On One Hand

January 6, 2008

Taxes

Filed under: Uncategorized — ononehand @ 5:00 pm
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The term “taxes” is one of the most weighted words in politics. It’s usually thrown around in political campaigns in completely irrational and decontextualized ways; it serves as a buzz word more than anything else, as each party appeals to its base.

Republicans talk about how Democrats will”raise taxes” or “tax Americans to death” when in reality most Democrats are willing to lower taxes on the middle class, and would lower taxes overall to help a weakening economy if the federal debt were not so outrageous. Meanwhile, Democrats talk about Bush’s “tax cuts for the rich” without mentioning what tax rate the wealthiest Americans pay in the first place.

During the January 4th New Hampshire Democratic debate, Hillary Clinton said she would raise taxes for the highest-income earning Americans to pay for healthcare. I think that was a bit of a blunder, since any mention of the phrase “raise taxes” plays right into the Republican playbook. She would have been better off saying “I think the richest Americans earning more than half a million dollars a year could be paying a 40 percent income tax rate rather than 35 percent.”

I would like to see some numbers on exactly what percent of income either party or any candidate thinks should be paid in income taxes. I think it would be easier for Americans to understand, and would ultimately benefit the Democrats, who are viewed unfavorably on taxes even though most Americans would rather not lose what their taxes pay for.

I don’t think anyone should be paying more than 50 percent of his or her income in taxes. Though it’s absurd how much some Americans make, it isn’t the government’s job to redistribute that; the imbalance of wealth is a failure of culture and not a responsibility of government. Remember that in a democratic republic, “government” is not an external organization that rules over the population; a democratic government means the people govern themselves, and it is more like an agreement between neighbors to protect each other from worst-case scenarios. The government’s concern is not the ratio between the richest and poorest Americans, it is the financial well-being of the poorest Americans, and the encouragement of the poorest Americans by making sure they see reasonable rewards for their hard work, are safe from starvation or disaster, and are given every opportunity to thrive. Welfare is absolutely a responsibility of government; but class redistribution is not.

Ultimately, the poor are no less poor if the richest person in a nation is a millionare or a trillionare. The presence of filthy rich people shouldn’t be our concern. But it is our concern if the poor do not have a fair chance to succeed, and capitalism is a moral system only if they do have that chance.

But it is also undeniable that the rich have a greater ability to pay taxes than anyone else, and work less per dollar than anyone else. The idea that the highest-income Americans work harder for their money is complete nonsense; if they are to be commended for anything, it is that they were likely given good health, high biological intelligence or wealthy parents, made smart business decisions and executed those decisions with good timing. I’m sure many of them do work hard and have made responsible life choices, but if hard work or effort could be measured, it would allign itself with anything but income in the U.S. economy. America is no longer a fronteir nation with a wide open and unclaimed West; it’s time to choose reality over one of our dominant national myths, and settle into a stable and permanent way of living with sustainable economic growth. No one is ever going to convince me that to earn a million dollars in a year by owning or trading stocks entails harder work than to earn twenty thousand dollars in a year by laying bricks.

It might be surprising for some Americans to learn that the highest income tax bracket is 35 percent, and kicks into effect for Americans earning about $350,000 a year or higher. That means a person who earns $430,000 a year will live a lifestyle of a person earning $300,000 a year, which, in both cases, will be spent almost entirely on luxuries or investments since basic living costs for an average family are about ten percent of that post-tax income. Most Americans earn between $31,000 and $77,000, which means they currently pay exactly a quarter of their income in taxes, minus deductions.

The lowest tax bracket, for those earning less than $8,000 a year, is 10 percent (in 2003 the Wall Street Journal editorial board refered to them as “those lucky duckies!”). Republicans who support a “flat tax” (or consistent tax rate for all income levels) think that the difference between what the rich pay and the poor pay is unfair, but few societies in the world forgo a progressive tax system, and raising taxes on the poor would burden them while adding negligible amounts of money to the federal treasury; hardly a pragmatic approach.

