ways we could tax citizens. We could tax at a flat fee, a flat income-tax rate, or a progressive rate (where those making more money pay a higher percentage of their income). There is nothing fair or just about a flat rate, let alone a progressive one. We don’t think that McDonalds should charge more to richer customers. Instead we think that people should pay for what they receive. The same should be true for government goods and services. This conclusion becomes more obvious when we remember that the poor and lower middle class get more benefits. It’s as if a poor family ate three more hamburgers than a rich one and then angrily demanded that McDonalds charge them less.

A flat tax still allows for income redistribution, although this is unfortunate. It is arguably unjust to force the rich to work for the poor. Consider the Christmas Carol and whether you think that Bob Cratchit may force Scrooge to give money to Tiny Tim. Clearly not. Nor does this change if Cratchit’s neighbors get in on the act. The same is true even if the neighbors schedule a friendly neighborhood vote on the matter. It’s not their money. Forced redistribution of wealth is just the systematic taking of stuff from Scrooge and people like him. Democracy doesn’t justify such a taking any more than it would justify the outcome when two foxes and a hen vote on what’s for dinner.

It’s worth noting that the rich didn’t cause the state of the poor. Robert Rector of the Heritage Foundation points out that in the context of poor children, two major causes of poverty have little to do with the rich. Rector points out that poor households with children are on average supported by an average of 16 hours of work per week. In addition, nearly two-thirds of poor children reside in single parent homes. If people in the household worked a combined 40 hours a week or poor mothers married the fathers of their children almost 75% of currently poor children would no longer be poor.

One solution to ease the burden on the rich is to adopt a flat fee or, if this is not politically viable, a flat income-tax rate. Another solution is to cut overall welfare liabilities. One example of going in the wrong direction was the recently defeated Kennedy-McCain immigration bill. The bill attempted to amnesty 12 to 20 million illegal aliens. The costs of this bill were staggering. Robert Rector, continuing his yeoman work, estimates that each low-skilled immigrant household costs taxpayers $19,588 per year (benefits minus taxes) and $1.2 million total and well over half of illegal aliens are low skilled. 50-60% lack even a high school degree. That this bill was even considered should tell the rich all they need to know about who the President and Senate want to have for dinner.


The Objectivist said...

The Congressmen and women who voted for the amnesty bill are unfit for office. The bill was an economic discrace in so many ways, it's hard to count them. That's not to say we shouldn't vote for them because while one person (e.g., McCain) might be unfit for office he could still be slightly less unfit than another (e.g., Schumer).

The Objectivist said...

I wonder if any person out there who supports progressive taxation thinks that restaurants, bars, and car dealers should charge on the basis of a person's income. If not, I'd love to hear the difference.

Anonymous said...

Actually, if the company could, it would. It's called price discrimination and it's done all the time. And car dealers do it all the time. Why do you think they ask you so many questions about where you work and such?

Whether it can be achieved depends upon two factors: (1) seller must know information to distinguish customers and (2) good cannot be easily re-sold.

Colleges are the best (or worst whichever way you look at) at this practice. They ask you 6 billion questions about your financial status, parent's, your dog's, and everything else -- why do they do this? It's so they can offer financial aid to those who are more sensitive to not going to school (typically those with lower incomes). The college sets extremely high menu prices for college (what you see), but then reduces those prices to people at different levels based largely upon financial resources. They are price discriminating.

Many people don't complain about price discrimination because in many cases, it tends to redistribute from rich to poor. The rich are more likely to have a higher opportunity cost for time, and thereby aren't going to shop around. So businesses will try to charge lower prices to people who are willing to take time to get a lower price -- like clip coupons.

Chris said...

Let's say the living wage for this area for a family of four is $42,000 a year. For the sake of argument let us look at two similar households, one that makes $50,000/year and one that makes $100,000/year. Let's call them Average and Rich respectively. Let's say that Average pays 15% in taxes while Rich pays 40% in taxes.
At the end of the year Average will have $500 left over ($50,000 - $42,000 - $7,500) at the end of the year.
At the end of the year Rich will have $18,000 left over ($100,000 - $42,000 - $40,000) at the end of the year.
So even though Rich has paid $32,500 more in taxes they are still left with $18,000 to invest, save, or spend as they wish. Average might not even have enough to cover any emergency expenses that may come up.

I think it is socially irresponsible to suggest that the wealthy are being economically mistreated. And to say the lowest fifth "made out like bandits" is reprehensible. Living in substandard housing, having to choose between food or medicine, and not being able to pay your bills is not making out like a bandit. Maybe some rich person make think themselves ill-used when they can't afford that third vacation home or a brand-new Hummer to replace last year's old model, but there really is no comparison.

Chris said...

Let's look at you car dealer analogy. If you have good credit and a lot of money you will get a better deal on your car. If you have poor credit and no money you can still buy a car, but will pay more for it (maybe not on the "sticker price" but with higher interest rates on the loan).

Also, keeping with the car analogy, let's say you drive a fourteen year old car. It has a problem that will cost $800 to fix. Now, this car probably isn't even worth $800, however if you have no savings and no credit you have no choice but to pay to get it repaired. More than likely this will mean having to skip paying a few other bills in order to afford it. But if you are better off financially then you can just scrap that car and put the $800 towards buying a new(er) car.

Again, I fail to see how the poor person is making out like a bandit.

The Objectivist said...

I agree that price discrimination occurs and that it's permissible. However, so is it's absence. The proponent of progressive taxes needs to establish that price discrimination is not merely permissible but morally required.

That said, you make a good point.

The Objectivist said...

Dear Chris:
You argue that it is wrong to argue that the rich are being mistreated. Your argument appears to be one of the following.

1. The rich are doing much better than the middle class and poor.

2. The rich are safely below some privileged threshold.

But why is it the government's business to distribute goods. As a way of evening out quality of life issues, would you have the government favor the poor and middle class in redistributing organs? I bet not. Why not? Because it's not the government's business to equalize quality of life.

This is true whether one thinks the government should maximize utility, efficiency, or respect rights against force, fraud, or theft.

Here's a way to see the issue (I forget who this argument is from). Imagine we could increase overall life expectancy by having involuntary organ donors who organs would be harvested to save many.

A. Would you support this?

B. If not, how is harvesting someone's labor or the value they get from it any different?

The Objectivist said...


Here is how the poor are making out like bandits. For the sake of argument, let's assume that poor households get $20,000 in benefits more than they pay in taxes each year and that they often stay in the position for their duration.

How is this different from
Bob Crachit and his neighbors taking Scrooge's money by force? I doubt you would think this is permissible. I strongly suspect you wouldn't think they could forcibly take his kidneys.

Persons seem to own things (we could argue what grounds ownership) and it seems to treat persons as beasts of burden to take away what they own. This is true regardless of whether it makes the world worse, although as a side note it almost undoubtedly does, at least for non-emergency welfare benefits.