02 November 2011

Occupy Wall Street and Obama's Mean-Spirited Demagoguery

Stephen Kershnar
The Case Against Progressive Taxes
Dunkirk-Fredonia Observer
October 30, 2011

The Occupy Wall Street (OWS) crowd and President Barack Obama claim that the rich don’t pay their fair share and should be made to do so. They want to make the tax system more progressive. A tax is progressive when people who make more money pay a higher tax rate.

The federal income tax rates are progressive. In 2011, the rich (married couples who file jointly and make over $379,150) have a 35% federal income tax rate. The middle class ($69,001-$139,350) have a 25% rate and the working class and poor ($17,001-$69,000) have a 15% rate.

The rich pay a higher rate of their income to the government than other groups. The Tax Foundation found in 2009, that the top 1% of earners earned roughly 17% of income but paid roughly 37% of federal income taxes. The super rich (top 0.1%) of earners made 8% of all income, but paid 17% of all federal income taxes.

If we look at effective tax rates (what tax rates people actually pay), we see the same pattern. The rich paid the highest percentage of their income, 24%, to the federal government versus 11% for everyone else. The rate was a mere 8% for the upper middle class. Because the rich make most of the capital gains, they undoubtedly paid a far larger share of other weighty taxes (for example, corporate and dividend taxes). Even the claims of investors like Warren Buffet that they pay a lower rate of taxes on their income can be seen to be false once we realize the income is double-taxed, initially as corporate income and later as capital gains or dividends. Payroll taxes do not reverse this overall trend.

As usual, the poor free ride on others. In 2009, nearly 47% of U.S. households paid no income taxes. A significant number of those filing (more than 36% in 2008) paid no income tax and a significant number of them made money via the tax code because of the earned income tax credit and other child-tax credits.

The moral case for progressive taxation is surprisingly weak. The argument against is that when it comes to coercion, the government should treat citizens equally unless there is a good reason to treat them differently. There is no reason to tax the rich at a higher rate than others. Hence, the rich should pay the same tax rate (or, perhaps, the same amount) as others. Consider some of the reasons cited in support of progressive taxation.

One reason given for taxing the rich more is that they impose greater costs on society. This is false. Antipoverty programs such as Medicaid, food stamps, cash-welfare payments, and similar ones are pricey. Worse, the biggest government programs (Social Security and Medicare for the federal government, public education for local and state governments) are almost always justified because they provide benefits to the poor and working class. The poor also constitute the majority of people in prisons and are the focus of police officers, social workers, and many other government workers. As economist Walter Williams points out, if anyone should pay more taxes because they impose greater costs on the rest of us, it is the poor.

A second reason given is that the rich contribute less than do others. This is also false. The rich get rich through the free market, which involves people voluntarily giving them their money in return for goods and services they value more than the money and more than competitors’ products. Consider, for example, Apple’s Steve Jobs. Writing in National Review, Michael Tanner notes that Jobs generated as much as $30 billion annually in increased wealth for the U.S. economy in addition to his role in causing Apple’s stock to skyrocket. When Jobs took over as CEO of Apple in 1997, it was worth $2 billion. It increased to $350 billion, which made a lot of people holding Apple stock richer. His company’s technology also provided valuable benefits to teachers, doctors, soldiers, autistic children, people trying to overthrow tyrannical dictators, and so on. Note his estimated wealth ($7 billion) was a small percentage of the wealth and other benefits he generated for others. While this is an extreme case, the contribution of other rich people has much the same pattern. In any case if anyone contributes less and takes more, it is the poor for the reasons mentioned above.

A third reason given is that the rich don’t deserve their money. On some theories, what people deserve depends on how hard they work or how much they sacrifice. Professors Mark Aguiar and Erik Hurst found that the most educated people work more hours than others and have to pay dearly for the education required for their jobs. Because education likely correlates with income, it is not clear the rich are less deserving. In addition, the hard-work and sacrifice theories are mistaken. Consider a job where one man digs ditches using a shovel and a second uses a backhoe. The former might work harder or sacrifice more, but the latter will accomplish a lot more and, as a result, intuitively seems to deserve more money. If this is correct, then desert tracks contribution, if it tracks anything. Via their labor and capital (money), the rich contribute more.

A fourth reason given is that the rich need the money less. If we are talking about what people need (for example, food, clothes, shelter, and protection), these needs are satisfied through anti-poverty, emergency programs (for example, the Federal Emergency Management Agency), and the military and police. Like the rich, the middle class don’t need most of their income and no one is calling for them to be soaked.

Class warriors support their claim that the rich don’t pay their fair share by pointing out that the rich get much of the nation’s income. The Congressional Budget Office recently reported that between 1979 and 2007, rich people’s income increased much more quickly than others. For the top 1% of the population with the highest income, household income (after-tax and inflation-adjusted) increased by 275%. In comparison the middle class’s (21% through 80%) household income increased by just under 40% and the poor’s (bottom 20%) increased by only 18%.

The rich and affluent people’s share of all income is increasing. During the 1979-2007 period, the rich’s (top 1%) share of all after-tax household income increased from 8% to 17%. In 2007, the affluent (top 20%) made 53% of all such income. This means the top fifth of Americans made more than the other four-fifths. None of this, however, supports soaking the rich. Such a soaking requires these changes be linked to an argument from justice or fairness.

In the U.S., taxes are already progressive and this is wrong. The refrain from OWS and Obama that the rich should be made to pay their fair share contains a lie and is a mean-spirited attempt to pick on an unpopular minority.


The Objectivist said...

Note in the last two paragraphs, when the left claims that the rich are making too much of the overall income, they never give a criterion for what is the threshold for an appropriate amount. The fact that they can't provide a threshold in practice or even set out a theory by which we could pick one out suggests that their objection doesn't rest on principle.

Here is principle they could cite. persons should not make more than the percentage they contribute to a firm's profits or, perhaps, to others' well-being. But then they would need to estimate what CEOs and others contribute. They don't even try do argue along these lines.

The Objectivist said...

Even a flat tax is unjust. A rich person not have to pay more for government goods and services than others any more than he should be charged more for food at the super market.

The demagogues on the left here need an argument. They don't have one and they know it.

Huh said...

The rich should be taxed as much as possible until the revenue to GDP ratio drops. In other words, find the sweet spot on the Laffer Curve. I don't care about morality or fairness--the economic argument is the primary concern; arguments concerning morality can come in the wake.