Who Should Pay More in Taxes?

Perhaps the affluent should pay more income tax, but the middle class will end up footing most of the bill – because that's where the real money is.

  • Share
  • Read Later
Getty Images

The late Louisiana Senator Russell Long once said that all tax proposals boil down to one principle: “Don’t tax you, don’t tax me, tax that fellow behind the tree.”

Today’s debate, however, is about more than who ends up paying a little extra. There’s a growing concern about fundamental fairness. Taxpayers increasingly question whether some parts of the population are getting away with something, either by not paying their fair share or by receiving government benefits they don’t deserve. And given the troubling long-term economic outlook, there’s also sharp disagreement about whether the root cause of the budget deficit is that taxes are too low in general – or whether the real problem lies elsewhere.

Both political parties have good reason to spin and obfuscate. Central to the Democrats’ policy proposals is the claim that today’s deficits are largely the result of the Bush tax cuts. But even the largest estimates of the cost of those tax cuts over 10 years is a little over $3.5 trillion. By contrast, the U.S. ran a deficit of almost $1.1 trillion in fiscal 2012, the fourth year in a row of deficits above $1 trillion. At that rate, the annual cost of the Bush tax cuts has accounted for less than a third of the deficit.

More important, though, is the fact that while the Democrats regularly talk about the cost of all the Bush tax cuts, they have proposed eliminating the tax cut only for the most affluent, such as couples with taxable incomes above $250,000. Even the most liberal estimates conclude that such a policy would save less than $1 trillion over 10 years – or less than 10% of the deficit at current rates. Raising taxes on “the rich” may be a reasonable policy, but it will not come anywhere near solving the deficit problem.

(MORE: Money Talking: Wall Street CEOs and the Fiscal Cliff)

Republicans, on the other hand, seem to think that the real problem is that too many people pay no taxes and are bleeding the country. It’s true that 46% of adults pay no federal income tax. But three-fifths of those pay payroll taxes for Social Security and Medicare. That means they are working, just not earning enough to have a Federal tax liability after various deductions and tax credits. Another fifth of the non-payers are retired. The remainder, less than a fifth of the non-payers, earn under $20,000 a year. It may be true that the growing number of people receiving subsidies from the Federal government is a disturbing trend. But the notion that almost half the population consists of moochers, scroungers, and parasites is absurd. We just have a screwy tax code with far too many loopholes, credits, and deductions. Moreover, even if we had a simple, seamless tax system, an estimated 27% would still pay no income tax, chiefly because they are retired or simply poor. About half of those would not pay payroll taxes, either.

These statistics don’t necessarily mean that the affluent and the truly rich are getting away without paying their fair share. Tax rates on earned income are somewhat progressive and will get more so if some or all of the Bush tax cuts expire. Moreover, the top 20% of households account for 51% of all income but pay 68% of all types of Federal taxes (and an even larger share if you consider only income taxes). In fact, the top 10% of households pay a larger share of total taxes in the U.S. than in any major European country. Part of the reason for that is that lots of other countries tax people with incomes low enough to escape income taxes in the U.S.

These facts may all seem to contradict each other. The affluent are paying too little, and yet they are paying more than anyone else. And even if they paid still more, there would still not be enough money to bring down a huge deficit that didn’t exist 12 years ago. Moreover, while a big group of Americans pay no income tax, they aren’t getting away with anything – they’re either retired or relatively poor. How can all these things be true at the same time? Here are five reasons:

(MORE: Atlus Shrugonomics)

The cause of growing inequality isn’t the tax system – it’s the increasing inequality in how much people earn before taxes. The reasons for that trend are complex, and really another discussion altogether. But changes to tax policy can only address the income gap up to a point. The fundamental solution has to be to come up with policies that enable low-income people to earn more money.

A big part of the deficit results from demographics that we can’t do anything about. The bulge in the population known as the Baby Boom has just started retiring. The strain it puts on the U.S. budget – particularly Social Security and health care — won’t stabilize for another 25 years.

Rich Americans pay a disproportionately large share of taxes, in the aggregate. Those who don’t are benefiting from policies such as low tax rates for capital gains and dividends. Those policies exist for sound economic reasons. Perhaps they should be changed, but there will be costs for doing that, too.

The poor aren’t really the problem, either. Recent growth in the number of people on food stamps or receiving disability doubtless includes people who are taking advantage of the system. But most people receiving help from the government are getting it because they simply don’t have much money. Moreover, they don’t account for most of the budget shortfall.

Spending has had a bigger impact on the deficit than tax cuts have. Relative to GDP, the total tax take in the U.S. – including all Federal, State and local levies – is slightly higher than it was in the early 1980s (although Federal taxes today make up a slightly smaller percentage of the total). Spending at all levels of government as a percent of GDP, by contrast, has soared over the past half century.

