Tax Burdens

There's been a lot of back-and-forth recently over the fact that almost half of all Americans pay no Federal income tax.  Conservatives trumpet this as evidence that we're too focused on taxing the rich; liberals retort that the poor often pay heavy payroll taxes, and anyway, the rich make more of the income.

Who's right?  To my mind, they both are.  Or perhaps, both wrong.

To start with, it isn't true that everyone at the bottom end of the pay scale pays 12.4% payroll tax; relieving them of that tax burden is part of the point of the EITC.  And while the share of income held by the top earners has increased, so has the share of the federal tax burden that they bear; it's now around 70%.  And before you start complaining about state and local taxes, they also bear a heavy share of those, particularly in high-income jurisdictions where they're likely to live.  They are the net payers of property taxes (your family needs to be in a pretty pricey house before the town gets back in taxes what it gives you in services.)  Even sales taxes don't necessarily hit the poor harder, because so many of the goods they buy are exempt or subsidized.  The real regressive action is in sin taxes, user fees, and Social Security, none of which are notably Republican projects.

On the other hand, the liberals have a point about fairness.  Warren Buffet should pay a higher percentage of his income in taxes, because losing 25% of his income is a much smaller burden on him than it is when his secretary loses 25% of hers.  Trying to get everyone to pay the same percentage smacks too much of "The law, in its majestic equality, forbids the rich as well as the poor to sleep under bridges and to steal bread."

I think the real problem with the current setup is the political economy of it.  A very large percentage of our electorate has nothing at stake when they vote for new spending.  Since that spending imposes real costs on other people, and the economy at large, this is a problem.  We don't want to end up in a situation where 65% of the population is systematically voting to take the stuff possessed by the other 35%.

But that doesn't mean we need to raise taxes on poor people; rather, it means they should have some skin in the game.  Simplify the tax code, and expand the EITC into a negative income tax which then continuously scales into a progressive income tax up to some maximum . . . and then make it clear that new spending means that all the marginal rates go up a little bit.  If you want a new project, you have to be willing to give up some of your EITC to pay for it.  Not as much, percentage-wise, as Warren Buffet might pay.  But no free programs.

This is something of a pipe dream, but it seems to me that this should be something liberals and conservatives can broadly agree on.  Liberals get a somewhat more generous welfare state--and conservatives get a natural check on further growth.

(NAV Image Credit: davitydave/flickr)