Considering that one must earn more than $160,000 a year to pay more than 28 percent of personal income on taxes, we can zoom in on the Americans who Republicans are talking to with their tax-cut rhetoric. The upper-middle class – those who fall into this tax bracket with between $77,000 and $160,000 a year – are the most important constituents of the Republican party when evangelicals are excluded. Those whose earnings rank them in higher brackets are too few to make an impact on the vote, but those earning less are not wealthy enough to substantiate the party’s financial contributions. Thus it should be no surprise that they pay only 3 percent more in taxes than those of the income brackett below; so a person earning 150,000 a year pays nearly the same rate as a person earing $32,000 a year. That is to contrast the 10 percent jump in the tax rate between people earning less than $30,000 a year and people earning more than $32,000 a year.

Americans earning $350,000 a year and above now pay 35 percent of their income in taxes; I would support returning this to the pre-2001 levels of 39 percent, but I think it would be better to include a higher tax bracket somewhere between $750,000 and $1 million a year. I don’t think its unreasonable for people at the highest levels of income to pay 45 percent since, at such high levels of wealth, even a drastic cut in income leaves one with similar experienced living standards, and the same amount of financial “pain” as taxing a low-income American at a drastically lower rate. But if all of the basic responsibilities of government were paid for – those being universal healthcare, excellent schools, public safety, food programs and social security – and the federal budget found itself in surplus, I would support an automatic decrease in tax rates effective immediately after the elimination of federal debt. It doesn’t matter how low it goes; since the goal of the tax code is to pay for government’s responsibilities and not to redistribute wealth, there is no “minimum” tax that any American should pay.

If Democratic candidates were explicit in what tax levels they thought different Americans should pay, it would clarify the fog of information that is used against them. Democrats aren’t for high taxes, they are for a progressive tax system that can accomplish what the government is responsible for accomplishing.

The distribution of population and business in this country proves that taxes are not prohibitive to a healthy economy when government is doing its job. Big cities like Chicago and New York are anchors of business with highly thriving economies, in spite of high state income taxes and sales taxes. California has one of the highest state income tax rates in the country for its top bracket, taking 10 percent of the income of those earning more than a million dollars a year, on top of existing federal tax rates; still, the richest Americans flock to California for its quality of life and culture. Wyoming, which has no state income tax at all, fails to grow.

Most of those who oppose current taxes do so out of principle, rather than a beleif that the rich are living pitiful or desolate lives. Meanwhile, those who support current tax rates or would entertain the possibility of higher rates do so out of a beleif that the poor or unfortunate are living below tolerable standards; for them taxes are not raised out of principle, they are raised out of necessity.

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8 Comments »

  1. I’m refreshed that we both agree on something — that the purpose of taxes is to raise revenue for the spending society wants, and not for remaking society in a particular image. And I’m pleased to see someone refuting the myth that our economy is zero-sum–that another millionaire means more poor people.

    I would point out though that your calculations just rely on marginal tax rates, not actual tax burdens. Payroll taxes, state taxes, the earned income tax credit, and who gets various deductions and credits alter the picture substantially. The bottom quintile gets about $6 in spending for every dollar in taxes they pay, for instance.

    The argument that high taxes aren’t a problem to economic growth isn’t so easily refuted. California is losing people to Arizona and Nevada, though not as badly as Michigan with its infamous disaster of a state (people get their state educations and then leave). Also, high state taxes don’t mean much to high-income-earners because state income taxes are deductible from the federal income tax for itemizers, masking the cost and resulting in higher taxes for everyone else. If people actually had to bear the burden of New York’s high taxes, for instance, more people would leave (although many have to neighboring states). Economic growth can occur in spite of high taxes (as in big cities), but it’s a tough case to argue that it’s because of high taxes.

    That said, I would concede that the federal income tax rate is to the left of the Laffer Curve peak. But just because it could be raised doesn’t mean it should be, although I think you make a good argument relying on assumptions about the “basic responsibilities of government.” I wouldn’t share that assumption (that federal taxes should pay for schools, health care for everyone, etc.), as it’s not the case historically and I think there are better ways for people to be healthy and education, so I’m not sure how persuasive that argument is on people who don’t already agree with you.

