Parsing the "f-word" for taxes
On April 11, President Obama delivered an eleven-minute speech at the Eisenhower Executive Office Building in Washington, D.C., on the Buffett Rule. He used the word fair 13 times, or once every 50 seconds. He even used it twice in a sentence: "We can build an economy ... where everybody has a fair shot, and everybody is doing their fair share, and everybody is playing by the same set of rules."
This particular habit is bipartisan. "Over 45 percent of the people in this country don't pay income taxes at all, and we have to question whether that's fair," Rep. Eric Cantor said this week at an event on C-SPAN 2. The president thinks fairness begins with raising rates on the rich. Cantor thinks fairness begins with making everybody pay federal income taxes. The two philosophies are divided by a common word.
It's true that more than 45 percent of U.S. households don't pay federal income taxes. Most of them receive a small refund from the IRS. It's also true that some of them are poor. Four in five make less than $30,000 as a tax unit. For more consider the chart below (all digits in thousands of dollars of household income):
But Cantor is not the first person to suggest that this statistic might create something of a civic conundrum. Income taxes account for 40% of government revenue. Most of the rest comes from payroll taxes and excise taxes collected to pay into specific programs, such as Social Security and transportation. That means most of what we think of as "the government" -- defense, education, R&D, and so on -- comes from federal income taxes. Should it bother us that tens of million households can vote on a slew of programs paid out of the general fund, to which they contribute nothing?
There is a reasonable discussion to have about everybody "paying our fair share." But it doesn't start with raising taxes on families in poverty, exclusively. It also doesn't start with Obama's campaign promise to exempt 98 percent of taxpayers from higher rates, forever, while funding the growth of government by targeting the top 2 percent exclusively.
"When both parties' presidential candidates put out budget plans that don't work unless you raise taxes on the middle class, that should tell you something," Josh Barro wrote yesterday. "That one of the fiscal changes that America needs in the medium term is a middle class tax increase." The most reasonable tax fix is the solution neither party wants to talk about. It's higher taxes, across the board, including for the middle class.
Since 1979, tax rates have gone down for virtually every group. By 2009, they had fallen by half for the poorest quintile; by four percentage points across the middle 60%; and by eight percentage points for the richest 1%. In the last two years, they've been cut again. Since 1997, income, investment, or payroll taxes have been cut (or a cut has been extended) at least seven times.
HIGHER AND FAIRER
Any tax increase should ideally follow at least three rules. First, it should increase revenue. Second, it should maintain the progressivity of the tax code. Third, it should improve prospects for growth. The easiest way to combine all three rules into one tax reform package is to lower marginal in exchange for fewer tax expenditures in a way that raises revenue from most households, especially at the top, and excluding those in poverty.
Obama's problem is that his administration's ambition for tax reform is limited by his campaign's ambition to preserve every tax cut for every family earning less than $250,000. Cantor's problem is much worse. He doesn't want to raise revenue, and he doesn't particularly value progressivity. He's repeatedly said that higher taxes for the rich are off the table. He's repeatedly said he's against using the tax code to raise revenue, except under make-believe "dynamic scoring" scenarios. But higher taxes on the bottom 40% not paying income taxes?
"You've got to discuss that," he said.
Do you, though? Do you really have to discuss making every household pay income taxes, even the tens of millions of families living on less than $20,000 a year?
Wealth buys a country many things: health care, leisure time, paved roads. One principle it buys is the responsibility to take care of people who don't share in the returns. In the last three decades, market wages for the top fifth have increased by a third. For the bottom fifth, they've fallen by a third. That statistic, and not the runaway wealth of the top 1%, is the fundamental tragedy of income inequality.
The official Washington definition of fairness might be elusive. But isn't America rich enough, and strong enough, to not have to go begging the poor for money?