Progressive Taxation: When Is Enough, Enough?

Given the current debate on extension of the “Bush Tax Cuts”, which “disproportionately” benefits the rich, it might be useful to know who’s making what and who’s paying the freight at the moment, before we decide just how “progressive” we want to be. 

The following stats are the latest from the IRS (2008) via the TaxFoundation.org.  These figures reflect the Adjusted Gross Income (AGI) from actual IRS tax filings for the year.

  • The Top 1%:  Incomes above $380,000.  Share of all personal income = 20%.  Share of all personal taxes = 38%
  • The Top 5% :  Incomes above $160,000.  Share of income = 35%.  Share of taxes = 59%.
  • The Top 10%:  Incomes above $114,000.  Share of income = 46%.  Share of taxes = 70%.
  • The Top 25%:  Incomes above $67,000.  Share of income = 67%.  Share of taxes = 86%.
  • The Top 50%:  Incomes above $33,000.  Share of income = 86%.  Share of taxes = 97%.
  • The Bottom 50%:  Incomes below $33,000.  Share of income = 14%.  Share of taxes = 3%.

Let’s chart these data.

 

 

 

 

 

 

From the above, we can see that the only income group that is actually paying a “proportional” share of their income are those in the 5%-10% income category, those reporting AGI between roughly $114,000 and $160,000.  And, by “proportional”, I mean that both their income and their tax load represents nearly equal shares of the total, or approximately 11%.

If you make more than $160,000 you’re paying more than your “proportional” share of total taxes.  Likewise, if you make less than $114,000, you’re paying less than your “proportional” share of the tax load.  

Mathematically speaking, raising the top marginal tax rate to 90% (i.e. Eisenhower era levels) on the Top 1% alone – as some have proposed – would mean, theoretically at least, that the same level of tax revenues could be raised by just the Top 10%.  That would free the rest of us (90%) from the tax burden altogether, just like the bottom 50% now. 

My question to progressives:  When is enough, enough?  (i.e. “when is it progressive enough?)  Notably, is it even remotely reasonable to have half (or more) of the country paying virtually no taxes?  Is it even remotely smart to allow only 10% of the country carry 70% (let alone 100%) of the tax burden?  Does this sound at all like a recipe for social destruction?  To me it does. 

As I look at the above data, what comes to mind is not that we have an insufficiently progressive taxation problem, but, rather, that we may have an income distribution problem.  Thus, instead of forever trying to retroactively correct some sort of (real or perceived) “unfairness” in the distribution of income through punitive taxations, shouldn’t we actually try to find (or return to) ways that allow the middle class and the “working poor” to both prosper and help carry the load?

And, speaking of taxes, it’s worth adding that (as others have said), “we don’t have tax (revenue) problem:  we have a spending problem”.  In other words, we ought to understand that quite a lot of the contentious squabbling over how to divvy up the tax load is caused by the onerous magnitude of taxes needed.  Reduce the need and, well, you siphon off quite a bit of the problem.

And, yes, it seems that we might well have a wealth disparity, even (more accurately) a wealth “opportunity” problem.   But, just maybe, if we got our fiscal house in order, if we shrunk the scope of governmental interference, and if we maintained sound monetary policy, we might actually begin to renew the sort of opportunities that would allow that bottom 50% to prosper enough to actually help carry some of the burden. 

That’s assuming, of course, that they would actually be interested.  After all, when you make a class of people dependent for long enough, they actually stop trying to care for themselves.  If you discourage ambition (not to mention other naturally positive societal tendencies, such as charity), these impulses whither and die.  The redistribution of wealth through progressive taxation, when it is pushed as hard as it is here, does exactly that:  It punishes success, rewards indolence, and thwarts ambition.  It’s just that simple.

But, we get to hear such nasty “class warfare” rhetoric these days that we never even stop to think about the underlying thought processes and problems.  For example:  “Employers are too greedy to pay a living wage.”  (Note:  A guest said this to me just this past week.)  And, of course, there is the ever popular “Big corporations like Wal-Mart only care about profits.”

Well, is that right?  Ignoring, for the moment, the simple truth that all businesses must care about profit (else they disappear in rather short order), they also pay what they must in order to attract labor.  The same principle applies to any of their operating costs.  Profits dry up rather quickly when businesses don’t try to keep their costs lower than their revenues.  Isn’t that, well, sort of obvious? 

Do we ever stop to wonder why the wages they pay aren’t as high as we might want them to be?  Aren’t we really asking why the economic value of one more hamburger flipper just isn’t all that high?  Perhaps the answer is that you simply can’t sell enough $20 hamburgers to support very many $40,000 per year burger flipper salaries?

But, let’s move outside the box a little more.  Perhaps those hamburger flipping wages just don’t go as far as they might due to rising prices for all those essential imported and/or overly regulated goods, you know, like energy, food, and housing?  Where does that sort of inflation come from?  And, why can’t the “working poor” keep ahead of it?  In other words, why have hated companies like Wal-Mart become the only viable business model? 

Note:  today we hear that A&P may be going bankrupt.  So, did Wal-Mart “put them out of business” or, given the state of our economy, is it simply that A&P’s business model didn’t work.

We might consider, for instance, that it could have something to do with the diminution of jobs in productive industries that command higher product prices and, thus, the ability to pay higher wages – not only for their employees, but more importantly, for their customers?    Might the cost of doing business due to rising taxes and regulation be limiting the ability of such businesses to be profitable?  Are we really sure it’s simply their greed?  We might conclude, after all, that maybe A&P wasn’t greedy enough.

So, perhaps we ought to consider why we don’t manufacture that much anymore.  Why did we allow our economy to be transformed into a “service based” economy, where flipping hamburgers is far more common than milling precision instruments or other high-value processes?  Even at the “bottom-end” of the scale, why is it that we don’t seem to encourage the entrepreneurial ambitions of our people?  Why discourage them with so much bloody paper work and other regulations? 

Let’s go a step or two further.  Perhaps we ought to consider all of the factors that erode the purchasing power of not only our dollar but of the labor we expend in exchange for that dollar.  Perhaps we ought to consider the sort of monetary, banking, and regulatory system that inherently seems to benefit one class of citizens at the expense of others.  Systems that, for instance, enable one class to have access to the means to not only protect themselves from inflation, but often benefit from it. 

Perhaps we can quite trying to grant ever more power to that very same Big Government system that has, progressively, facilitated globalized outsourcing, discouraged small business formation, and punished the lower and middle classes with incessant inflation.  Perhaps, we might begin to see that progressive taxation is not only a sham – a sort of band-aid applied to an open sucking chest wound, it is actually a social poison.

I, for one, am not at all satisfied that redistributive tax strategies accomplish anything more than feeding ever more dependency, ever more greed, ever more social destruction.  I fervently hope we don’t end up with a society in which the Top 10% makes 75% (or more) of the income, even if – especially if – they pay 100% of the taxes. 

Is that the sort of progressive society that you’re yearning for?  It surely seems we’re headed that direction.

Harry Tuttle

 

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