Week 46: Fair Share

The notion of paying one’s fair share of taxes comes up time and again in election cycles, and it is based on two key fallacies. First, the fallacy that wealth is finite; that for one person to become wealthy, it must be at the expense of another. For anyone with even a rudimentary understanding of economics, it is evident that this is not true. Second, the fallacy that the wealthy unscrupulously avoid paying a fair share of taxes.

Consider what some presidential candidates say:

“We’re in a situation where you have the top one percent, in fact, making — paying a lower tax rate than you do.” -Joe Biden

“Democratic socialism means, that in a democratic, civilized society, the wealthiest people and the largest corporations must pay their fair share of taxes.” -Bernie Sanders

“I want millionaires and billionaires and big oil companies to pay their fair share.” -Elizabeth Warren

These statements and many more like them are illustrative of the us-versus-them thinking that is prescribed in Saul Alinsky’s Rules for Radicals, a political handbook designed to foment discord and hatred so that these feelings can then be used by those who stir them up (i.e., his “organizers”) to their own political advantage and power. According to Alinsky, “An organizer must stir up dissatisfaction and discontent.” He expands on that, writing, “He dramatizes the injustices.” In short, Alinsky’s so-called organizer “stirs up unrest.” Alinsky’s acolytes, such as those quoted above and as with our former President, intentionally pit one group of people, be they identified by socio-economic status, race, gender, etc., against another, and then they leverage the media and half-truths to dramatize the unrest they sow. Tragically, this is a playbook that no longer informs only the far left but informs all in power to some extent or another.

Focusing on socio-economics, let us look at the principle behind this sample of candidates’ statements and what it means for our society and how they affect the values and virtues we discussed last week.

To begin our analysis, let us consider income tax data from 2016, which comes from the Internal Revenue Service (IRS) and is the most current data available. The top 50 percent of wage earners paid 97 percent of all income taxes, and the top one percent, about whom we hear so much from presidential candidates, paid 37 percent of all income taxes, which is nearly twice the percentage they have of the overall income pie (19.7 percent of total income). For those in the lower income brackets, they receive a credit that exceeds any tax liability they may have incurred. This Earned Income Tax Credit resulted in adjustments and direct payments to those tax filers of approximately $100 billion.

It is important to keep in mind that, when candidates claim that the rich pay less than the poor, they are factoring in capital gains tax rates, among other things, making the comparison between rich and poor one of apples to oranges. Therefore, for the purpose of our discussion, let us have an honest discussion and stick to apples, which is to say income tax rates and related perceived disparities.

More data…to maintain deficits at present levels, income tax rates on the top earners (i.e., those making more than $400,000 per year, so here we aren’t even talking solely about millionaires and billionaires) would need to be increased by approximately 20 percent, from nearly 40 percent to 60 percent. To achieve a balanced budget at the expense of top earners, their tax burden would need to be increased to 102 percent. These estimates come from the Congressional Budget Office (CBO). It is important to note that these estimates do not factor in new proposals, such as Medicare for all, free college education, a basic income, and so on.

With these facts in hand – data from the IRS and CBO – there can be no question that the top half of wage earners pay almost all income taxes in the United States, with the top one percent paying more than a third of that. The bottom half of wage earners pay almost no income taxes, with some even receiving tax credits and refund payments.

This brings us, at long last, to two questions: what is a fair share and who determines what is fair? Let us begin by turning to Adam Smith. Contrary to a reference you may expect, namely his work An Inquiry into the Nature and Causes of the Wealth of Nations, consider the thoughts he expresses in Part II, Chapter II of The Theory of Moral Sentiments. He writes, “There can be no proper motive for hurting our neighbor.” He continues, “To disturb his happiness merely because it stands in the way of our own, to take from him what is of real use to him merely because it may be of equal or more use to us, or to indulge, in this manner, at the expense of other people, the natural preference which every man has for his own happiness above that of other people, is what no impartial spectator can go along with.”

Montesquieu also has something to say on this topic, which may inform our conversation – or at least inform the questions we consider. In The Spirit of the Laws, Book XIII, Chapter 1, he writes, “One must not take from the real needs of the people for the imaginary needs of the state. Imaginary needs are the ones sought by the passions and weaknesses of those who govern, the charm of an extraordinary project, the sick envy of vainglory, and a certain impotence of spirit in the face of their fancies.” He goes on to say, “There is nothing that wisdom and prudence should regulate more than the portion taken away from the subjects and the portion left to them. Public revenues must not be measured by what the people can give but by what they should give.”

What is a “fair share?”

As we learn from Smith and Montesquieu, a fair share must not be based on what a person can conceivably pay, as this may inflict a sort of financial pain on the individual and adversely impact his or her ability to pursue the things that would bring them happiness, such as pursuing the noble ambition of building an idea into a thriving business, employing others in useful work, and satisfying the wants and needs of others. Consider the effects of imposing an income tax of 102 percent on the top one percent. It may theoretically address our nation’s financial woes in the near term, but one thing is likely to happen and another is certain to happen. It is likely that the top one percent would move away, thus killing the goose that lays the golden egg. In fact, the top one percent would be foolish to remain in such a confiscatory environment. This is the self-interest that Smith explores in his Moral Sentiments as well as in his Wealth of Nations. It is certain that such a tax rate is unsustainable. Taking from people more than they earn would relieve them of their income immediately and cause them to burn through their savings over time. Without that income and capital, they would no longer be able to invest in business, new technologies and – to be sure – people, whom they or others employ. Again, the goose is dispatched, along with its golden eggs.