(MORE: The New Culture War Over Fairness)

It may make sense to spend more as a society becomes richer, but that ultimately has to be paid for. Raising taxes on the affluent only reduces the deficit by 10%. Letting the Bush tax cuts expire for the middle class slashes the deficit by 35% or more. There isn’t a lot anyone can do about the demographic trends over the next 25 years. Finding a way to boost economic growth would certainly make it less painful to bring the deficit down. But shrinking the budget deficit will mean trimming programs that benefit the middle-class and raising taxes on those same people. Even if the poor get less and the rich pay more, in the final analysis the fellow behind the tree who gets taxed will turn out to be in the middle class, because that’s where the real money is.

51 comments
jimi
jimi

Tax is important for any economy.I think everyone should pay tax according to their income. But business organization like Bank &Financial company should pay more tax so that government can collect enough money to  contribute countries well being  properly.

midas360
midas360

What concerns me is the following statement

"The affluent are paying too little, and yet they are paying more than anyone else. And even if they paid still more, there would still not be enough money to bring down a huge deficit that didn’t exist 12 years ago."

I am curious,  why are they responsible for our hug deficit?  Why are they being targeted.  The truth is, our tax code is inefficient.  We need a VAT tax that will be used to strictly pay down the deficit. A VAT tax will force everyone to help pay it down. The money should be used for nothing else other than the deficit. You can even call it a Deficit VAT tax. 

Yoshi
Yoshi

Make it simple. NO deductions of any kind. Tax income at a flat ten-percent for everyone except those with no income outside savings for retirement. I'll wager that there would be a far higher rate of compliance, and, far fewer IRS employees needed. The tax code could be reduced to a very few pages.

J.j. Lasne
J.j. Lasne

Everybody but mostly the richest. Taxes are too low in America.

Sunil Bothra
Sunil Bothra

Unregulated capitalism will lead to increasing wealth disparity,which will choke economic growth and eventually destabilize society. A political democracy provides a power balance. Redistrubutive schemes like progressive taxation and welfare programs are the solution which a working democracy will put in place to ensure optimal economic growth. Its similar to investment portfolio rebalancing.

Jimmy Jones
Jimmy Jones

Everyone... Let's face it:% In an orderly fashion, Start the line with each of us paying as much as we can. Not just what we have to. Those that can pay forward do so & receive extra credit lower interest rates for those that pay forward.reward those that put there faith in the unseen... true believer's of us being UNITED!!!

demisthefacts
demisthefacts

how about factoring in the WARS that were OFF the books until this administration  made them part of the equation - seriously THAT is how the deficits exploded over the last 10 years **and I really do not care that the top 1 percent being taxed at a fair rate would ONLY cut 10% off the deficit - they have had the best of both worlds for far too long and need to pay a rate that is at least the rate most citizens who make under $50,000 a year pay.

Rich Americans pay a disproportionately large share of taxes, in the aggregate. Those who don’t are benefiting from policies such as low tax rates for capital gains and dividends. Those policies exist for sound economic reasons. Perhaps they should be changed, but there will be costs for doing that, too

and the above quote from your article is more "trickle down " blah blah - the top 1% should be shamed to pay a lower rate than the janitor - but they aren't - it is time to change THAT.

ScottieB4
ScottieB4

I am aghast.  I thought it was all Bush's and rich peoples' fault.  Thanks for informing the so called liberal intellectuals that once again fail math.  Having the rich pay some more and greater than 54% have skin in the game is the start of a compromise.    But cutting costs is the key.  For private enterprise productivity is essential.  For public institutions it is an oxymoron.

Jennifer Wappler
Jennifer Wappler

Its not so much how much more taxes or tithes one should pay, it is an ethical and moral issue of who is hiding taxes from their own governments and future generations and who should be obligated to give back some of their obscene wealth to starving children in order to uplift the living standards of their own nations? xx

Jack
Jack

"I've been here three years and three days,

and I can tell you without hesitation: Being President of this country

is entirely about character." 

 

Will the audience ask Romney the character question. 

Mitt and Ann refuse to show their tax 

returns for 2005-2009, since their accountants said they paid about 

14%, the only reason to hide those returns is the IRS amnesty for 

rich tax cheats with secret Swiss accounts. After the UBS whistle 

blower case the IRS let rich tax cheats "pay the fine" 

instead of trial for the felony they committed

John A. Schumacher
John A. Schumacher

People who believe that the rich will solve our problem are ignorant fools.

