Sunday, September 2, 2012

WHAT'S FAIR and Who Decides What's Done with "INITIAL" MOM? ... Income, Taxes Paid, Tax Rates and Charitable Donations


I've been thinking about taxes and the need for all of us to pay our fair share. But what's fair? And who decides?

Here's what I say about fairness. We're obligated as a matter of law to pay what we owe in taxes. We're allowed as a matter of principle and what each of considers fairness to give to others that which we wish to and are able to give. Accordingly, the combined total of (1) what the government confiscates and (2) what we give to others reduces what we keep for ourselves from our income, aka our INITIAL MOM.

The formula can be stated this way:  100% of income (INITIAL MOM) - total reduction of that income (forced taxes + voluntary donations) = percentage MOM remaining to each of us.

Some Questions

If I pay taxes representing 30% of my income and you pay only 10%, is that unfair?  Is there something wrong with the tax laws? Does it matter who has the most ability to pay taxes?

But if I pay taxes of 30% and you pay 10% but donate another 50% of your income to help others voluntarily, amounting to a combined total of 60% of INITIAL MOM, am I being unfair? Are you?

Is it better to give it to government for allocation as the bureaucrats in the best spirit of OPM will decide, or would it make for a better societal outcome if, at least to a larger extent than now, we each determined where MOM would be best used in the community?

Finally, what's more; 30% or 10%? For my answers to those questions, please read on.

An Example

{NOTE: The Bible teaches that we should "Render therefore unto Caesar the things which are Caesar's, and unto God the things that are God's." Matthew 22:21. Sounds good to me. But what's fair?}

So here's a troubling example, at least to me, concerning focusing on the percentage of earned income we pay in taxes as an indication of fairness. It's admittedly a rather simplistic example, but you'll easily get the message, I'm sure.

Assume person A earns $300,000 per year and therefore automatically qualifies as an Obama designated fat cat greedy millionaire or billionaire.

Now further assume that person A is taxed at an average blended tax rate of 30%. That means he pays $90,000 in taxes out of his $300,000 in income.

Now assume that person B makes the exact same $300,000 as does person A, but that B contributes 50% of his earnings to charity. Thus, after paying $150,000 to charity, B's taxable earnings are $150,000. We'll assume he pays an average blended rate of 20% on his taxable income of $150,000. That means he'll owe $30,000 in taxes or 10% of his $300,000 in income.

Summing Up

To summarize, overall person A pays 30% in taxes ($90,000 out of $300,000 in earnings) and keeps $210,000 of his earnings to spend as he sees fit.

However, person B pays 10% in taxes ($30,000 out of $300,000 in earnings) but keeps only $120,000 of his earnings to spend as he sees fit (having donated $150,000 to charity and paid $30,000 in taxes).

B pays 10% in taxes and A pays 30%.  Yet B keeps $120,000 of his earnings and A keeps $210,000.

Government gets $90,000 from A and only $30,000 from B.

Charity receives zero from A and $150,000 from B.

What's fair?

We report. You decide.

Thanks. Bob.

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