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Sunday, January 22, 2012

Romney's Taxes ... What's Fair?

Following up on yesterday's general posting about taxation and fairness, let's specifically discuss Mitt Romney's tax situation today.

After being accused of raiding companies with his private equity firm, Mitt Romney is now taking heat about paying ~15% in taxes. Although it's not clear what the 15% refers to, we'll assume it to refer to federal income taxation.

My first question would concern why anybody would want to run for president in the U.S. But it's a free country, so if that's what people choose to do, it's their right to do so.

So let's not feel sorry for Mr. Romney or anybody else willing to play the silly game of running for president. That said, why should he or anyone else be reluctant to discuss in detail the fairness of our system of taxation?

First, let's acknowledge that Mr. Romney has never been a member of Congress. Accordingly, the taxes he pays are ones that prior and current nationally elected officials have enacted. Thus, my view is that he owes what the law says he owes. Nothing complicated about that.

Further, my strong conviction is that he's complied with the tax laws in effect over time and paid all the taxes he has owed over the years.

So here's my question. If he always pays what he owes, whatever that may be, and if he didn't vote any of those laws into being, what's the big deal?

Well, I guess the big deal politically is deciding what's fair. As with beauty, fairness is in the eye of the beholder. But let's take a swing at this issue of fairness anyway.

To keep the math simple, we'll assume Romney's taxable income was $6-$7 million for the year. If so, at a 15% rate, he paid ~$1 million in federal income taxes. One million dollars in taxes paid for a single year sounds like a lot of money to me. I wonder how much good government he thinks he got for that money.

The Lessons From Romney's Tax-Rate summarizes the overall fairness issue nicely:

"Mitt Romney has a new PR problem: his tax rate.

According to press reports, Romney said his tax rate is “probably closer to 15% than anything else.” The admission immediately lit up the left-leaning blogosphere and drew comparisons to Warren Buffett, who famously complained that his 17% effective tax rate is less than his secretary’s.

Romney will no doubt quickly become exhibit A in the argument that the rich don’t pay their fair share.

The White House quickly commented that “everybody who’s working hard ought to pay their fair share. That includes millionaires who might be paying an effective tax rate of 15 percent when folks making $50,000 or $75,000 or $100,000 a year are paying much more.”

We don’t know how much Romney earned, of course. But his example and the arguments of Warren Buffett don’t reflect the nation’s true income-tax structure. In point of fact, the 1% as a group pays a higher effective income-tax rate than the rest of the population.

According to the Tax Foundation, the top 1% of taxpayers had an effective tax rate of 24.01% in 2009, the latest year available. The top 0.1% (those making $1.4 million or more) paid a rate of 24.28%. The rate falls as you move down the income ladder. The top 5% paid a rate of 20.46%. The top 10% paid 18.71%. Those in the 20% to 50% groups had a rate of 5.58% and the bottom 50% had a tax rate of 1.85%.

In other words, the more you earn, the higher your tax rate – on the whole.

Of course, income tax rate starts to fall again at the very top of the top 0.1%. The 400 top earners in America, for instance, had an average effective tax rate of 18% in 2009. That’s because the super-rich, like Buffett and Romney, derive more of their income from investments rather than salaries. Capital gains and dividends are taxed at 15% rather than the top rate for ordinary income of 35%."

To recap, the top 10% of earners pay roughly 19%-24% in taxes. The more dividends and capital gains, the lower the tax rate paid. Still, it's usually above 20%.

On the other hand, 80% of American taxpayers pay somewhat less than 6% of their income in taxes. The bottom 50% paid 1.85 % and those in the 50% to 80% category pay an average of 5.58%.

In per person tax dollars paid, of course, there is an enormous difference between what a top 10% earner pays and what an earner at the 50% or below level pays. Nevertheless, the benefits received from the government are essentially the same in each case, regardless of the taxes paid.

So what would the "fair" tax be? In my view, it should be a number of dollars, not percentages, sufficient to cover necessary government expenditures. We would stop deficit spending at once.

So if we want our government to spend $1.5 trillion, and if there are 300 million Americans, each of us would theoretically pay $5,000. If we want to restrict those taxed to the adult population, then the tax bill would perhaps be $10,000 per household. And if we want to restrict payment to those active in the workforce, then perhaps $12,500 per person would be the right amount. Or some such thing.

{NOTE: Please forgive me for any math errors contained herein. They won't change the argument I'm making in the slightest. And that argument is the need to cut government spending dramatically. We'd do so if we all paid more than we'd like to pay but still enough to get what we need to get from government.}

Now let's discuss the progressive aspect of our current system of income taxation. I think it should be eliminated. Of course, it won't be.

In our example, government spending is assumed to be a total of $50,000 for a four citizen society.

If I earn $100,000, my neighbor earns $75,000, you earn $50,000, and the poor guy down the street earns $25,000, how much should each of us pay? Well, I would argue that to the extent we're capable, we should each pay the same amount in taxes, unless somehow one of us receives more government benefits than the others. That would be $12,500 each, or $50,000 in total taxation.

But what about the guy down the street's $25,000 in earnings? He has a hard time living on $25,000 annually. Fair enough.

Then the $25,000 earner shouldn't pay anything. In that case, you, my neighbor and I would each pay close to $17,000 instead of $12,500 as in the example above. The guy down the street would pay nothing. We still raise $50,000 in total.

Welfare is welfare, and fair play is fair play.

But our longstanding "progressive" income tax system says that the more income we earn, for some mysterious reason, the higher the percentage of that increment we should pay in taxes. Why?

Here's what makes sense to me. To begin with, let's recognize that my income is my income, as is yours. I earned it, so it should be mine to do with as I please.

How does taking a portion of it from me and "indirectly" giving it to you or my neighbor make for either a better society or a better government? It doesn't.

Although the three of us earn different amounts, assuming arguendo that we have the ability to pay, why shouldn't we still pay equal amounts in taxes? And why shouldn't we keep what's not needed for government operations? We'll decide what to do with our own money. MOM at work.

If we ever hope to control our current out-of-control government spending, we first need to get more of our people to have skin in the game. That means more people have to pay taxes. And more people have to feel the sting.

To make somebody like Romney feel that sting, maybe ~$1 million isn't enough for the progressives among us. How about $2 million? $3 million? Let me know when we get to "fairness."

But what we should be doing is deciding how much government we want and are willing to pay for as a nation. Only then should we decide who should pay for how much of that government. And somewhere in the mix, there should be a cost-benefit analysis done for all taxpayers.

That would be the "fair" thing to do, even if not popular with the "progressives."

Thanks. Bob.

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