Progressive Tax Percentages, Dollars, Government, Groceries and Fairness

There's a whole lot of talk these days about taxes and what's fair.

We'll discuss Mitt Romney's specific situation tomorrow, but today let's deal with the basic concepts involved with our country's system of personal income taxation.

The U.S. has long had a "progressive" system, meaning that the percentage of taxes owed on incremental dollars earned increases as earnings climb.

However, what nobody ever discusses is the dollars paid versus percentages paid comparison. Let's look at that admittedly quite different concept today.

In simple terms, assuming two able-to-pay taxpayers have different incomes, why are they required to pay different dollar amounts when "buying" government services?

It doesn't work that way with other purchases we make. Such as bread.

In other words, we buy bread and other items based on the price in dollars and not based on the percentage of our income that the purchase represents. When we go to a store to make a purchase, what we pay isn't a result of how much we earn.

So why doesn't it work that way for taxes? Why are U.S. tax percentages and amounts paid "progressive?" Politics, government power and vote getting are the primary reasons, I would argue.

Let's take the time to consider the politics of a progressive tax system, such as ours. And in this regard, politics applies equally to Democrats and Republicans as well.

In brief, politicians want to collect in taxes the most money they can but tax as many people as possible as little as possible. They also want to get the maximum number of votes possible at election time.

To accomplish those seemingly competing objectives, our progressive tax system comes to their rescue. It's politically friendly and based on straightforward political math.

So the pols play Robin Hood and try to take all they can from the relatively few voters who are deemed to be "rich" and give as much as they can to the rest of the "middle class" voting population.

They call the receiving "taxed-as-little-as-possible" group the "middle class," or the 99%, or whatever else has a feel good message. Besides, it helps them at election time.

Of course, my "third way" equal tax dollars paid approach isn't ever discussed, let along considered on its merits. The two political parties instead talk about job creation, helping the "middle class," fairness and tax rates or percentages.

Never mentioned is the concept of the various different income earning taxpayers paying taxes in equal dollars for equal government services rendered.

But why give the rich a break, you may wonder? That's not the point. Not at all. It's all about the size and quality of government and taxpayer skin in the game for "services rendered."

In my view, adopting an equal dollars in taxes paid for government services rendered approach would dramatically and immediately reduce both the current sickening size of government and its wasteful spending.

It would also curtail government's power to something approximating what the Founding Fathers intended. Public service and limited government would result. What a happy thought.

Now let's move the discussion along and return to the present political reality briefly, albeit reluctantly.

How Much the Rich Pay makes the case that the rich pay enough--twice as much in percentage terms as the middle class. Here's a brief excerpt:

"We're not sure if facts will matter in this cacophony, but someone should at least try to introduce a little reality into the debate, especially since Mr. Romney seems so unprepared to make the case.

Start with the fact that, like Warren Buffett, Mr. Romney said he makes most of his money from investments, not wages or salary. Thus his income is really taxed twice: once at the corporate tax rate of 35%, then again at a 15% tax rate when it is passed through to him as dividends or via capital gains from the sale of stock.

All income from businesses is eventually passed through to the owners, so to ignore business taxes creates a statistical illusion that makes it appear that the rich pay less than they really do. By this logic, if the corporate tax rate were raised to, say, 60% from today's 35% and the dividend and capital gains tax were cut to zero, it would appear that business owners were getting away with paying no federal tax at all."

Taking the other side of the argument, liberal columnist Paul Krugman sums up his position that the top earners don't pay enough in Taxes at the Top.

"But the larger question isn’t what Mitt Romney’s tax returns have to say about Mitt Romney; it’s what they have to say about U.S. tax policy. Is there a good reason why the rich should bear a startlingly light tax burden?

For they do. If Mr. Romney is telling the truth about his taxes, he’s actually more or less typical of the very wealthy. Since 1992, the I.R.S. has been releasing income and tax data for the 400 highest-income filers. In 2008, the most recent year available, these filers paid only 18.1 percent of their income in federal income taxes; in 2007, they paid only 16.6 percent. When you bear in mind that the rich pay little either in payroll taxes or in state and local taxes — major burdens on middle-class families — this implies that the top 400 filers faced lower taxes than many ordinary workers.

The main reason the rich pay so little is that most of their income takes the form of capital gains, which are taxed at a maximum rate of 15 percent, far below the maximum on wages and salaries. So the question is whether capital gains — three-quarters of which go to the top 1 percent of the income distribution — warrant such special treatment.

Defenders of low taxes on the rich mainly make two arguments: that low taxes on capital gains are a time-honored principle, and that they are needed to promote economic growth and job creation. Both claims are false."

Krugman concludes his argument for "fairness" as follows:

"So Mr. Romney’s tax dance is doing us all a service by highlighting the unwise, unjust and expensive favors being showered on the upper-upper class. At a time when all the self-proclaimed serious people are telling us that the poor and the middle class must suffer in the name of fiscal probity, such low taxes on the very rich are indefensible."

So who's right? Neither, in my opinion. Consider another point of view, if you will. Mine.

Let's stipulate that we pay roughly $2 for a loaf of bread at the grocery store. Everybody pays the same amount, no matter how much we earn. A loaf of bread costs $2, pure and simple.

But with taxes, we talk in percentages and not in dollars paid for the government we've "purchased." Why?

In other words, what's the difference between buying bread and buying government services?

If someone earns twice as much money as I do, he's not required to pay twice as much for groceries, gasoline or other items that we each buy in equal amounts. We both pay the same thing, since we buy the same thing.

Why doesn't it work that way for government?

The straightforward if not understood goal of the politician is to get as much money as possible from as few voters as possible.

So they go after the relatively few (as a percentage of the whole) high income earners. As famous bank robber Willie Sutton said when asked why he robbed banks, "That's where the money is."

By going after the "few with the most," the "middle class" taxpayers ostensibly get a pass--but not really. I say not really because if it's deemed to be a free lunch we won't pay attention to the quality or amount of government that we're getting.

That results in power to the pols and definitely not in power to the people. It's a political magic act!

Let's sum up.

The remedy is simple, at least in my view. To the extent we're each capable of paying for the government we're "buying," let's all pay the same amount of dollars. Just like when we buy bread at the grocery store.

What if we did that? Here's my bet.

The size of government would drop dramatically and immediately, and taxes on the middle class wouldn't increase much, if at all. But we'd all then forever after be vigilant about what we're purchasing from the government. And those in government would deliver value for services rendered or suffer the consequences at the next election.

The basic point or goal isn't to reduce taxes on the fat cats and top earners.

Instead it's to reduce the size of government to an amount equal to what the vast majority of our people think it's worth and are willing to pay to "buy."

So let's think in terms dollars and not percentages when deciding what is the right thing to do.

Then if we need more money, as a last resort, the high earners can make up the shortfall.

We'll just decide how many dollars we need and send them the bill in dollars for the excess. But only after at least the top 80% of the voting public have paid the basic freight--in equal dollars.

By the way, my bet is that the fat cats would pay the shortfall immediately and welcome the opportunity to help the cause.

E Pluribus Unum.

Thanks. Bob.