Is the US tax system fair?

Warren Buffett, the mega-billionaire investor, recently wrote an editorial in the New York Times entitled “Stop Coddling the Super-Rich.” In it he argues  that the  rich should pay a higher amount in taxes than they currently do. He uses himself as an example, saying that he only paid 17.4% of his income in taxes last year. He also argues that “people invest to make money, and potential taxes have never scared them off.” Buffett himself invested very heavily and made lots of money in the 1990s and 1980s, when taxes were higher than they are now.

Against Buffett, we have people who divide Americans into two camps of “tax  payers” and “tax eaters,” while you can barely listen to a Republican talk about taxes without hearing them say that 50 percent of Americans pay no income taxes. That leads us to the question: is our tax system fair?

“Half of Americans pay no income taxes”

Let’s work backwards by looking at this charge. To start with, its true, half of Americans (some of whom are millionaires)  do not pay income tax. Is that fair? Here’s how much wealth the poorest 50 percent actually control:

Kind of sad, huh? So, when you only control 2.5% of the nation’s wealth, it seems pretty fair for you to only pay about that amount in wealth-related taxes (the source is here). But saying that half of people don’t pay income taxes is pretty disingenuous. Its like saying that 75 percent of people don’t pay capital gains taxes. So what? The income tax is meant to be paid by the people who have a lot of money. If you don’t have a lot of money, then obviously you shouldn’t be paying income taxes. However, there are  many other taxes  that the bottom 50% does pay in greater proportion to the rich.

“Tax Payers and Tax Eaters”

Are there two classes of people in America? One that pays taxes and one that just lives off the taxpayers? If you think that income taxes are the only kind of tax there is, then you might be tempted to believe this, but Americans pay all kinds of taxes, and most taxes fall more heavily on the poor than on the rich. The poorest 50% of America pays more in payroll taxes than the rich do, they pay more in property taxes, sales taxes and excise taxes than their richer neighbors. For example, here is how payroll taxes fall, according to your income:

As you can see, the amount you pay in payroll taxes falls as you earn more money. All this talk about income taxes ignores that the poor and working class are already paying much of their earnings in payroll tax. And unlike with income taxes, you aren’t going to find any tax loopholes that will get you out of paying your payroll taxes. The difference in rhetoric between payroll taxes and income taxes,  and the different treatment of them in the tax code is part of what makes our tax system unfair.

In fact, the federal government draws almost as much money from payroll taxes as it does from income taxes but you will NEVER hear a Republican politician talk about how we need to lower the payroll tax. Why? The payroll tax falls most heavily on the working class and the middle class, not the rich. Republicans only really seem to care about tax cuts for the rich, not tax cuts for the rest of us. To make our tax system more fair, we should make it so that the blue line up there stays horizontal instead of dipping further and further down as you make more money.

“Coddling the Super-Rich”

By now, you should know what I am going to say here. Our tax system does coddle the super-rich, as Warren Buffett says. The super-rich don’t ever have to worry about sales taxes, excise taxes or payroll taxes (the amount they pay here is so minuscule its laughable) and they pay much less in property tax as a percentage of their income than you or I do. The only tax they have to worry about is income tax, and they don’t even pay much of that! Buffett says:

Since 1992, the I.R.S. has compiled data from the returns of the 400 Americans reporting the largest income. In 1992, the top 400 had aggregate taxable income of $16.9 billion and paid federal taxes of 29.2 percent on that sum. In 2008, the aggregate income of the highest 400 had soared to $90.9 billion — a staggering $227.4 million on averagebut the rate paid had fallen to 21.5 percent. (emphasis mine)

21.5 percent! If you make $75,000 a year, you almost pay that in payroll taxes. Add on your income tax rate and congratulations! You pay more in taxes than the richest 400 people in America.

America’s richest citizens have received much from our country. In almost no other country in the world could they have made as much as they have. Our society, our laws, our government, our institutions and our workers have provided them the unique opportunity to make as much money as they have. No where else in the world could so many make so much money. So it is only fair they pay a bit more (or at least as much as everybody else does) to maintain this society that has given them so much. The country has a moral obligation to ask that the rich pay a fair amount in taxes so that others may have a shot at the kind of life that our richest have achieved. The rich benefit most from our society. Its time our taxes reflected that fact.

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