    Comment by jdhenchman — January 7, 2008 @ 3:44 pm | Reply

    • I would take issue with the idea that California is losing people to Arizona and Nevada; it’s true that those states are growing, but California’s growth is one and a half times the national rate. How much faster would what is already the most populous state want to grow?

      Meanwhile, Arizona and Nevada have much smaller populations to begin with, so the people moving there lead to a bigger percentage growth while the actual population growth is not so rapid. It’s also harder to praise growth there when development is emerging in such a haphazard and irresponsible style; Phoenix is one of the worst urban sprawl cities in the country.

      I don’t think Michigan is losing population because of taxes, I think it is losing population because of climate. More and more Americans are attracted to hot summers and lots of sun. Why anyone would want to live through 125-farrenheit summer afternoons in Arizona, I don’t know, but it seems that people just happen to like that extreme better than they like snow.

      Comment by Anonymous — January 7, 2008 @ 8:58 pm | Reply

      • Those are all very reasonable arguments, and are doubtless true for some people. It’s always been cold in Michigan, though, and California’s growth rate is way below that of its neighbors to the east. There’s quite a bit of evidence that people leave states because of relative overtaxation and overregulation, and that it’s happening to California, Michigan, and others.

        There’s an excellent book recently published which looks at the West Virginia case, available here:
        http://www.amazon.com/s/ref=nb_ss_gw/102-7640546-5598567?url=search-alias%3Daps&field-keywords=west+virginia+sobel&x=0&y=0.

        I would recommend it if you’re looking for a more convincing explanation of why high taxes and heavy regulations can cause poor economies and resident flight.

        Comment by jdhenchman — January 7, 2008 @ 9:23 pm

      • I don’t know how my last comment got there halfway through me writing it, and why it was posted as anonymous; but my full argument is posted below.

        Comment by ononehand — January 7, 2008 @ 9:29 pm

      • Some of the best political arguments were made anonymously 🙂

        Comment by jdhenchman — January 7, 2008 @ 9:38 pm

    • I would take issue with the idea that California is losing people to Arizona and Nevada; it’s true that those states are growing, and there is certainly some cross-mobility between the two states, but California’s growth is one and a half times the national rate. How much faster would what is already the most populous state want to grow? When compared ot other staets, California’s economy is extremely healthy. If Arizona out-bids them on taxes, and that leads to some economic growth, then fine, but I would hardly consider California’s situation a failure.

      Meanwhile, Arizona and Nevada have much smaller populations to begin with, so the steady number of people moving there amount to a bigger percentage growth while the actual population growth is much slower than California’s. It’s also harder to praise growth there when development is emerging in such a haphazard and irresponsible style; Phoenix is one of the worst urban sprawl cities in the country.

      I don’t think Michigan is losing population because of taxes, I think it is losing population because of climate. Notice how much faster Southern California is growing than Northern California. More and more Americans are attracted to hot summers and lots of sun. Why anyone would want to live through 125-farrenheit summer afternoons in Arizona, I don’t know, but it seems that people just happen to like that extreme better than they like snow. If there is an economic reason for Michigan’s decline, it’s that the American automobile industry is currently a dismal failure, and blue-collar jobs across the country are, for good or ill, being outsourced. Also, economic recession has a landslide effect; part of the reason business want to move their headquarters to Houston is that other business headquarters are already there.

      I don’t argue that anyone goes to NYC or San Francisco because the taxes are high. That would be a ridiculous postulation. However, I do think they go to NYC or San Francisco for what those taxes buy. A healthy, well funded public parks system is a good thing for quality of life in a city. Paying a dollar a month in sales tax so that I can jog on a public trail in a park is a better buy than a 40-dollar a month membership to a privately-owned athletic club (though plenty of New Yorkers opt to have both). Public schools and hospitals at higher density means you won’t have to travel far for what you need. Targeted poverty reduction programs can and do work, and zoning laws, as much as property-rights advocates hate them, make a city more navigable, attractive and vibrant overall.

