On Taxing the Rich

It’s a well known fact that modern liberals want to “spread the wealth around” by taxing the rich. It’s less obvious why they are attempting to do so by raising income taxes on individuals who earn more than a certain amount of money (depending on the particular proposal, the amount varies from about $250,000 to $1 million per year). If modern liberals’ goal is to “tax the rich” then they should propose wealth taxes, not income taxes. The rich are wealthy (by definition), but not all high income earners are rich. If that isn’t clear, read what economist Thomas Sowell has to say about wealth and income.

A recent “tax the rich” scheme is the Buffett rule, which is a proposal to raise taxes on individuals who earn more than $1 million per year in income. Warren Buffett, the man who proposed it, devised his “rule” after observing that he paid a lower percentage of income taxes (19%) on his $48.1 million income in 2006 than his employees who earn less. That may sound like a wonderful and altruistic idea until one considers that Buffett’s wealth has been between about $37-62 billion in recent years. (To be fair to Buffett, he does contribute a significant portion of his money to charity, much like conservatives who donate more to charity than modern liberals — despite the fact that liberals have slightly higher incomes on average.) If Buffett really wanted to pay higher taxes to contribute more to the U.S. federal government (besides voluntarily sending a check to the U.S. Treasury) he’d propose a wealth tax: if he paid 19% of his wealth in tax he’d be contributing about $7 billion (using $37 billion as his wealth) in taxes. A wealth tax of just 1% on Buffett would generate $370 million in tax revenues, and a wealth tax of 0.025% would generate the same tax revenue as the 19% income tax rate on his $48.1 million income (about $9 million).

Of course, only a very few individuals have as high income or as much wealth as Warren Buffett. Some individuals have high income but little wealth (such as a small business owner who, despite earning significant income, may also have significant costs that result in a low increase — or even decrease — in wealth). Those who have high income but little wealth are considered “rich” by modern liberals and their high income tax schemes, but are not actually rich since, by definition, they do not have significant wealth. Worse, income is constantly in flux from year to year so someone who isn’t even wealthy might receive a high income one year (and be considered “rich”) but suffer a low income the next year(s). Increasing income tax rates is especially problematic for these individuals with high income but little wealth, and this is one of the concerns of conservatives who oppose income tax rate hikes on those with high incomes (there’s also the problem of unintended consequences of taxing the rich, the fact that decreasing tax rates can actually result in increased tax revenues, etc.).

On the other end of the spectrum, there are some individuals who have a lot of wealth but low income. An example of such an individual would be someone who has inherited great wealth (or earned it earlier in life) and lives off this wealth rather than productively working to acquire income. The problem with trying to “tax the rich” using income taxes is that such a person is not considered “rich” (because he does not have high income, despite having plenty of wealth) and therefore has a relatively low income tax rate. This type of individual would presumably be considered by modern liberals as a perfect example of the “greedy rich” who doesn’t contribute his “fair share” of taxes compared to “hard-working” teachers, police and firefighters, etc. Yet a high income tax scheme would utterly fail to tax this type of wealthy individual at a higher rate.

Much of the “tax the rich” rhetoric is misleading or false in other ways than just the confusion between wealth and income. Modern liberals also constantly complain that the rich are not paying their “fair share”. There are many ways — all subjective — to define “fair share” (e.g., equal percentage of income, equal percentage of wealth, a progressive tax system, etc.) so asking if the rich pay their “fair share” is a pointless exercise. Even the same data can suggest contradictory answers as to whether or not the rich are paying their “fair share” depending on one’s definition of “fair share”. For example, a sociology professor at UCSC recently published an analysis of wealth and income distribution which demonstrates that the wealthiest Americans are accumulating a larger and larger share of wealth. On the other hand, the same analysis shows that Americans with the highest income tend to pay a higher share of all taxes:

Using this data and defining “fair share” as paying the same share of taxes as share of income, one could say that only the top two quintiles pay their “fair share” and in fact the top quintile pays more than its “fair share”!

Despite the obvious fact that “fair share” is subjective and ill-defined, many people (such as Chrystia Freeland) actually consider it a serious question:

That’s why it seems so important to figure out whether the rich are paying their fair share. It is a crucial question…

Others (such as Ellis Cose) think that those who don’t have a certain definition of “fair share” are irrational (but Cose is oblivious to the fact that “the rich should pay their fair share” is an irrational argument since “fair share” is subjective):

Not that any rational person can be opposed to millionaires paying their fair share.

Using the above chart one could argue that millionaires and the rest of the top two income quintiles are the only ones paying their fair share, so Cose would need a special definition of “fair share” to have a point. Not to be outdone by Ellis Cose and Barack Obama’s “fair share” irrational argument, though, enter Larry Bartels:

No government can survive indefinitely while catering to the fantasy that taxes are evil or unnecessary.

This is a pointless strawman argument since not even the Tea Party actually claims that taxes are evil or unnecessary (just that tax rates shouldn’t be raised). This kind of rhetoric (which uses such an obvious and basic logical fallacy from no less than a university professor) is detrimental to finding solutions to our economic problems since it attacks political opponents while failing to offer any suggestions. Determining the appropriate tax rates and tax types (income, wealth, sales, etc.) is a very difficult problem which is of course exacerbated by the fact that people disagree with each other and can’t even agree on what “fair share” means. Such a difficult problem requires serious debate and analysis of available economic data, not denunciations of political opponents for engaging in “class warfare” or for being “greedy” or for protecting the “rich” from paying their “fair share” (even if one’s political opponents are behaving irresponsibly).

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3 thoughts on “On Taxing the Rich

  1. Man! I’ve been asking for a definition of fair share for a loooong time and have gotten nary a solid response. When you point out the part about what piece of the income tax pie high-income earners pay, folks want to say “well, the bottom 47% still pays state tax, payroll taxes, ect, which is a higher percentage of their income.” to which I reply that those people also get the earned income tax credit, government assistance, and other breaks that not only negate much of what they pay, they end up getting more back than they paid out. As for Buffet, I’m willing to bet he didn’t factor that in when he said he paid less than his secretary, so i’m pretty sure his numbers were incorrect.

  2. Pingback: Income Inequality… So? What’s the point? – | Rightlinks Blog – Greece: Setting the standard for Democrats everywhere

  3. Pingback: Thomas Sowell on Tax Cuts | The Nullspace

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