Rahul Singh
Rahul Singh

reduce tax level for all but curb illegal economic practice

Michelle Ethridge
Michelle Ethridge

I like the idea of a flat tax on income and a larger tax on gains that can somehow correspond to making a fair gain, but not a bonanza. Call me crazy, but when you work to pay bills, you shouldn't be poor because you are doing your part by keeping up with all the insurances and taxes you are obligated to pay.

Greg Rudy
Greg Rudy

Flat. Consumption tax. Period. Everyone pays same rate.

Becky Rhoades
Becky Rhoades

The companies that have taken jobs overseas.

NewsDogReports
NewsDogReports

In the late 50's and early 60's the highest tax rate was above 50%. How would Romney react if his rate went from 15% to 55%? Exactly

NewsDogReports
NewsDogReports

Those who are making all the income gains for the last 20 years. Oh ya the wealthy... If they are only group making more then its just a point of logic...

Wallace Freeman
Wallace Freeman

Eliminate individual income taxes and return to the ORIGINAL method of financing the government by apportioning the taxes equally to each congressional district. Taxation will then be linked to representation and any representative voting for any expenditure will know (and his/her constituents will know) that that representative also voted to tax them in the same amount as the residents of every other congressional district.

Pop Teerakathiti
Pop Teerakathiti

The first comment applies to not only the States but the rest of the world.

David Houghton
David Houghton

How about you stop pitting one group of Americans versus another to get freaking Facebook hits? Irresponsible...

Cathie Chansamone
Cathie Chansamone

as one who once paid 38 per on a middle income under 50k anyone over 100k should pay more. when a rich man pays 13 per when the avg person pays 17 to 21 time to anty up when the rich are getting richer.

John Lewinski
John Lewinski

Warren Buffett knows Mitt will screw the middle class

Bill Kirby
Bill Kirby

I believe in a flat 10% tax on every dollar made in the US. Whether you're a individual or corporation, foreign or domestic. Then that's what the fed government gets period and they better spend it wisely for a change. Everybody pays.

Sarah Price
Sarah Price

I don't think anyone's asking someone to pay more; we just want fair share.

ERenger
ERenger

Another problem with all the various deductions and loopholes is that it is extremely difficult to know for sure what they cost. But they cost a whole lot. I'd say get rid of them all, including the popular ones like the mortgage interest deduction and charitable giving. And if we decide we want to subsidize these things, do it through separate programs with fixed budgets.

So if the government wants to subsidize homeownership, then do it through a separate program that has a fixed budget. Instead of giving a tax deduction, people could apply to a program for a reimbursement of a percentage of their mortgage costs. We would know how much the program costs and could decide if the program was worth the cost.

If the government wants to subsidize charities, same thing, don't do it through the tax code. Peopl could apply for a reimbursement of charitable giving through a program with a fixed budget, and we'd all know what it costs.

ERenger
ERenger

Capital gains and dividends should be taxed at the same rates as wages. The article points out that these rates are lower for a reason, and there may be some kind of cost for raising them, but if we are talking about fairness, there should be no distinction between whether you earn your money working, or you earn your money by having your money work for you.

If rates on capital gains and dividends were increased, maybe rates on wages could be kept lower.

ERenger
ERenger

One way to help with the demographic problem is to boost immigration. Bring in a generation of hard-working immigrant tax payers to help pay for the baby boomers' retirement entitlements.

ERenger
ERenger

Running deficits in the present raises costs long term. So a tax cut that adds to the deficit requires an even larger tax increase in the future. For years we've run big deficits and racked up debt, and at some point we'll need a lot of revenue to pay it all off. I think the article is right, and everyone one, rich to poor, especially the middle class, will be hit.

OzarkGranny
OzarkGranny

Absent from this analysis is the enormous annual spending on the military industrial complex.   The rest of the world combined (more than 200 countries) barely spends as much as our country.    

OzarkGranny
OzarkGranny

"In fact, the top 10% of households pay a larger share of total taxes in the U.S. than in any major European country."  Europe may have a lower income tax, because they have a Value Added Tax (basically a national sales tax), which last time I was in Europe was 17% of the purchase price.  

dmbfan93933
dmbfan93933

Ah, but then you would have to set up government agencies (more federal employees) just to run these programs.

Since just about every tax return is filed electronically now, I don't see how it would be very difficult to determine just how much effect charitable donations and mortgage interest deductions have on tax revenue.

