In round numbers, our federal government spends in excess of $3.5 trillion each year. It receives less than $2.5 trillion in federal revenues.
Closing the gap between spending and receipts is a fundamental necessity.
The best way to expand government revenues, of course, is through solid economic growth leading to increased employment and personal income, which in turn will lead to higher taxes paid by both individuals and firms.
In this political season, however, some people, especially President Obama and his fellow Democrats, only want to talk about increasing taxes on the fat cats---the 1% at the very top of the income scale.
They say they want to do this in the name of fairness. Although I have no way of knowing whether their view is just another version of cheap politics or just plain wrong, it works to take our collective eye off (1) government spending and (2) promoting private sector economic growth, the two areas that could make a fundamental difference to solving our country's financial mess.
But now let's take a closer look at some of the relevant facts about the phony tax fairness debate.
The Latest News on Tax Fairness is subtitled 'A New Congressional Budget Office report shows the share of taxes paid by the top 20% has gone up over the last 30 years, while the share of taxes paid by everyone else has gone down.' Here are some relevant facts:
"If fairness in paying taxes means the amount you pay is based on the
amount you make, then the only group in America paying at least a "fair
share" is the top 20%—people who make more than $74,000. For everyone
else, the tax code is a bargain.
You wouldn't know this from President
Obama's rhetoric, but our tax system, according to a recent report by
the Congressional Budget Office (CBO), is incredibly progressive.
Consider: The top 1% of income earners pay an average federal tax rate
of 28.9%. . . . The average federal tax rate on the
top 20% is 23.2%. The 20% of taxpayers earning between $50,100 and
$73,999 pay an average 15.1%, and so on down the line. The CBO report
includes payroll as well as income taxes paid.
There's also another way of looking at
fairness, and that's the tax burden. Here, consider the top 20% of
income earners (over $74,000). They make 50% of the nation's income but
pay nearly 70% of all federal taxes.
Yet President Obama says that "for some
time now, when compared to the middle class," the wealthy "haven't been
asked to do their fair share."
He's right that the system isn't fair, but not because the top 1% pay too little. It is because they pay too much.
Mr. Obama has said that some wealthy
employers pay a lower tax rate than their secretaries. True, some are
able to lower their effective federal tax rate by giving millions to
charity. Or because they derive much of their income as capital gains or
from tax-free municipal bonds.
But middle- and low-income Americans who
do not invest also pay lower rates thanks to the deductions they
receive, such as a $1,000 per child tax credit (which phases out for
couples who make more than $110,000), or the Earned Income Tax Credit,
which no one making more than $50,000 is supposed to receive.
The CBO report ("The Distribution of
Household Income and Federal Taxes, 2008 and 2009") covers the years
1979-2009. It makes plain that the impression conveyed by the president
about what upper-income Americans pay in taxes does not hold up to
First of all, the share of taxes paid by
the top 20% has gone up over the last 30 years, while the share of taxes
paid by everyone else has gone down. It has gone up despite the tax
cuts enacted by President Clinton in 1997 and by President Bush in 2001
and 2003. But that makes no difference to the president. The only group
of taxpayers he calls on to "sacrifice" are those already doing all the
The top 20% in 1979 made 44.9% of the
nation's income and paid 55.3% of all federal taxes. Thirty years later,
the top 20% made 50.8% of the nation's income and their share of
federal taxes paid had jumped to 67.9%.
top 1%? In 1979, this group earned 8.9% of the nation's income and paid
14.2% of all federal taxes. In 2009, they earned 13.4% of the nation's
income but their share of the federal tax burden rose to 22.3%.
Meanwhile, the federal tax burden on
middle- and lower-income earners is lighter. In 1979, the bottom 20%
paid barely any taxes at all, just 2.1%. Now their share of taxes is a
minuscule 0.3%. The burden on the middle-income earners ($34,900 to
$50,100) has dropped too. In 1979, they paid 13.6% of all federal taxes;
in 2009 they paid 9.4%.
One reason our country is so divided is
because the president keeps dividing us. If taxes need to be raised to
fight a war or fund a cause, the president should ask everyone to pitch
in. If the need is national, the solution should be national—and that
includes all of us."
In a "Progressive" Tax System, What is "Fair" Is Always an Unanswerable Question.
As the article notes, 20% of the people now earn 50% of the income and pay 70% of total taxes. Meanwhile, the remaining 80% of the American people earn the other 50% and pay 30% of the taxes. What's fair to one and all? I have no clue and neither does anybody else.
In other words, in any "progressive" tax system, an objective answer to the subjective question "How much is enough?" is simply not possible. Fairness is always in the eye of the beholder, or payer, as the case may be.
So if I'm one of the 20%, I probably think those in the 80% who pay only 30% of the total taxes should be paying more. And if I'm toward the bottom of the pay scale, I probably thing the top 20% should assume more of the total tax burden. In other words, to ask what's fair is to ask an unanswerable question. Maybe that's precisely why it's asked so often.
The Politics ...
But if I'm President Obama and running for reelection, I'd probably prefer talking about raising taxes on the 1%, since most of them probably won't vote for me anyway. Besides, since they only account for 1% of the total votes, he'd rather try to appeal to the other 99% for their votes. And the 99% won't want their taxes raised or even discussed.
But here's the simple math. The top 1% don't have enough money to balance the books all by themselves. For that matter, neither do the top 20%. And our President knows enough math to understand that simple and straightforward mathematical reality. Politics sucks.
Tax increases are not an answer to our nation's fiscal and debt problems. It's a nonstarter and would also harm future economic growth, one of the two ways to fix what ails us.
Where the Focus of We the People Should Be ...
Let's set aside the 20/50/70 and 80/50/30 issues for now. Instead let's concentrate on how much total government spending we require. To do that, we need to look carefully at the biggies of (1) public school spending, including K-12 through college and student loans, (2) medical care spending, including Medicare, Medicaid and the Affordable Care Act, and (3) retirement spending, including Social Security and public sector retiree pensions and retiree health care.
Then let's assume that interest rates on the national debt will double in the next few years and that the national debt will continue to grow at an additional one trillion dollars each year. That means hundreds of billions of dollars in newly added government spending to be able to service the increased national debt.
We the People will either need to raise taxes dramatically or cut government spending materially in the very near future. No doubt about it. If we don't soon deal with our debt and deficit issues in convincing fashion, interest rates will explode as will additional annual trillion dollar deficits add to the already huge national debt.
So we have some very serious choices to make as a society.
Raising taxes on the rich and "near rich," herein defined as those earning $74,000 annually, and requiring them to pay 80% of the total tax bill instead of the current 70%, wouldn't even come close to balancing the budget.
Thus, rather than debating how much each segment of the population should pay in taxes, let's first focus on a real solution to our fiscal woes that involves how much government we're going to pay for as a country.
Thereafter, we can decide what's "fair" for each group to pay in taxes as a percentage of the whole.
My guess is that all taxpaying groups, given a choice, will resist increases in the proportion of the total tax bill that they have to pay. That's only human nature, and resisting tax increases sure sounds fair to me.
Thus, reducing that government spending bill in total is an idea which will appeal throughout the citizenry. Except for certain of our government knows best politicians, that is.
And maybe after the election is over in November, even the current hold outs will decide to get serious about all this spending and taxation fairness and amounts.
Let's hope so. More important, let's insist on it.