      My argument is that the government should not tax rich people in order to make them poorer. I’ve never beleived that. Neither have any Democrats except maybe increasingly-populist John Edwards. But it should tax all citizens at a progressive rate in order to ensure that there is a social safety net that benefits everyone, and that the minimum responsibility of government is to ensure that no one is homeless or starves because of their work capaibilities or economic situation. If rich people want to be on the same public health program that poor people are on, that’s great for them – just in the same way that rich families can send their children to public schools at no extra cost. It seems that the compromise will have many of them on a private program anyway.

      Comment by ononehand — January 7, 2008 @ 9:19 pm | Reply

      • I don’t argue that anyone goes to NYC or San Francisco because the taxes are high. That would be a ridiculous postulation. However, I do think they go to NYC or San Francisco for what those taxes buy.

        True, but that’s an argument for an efficient government, not high taxes. West Virginia has high taxes but abysmal government services. Virginia next door has relatively low taxes but is often ranked at the top in government services.

        zoning laws, as much as property-rights advocates hate them, make a city more navigable, attractive and vibrant overall.

        I’ve yet to meet a property-rights advocate who opposes zoning laws; I have often found myself being the only one. An owner of a piece of property may hate his particular zoning classification, but that’s different. Zoning laws generally mandate low-density sprawl and ban mixed uses, such as in Phoenix as you point out, so I wouldn’t say they are an unqualified success.

        But it should tax all citizens at a progressive rate in order to ensure that there is a social safety net that benefits everyone

        I too believe in a social safety net (though I think we would disagree on its extent), but that doesn’t necessitate a progressive rate. It would necessitate spending, not revenue.

        Comment by jdhenchman — January 7, 2008 @ 9:36 pm

      • I’ve never argued in favor of high taxes. I have only argued that low taxes are not the end-all of government and politics, which is why I am liberal, not conservative or libertarian. West Virginia is an interesting example, but no one wants taxes to be high with poor government service. All voters are pro-efficiency, and if government is ineffecient, it’s because of the failure of leadership, not the failure of a political philosophy. I think deficit spending is an example of gross ineffeciency because so many tax dollars go towards paying the interest on that debt, and the current federal budget is an example of inefficiency because of bad leadership. In this case, I think that raising taxes to pay off the deficit is the most responsible thing for government to do on behalf of taxpayers.

        Zoning laws generally mandate low-density sprawl and ban mixed uses, such as in Phoenix as you point out, so I wouldn’t say they are an unqualified success.

        That’s an interesting thing to think about; I am definitely in favor of zoning ordinances but it’s true that many awful suburbs or urban layouts look they way they do because that’s exactly what the local government wanted them to look like. Sort of like Colorado’s Independence Institute, which is a low-tax policy organization and claims to be libertarian, but is wildly against public transportation and supports massive road and highway construction even though it’s not economically efficient.

        I too believe in a social safety net (though I think we would disagree on its extent), but that doesn’t necessitate a progressive rate. It would necessitate spending, not revenue.

        I don’t see how it would work without a progressive rate; taxing people into poverty in order to spend them out of poverty is a vicious cycle. I really don’t think a person making $9,000 a year could afford to pay a third of that in taxes. I currently make much less than that as a student with only a part-time job, and with over two thirds of my paycheck going to rent, it would be impossible for me to live where I do (in one of the cheapest living situations available in Boulder) if I paid a third of my income in taxes. This isn’t me saying I like the tax system because it benefits me, because I doubt I’ll be in the lowest income bracket much longer. I’m saying that I am an example of why a flat tax rate is impractical. I really don’t see why a progressive tax system is wrong, except that some people say it weakens their anti-tax rhetoric because the majority of voters aren’t paying high taxes.

        Comment by ononehand — January 8, 2008 @ 2:46 am


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