They can conceivably pay nothing, but the results of this are clear, as well. Most evident is the fact that the public treasury would be deprived of its income. Under present taxation levels, the treasury would be slashed by more than a third in terms of funds coming into it, and the government functions dependent upon these funds would be impacted. (Whether that is a good thing or not, I am sure I will address in another post!) What may be less evident is the result of turning givers into takers. Giving requires significant work. Taking does not. As Montesquieu observes, “Ambition is excited by work; poverty is consoled by laziness.” This is not saying that those in poverty are lazy. The point that Montesquieu is making is that poverty can result in a feeling of resignation and hopelessness, and an easier route in life is to accept the financial welfare proffered by government than to produce financial welfare for one’s own self. In this situation, I am compelled to share my personal opinion – my belief, based on statements in the public record and on the application of logic – that our political system is, by deliberate design, set up to push people toward poverty and to keep them beholden to the state for their sustenance. The opposing force to this design is the industry, purpose and mobility offered by the free market. At no point in history has there been greater upward mobility for people in the lower- and middle-income classes than in the nineteenth century. People flocked to this nation to benefit from the consequences of a free and open market. We had relatively open borders, which I believe is a fundamentally good thing in a free society, but one that is ruinous in a society that is not free, with a major corner stone of such freedom being economic freedom. Because we have not had a free and open market for more than a century, the benefits of open borders cannot be realized and must be regulated to a similar extent that the economic life of the nation is regulated. More on that another week!

As we see, too many or too few taxes may have detrimental effects for individuals and for society. What is the sweet spot? What is fair? This brings us back to what one should pay.

Should. Is there any word more subjective, more inclined to paternalistic judgment than this?

It seems reasonable to assert that a fair share must focus on results. Thinking back to our discussion about values and virtues, our social contract demands the maximization of individual happiness by leveraging only the essential social mechanisms to achieve that maximization. A fair share must also play to the rule, not to the exception. To be sure, there will always be those who accumulate wealth with the sole intention of stuffing it in the proverbial mattress. These wealthy are the exceptions. The rule in terms of the wealthy is that they use their mental and financial resources to build up and expand enterprise, which provides employment and opportunities for upward mobility to those who are not wealthy.

Therefore, the concept of paying one’s fair share must be bifurcated into one share that is surrendered to the government for its uses, purposes and its cut of the share, and one that is used by the individual for his or her purposes, which may be to build and expand industry and initiative.

The former provides money, the latter provides work and remuneration. If we think back to the effects of work, much more than money is gained by the individual. He or she derives purpose and an ambition that is in no way evil.

Through services provided as part of the taxation system, a culture of entitlement is fostered, and rightly so. If we pay into a system, we should be entitled to its fruits. It is interesting to observe, though, that just the opposite occurs in practice. Entitlement is promoted, a la Alinsky’s philosophy, in those who contribute the least. I do not ascribe blame to the impoverished in the least. They are operating in the system established by the political class (established, I believe, with nefarious intent). A person struggling at the bottom of the socio-economic hierarchy could be considered foolish if they did not avail themselves of the resources being offered by government. The tragedy is that the system is designed to perpetuate dependency on and vassalage to those in political power. It is in no way the fault of the poor that they are provided with ineffective schools, inadequate housing and the like that damns them to a life of struggle and pain. It is not their fault that politicians’ answer to this conundrum is to tax more and throw more money into these failing programs, like a distant, uncaring uncle who simply sends a check on birthdays and holidays to demonstrated his supposed care.

It is also essential to recognize the fact that it is not the fault of the wealthy. They provide opportunities to enhance the self-sufficiency and upward mobility of those who work for them. They do so while being vilified in the chambers of Congress and in the media.

In considering the fair share paid by the wealthy, it is important to consider the point of diminishing returns, a point which straddles the fence between what they can pay and what they should pay.

Cui bono? This is the question we should ask when determining what is a fair share and who decides what fairness is. To whom is it a benefit?

History demonstrates (i.e., it is a fact) that as tax rates are lowered – yes, including tax rates on big corporations – revenues to the treasury increase. The inverse is demonstrated in the historical record, as well. Lower tax rates spur economic activity and result in more tax dollars flowing into the system. Higher tax rates restrict and lessen these things. A current example illustrates this point: the recent tax rate cuts enacted by Congress. Overall tax burdens have been lowered, and tax receipts to the treasury are at an all-time high.

With lower tax rates, people keep their income and capital and can use them to pursue their individual purposes, which have a ripple effect that results in economic benefit to society. Higher tax rates limit the benefits enjoyed by individuals and to society. The only winners from higher tax rates are those in the political class and those working in government.

Who decides what is “fair?”

This begs the question: should those in the political class, therefore, be the ones deciding what is fair. From this treatment of the subject, it seems clear that they have an inherent conflict of interest. This conflict plays out in example after example of legislation in which law makers exempt themselves from the very tax legislation they impose on citizens, such as the Affordable Care Act (aka Obamacare). This is a very real and fundamental violation of the principle of the veil of ignorance, making such exemptions unethical. Do we, as a people, want those among us, who are so devoid of an ethical compass, determining for us what is or is not a “fair share,” let alone any other decision of import to our lives and happiness?

As you listen to program proposals and hear that we will tax the top one percent to fund them, ask if they are fomenting unrest, as Alinsky would advise, and whether the lessons of history would suggest an increase in the happiness and fulfillment of the people giving and the people receiving, or are they simply endeavoring to bind us with strings attached to taxes and blind us with an unfounded hatred for one another.

Education, roads and healthcare seem to be the hot topics, as always. Is increasing the tax rates of one group of citizens to supposedly provide more funding to programs that the federal government has been failing to provide with efficiency and effectiveness since their inception a good use of citizens’ financial resources, as Smith discusses? Is the confiscation of wealth through taxation truly serving anyone well, apart from political candidates’ ability use to acquire, amass and sustain power?