Jack
Jack

 Gee eliminate charitable giving and charities will go away, not my idea, an idea by the head of the Bill and Melinda Gates Foundation and subscribed to by hundreds if not thousands of donors. I am tired personally of subsidizing Wall Street. They have caused the last two major economic down turns. At least during the Great Depression the Wall Street scum had the decency to commit suicide.

bcfred
bcfred

Capital gains 1. are risky - you make an investment it might go to $0.  That is not the case with salaried income; 2. are already taxed at the corporate level, and the U.S. has the highest corporate tax rate in the developed world, so combined capital gains and corporate tax rates on the money earned is actually 50% by the time it gets to the investor who put up the money; 3. encourage people to invest in the capital markets, in startups, in developments, etc. - investment we badly need right now.  Further, the reduction in capital gains rates in the early 2000s actually increased collections because it increased the incentive to invest and take gains by more than the 5% rate reduction; a pure distillation of how the profit motive works.

So your argument that it's not fair (though as I just argued, I think it's perfectly so) is supposed to outweigh the good that capital investment does?  That's as self-defeating an argument as I've heard.

bcfred
bcfred

Not just that, but expand the visa program for highly educated immigrants.  Right now our universities award phd's to foreign students who must then take that knowledge and return home - it's idiotic.  There are only something like 60,000 such visas awarded per year, while we have a decline in degrees awarded to Americans in engineering and the sciences - exactly the types of people we need in the country to compete in the global economy.

Rene  Arizmendi
Rene Arizmendi

@tel00:disqus The rest of the world combined (more than 200 countries) barely spends as much as our country.  I'm making $86 an hour working from home. I was shocked when my neighbour told me she was averaging $95 but I see how it works now. I feel so much freedom now that I'm my own boss. This is what I do, >>..Xfd.qlnk.Net

bcfred
bcfred

You're assuming that reducing rates, thus increasing the incentive to earn and invest (and report earnings rather than try to shelter them) has no positive impact on the economy.  The easiest example of why that's not true was the reduction in the capital gains rate from 20% to 15%.  Under your assumption collections would decline by a quarter; what actually happened is collections increased dramatically because each trade or sale of an investment was now more profitable, so there was more activity to tax.  We are in such a deficit hole right now that we can't possibly tax our way out of it (as the article notes)- growth is the only solution. 

tel00
tel00

 Yes and no.  As i understand it, it depends on the interest rate and inflation rate.  If the interest rate is below the inflation rate then it costs less (once inflation is accounted for).

Of course this screws over the (mostly american) people that invest in the government bonds.

Jeffrey Geez Glavick
Jeffrey Geez Glavick

Yes, and if Romney is elected expect that to increase greatly. He likes punping his chest, beats actually serving in the military that is for sure. The mentality is the more you spend the safer you are, hence if our military budget in 2001 had been double, no 9-11? Not true. Two BS war's and the country is no safer, that money could have been spent in the USA, guarding our border's and ports etc,improving the country, instead we went into Iraq where there  were no insurgent's , so they came to greet us. Brilliant---

ERenger
ERenger

It's possible to estimate how much various deduction cost but hard to know for sure. The main point is that their cost is hidden in the tax code, and they are not budgeted. If congress said, we are going to budget $500 billion to subsidize mortgages and $200 billion to subsidize charity (numbers I made up), we could all see the cost and decide if it was a good idea or not. But instead they hide it in the tax code as deductions, and no one knows how much it costs.

ERenger
ERenger

Eliminating the deduction for charitable giving is not the same thing as eliminating charitable giving. People give money to charity because they believe in the charity, not because they can get a deduction later. At least I do. If I give $500 to the Red Cross, it's because I support the Red Cross, not so I can save $100 on my taxes later. No doubt eliminating the deduction might affect how much people give, but the question is whether the government should subsidize charitable giving or if charitable giving should be something a person does out of generosity without a subsidy.

On your other point, I agree, no subsidies to Wall Street. Get rid of the carried interest loophole.

dmbfan93933
dmbfan93933

Exactly, and we (the taxpayers) are going to be paying for years to make up for the mess that Wall Street and the big banks have made.

One of the causes of the Great Depression was a housing bubble.  You would think people would learn.

bcfred
bcfred

Yet those two wars are winding down, which should produce a "peace dividend" like we saw in the 1990s after the end of the Cold War.  But instead we are seeing record annual deficits - projected to be $1 trillion or more FROM NOW ON.  That means we're seeing a double-whammy of spending; not only are we spending the peace dividend, we're spending it plus a trillion dollars. 

Tax revenues exploded at near double-digit rates after the Bush tax cuts because it increased the pace of economic activity.  We don't have a tax problem - we have a spending problem.

dmbfan93933
dmbfan93933

Good for you ERenger :)  Actually lots of people who donate do not benefit from the charitable deduction (Schedule A - Itemized Deductions) because they only qualify for the standard deduction on their 1040.   They just quietly help to make the world a better place.