Exploring wealth distribution and the root of an eternal populist slogan. by Gene DeNardo
(libertarian)
Friday, July 22, 2011
The idea that we should “tax the heck out of the rich” or conversely that we should exempt the rich from taxes because they are the “job creators” both originate from the same condition. That condition is that no matter how you structure an income tax, it can never be structured in a “just” way. The nature of any coercive income tax is injustice.
If we study the three fundamental ways in which an income tax can be structured, we discover why this is the case. An income tax can be arranged as a “flat” tax, with one rate for all or in a manner that is known as a “progressive” tax, in which the rate increases as income increases. Or, the worst of all three evils and most like our current system, the income tax can also be structured “regressively”; so that those who earn the least pay the highest rate.
With our system as complicated and as unfair as it is, many cry out for a simplification of the system in the form of the flat tax. Some random rate would be chosen and every taxpayer would pay the same rate on all income.
While its simplicity is appealing, levying the same rate on all income obviously has a grossly different effect on large incomes than on those with meager earnings. Even with a rate as low as ten percent and a rate that modest would be unlikely, a lower income earner who brought in $20 thousand a year would pay $2 thousand in income taxes.
That $2 thousand would deny the low income taxpayer from purchasing $2 thousand dollars of necessary items such as food, clothing or even the roof over their head. When this occurs, funds are then needed to provide the basic essentials to those who can’t afford them, creating a circular flow of funds. The other alternative within this type of tax system is to leave people hungry.
The upper income earner within a flat rate system, who might bring in $200 thousand, is faced with a $20 thousand dollar tax bill. $20 thousand is not “small potatoes”, but would have no effect on the ability of the high earner to obtain what he needs to sustain himself. Obviously, it could never be considered “just” to force anyone to give up the fundamental necessities of life. This injustice just becomes more glaring in relative terms, when fellow tax payers are doing quite well.
The second option is often touted as the solution to the first. If we choose some random lower limit at which income taxes commence, perhaps our example $20 thousand dollar level, and we institute different tax rates that rise as income rises, we have what is known as a “progressive” tax.
The problem with this is twofold. While, it is fairly easy to determine with some accuracy what basic income people need in order to afford the essentials of life and restrain from taxing to that level, it is impossible to determine what rate anyone should pay above that level. Why should someone who earns $59 thousand pay a lower rate than one who earns $159 thousand?
If the reason is to “allow” the medium level earner the “ability” to afford the luxuries that the higher earner can, then the logical step would be to determine what level of luxuries we all should have and collect every dollar after that from everyone!
On the other hand, if we accept the basic exemption level as fair in order to allow everyone the opportunity to afford the necessities, but also accept that varying rates above that are unfair, then those that lie precipitously close to the basic level will be taxed at a geometrically higher rate than those whose income is three or four times the basic level.
The third income tax system is by far the most unjust and coincidently happens to be our present system. This is known as the regressive income tax.
While it is true that we do theoretically have a “progressive” rate system, the institution of the payroll tax and the myriad exemptions and rate adjustments of certain “types” of income such as capital gains have led us to a place in which we tax the poor rather handily while allowing those who earn enough to afford professional guidance in avoiding taxes to come out smelling like a rose. While the rich do pay a total amount of taxes that are greater than the lower earners, the overall “actual” rate they pay is substantially lower when actual real income and real payment levels are taken into consideration.
None of these three versions of the income tax are just, not because of their inherent mechanical quirks but because any coercive income tax system is grounded in injustice. It can be debated all day long whether or not coercive income tax is theft or the “social” agreement to “cooperate” and share what we all produce, but there is no denying that if you fail to pay your income tax, you may soon be eating prison grub and sleeping in the clinker.
The income tax system is based on the use or the threat of aggressive force. While those that pay are looked on as those who are “cooperating”, those who don’t are classified as “criminal”. If their “criminal” ways are discovered, they will have the choice of paying their taxes with penalties and interest, having their future earnings automatically confiscated or facing jail time. Whether they can “afford” to pay or not, does not change the “criminality” of the act, according to the laws of the state.
So, the whole question of who to tax and how much is really a question of at what point of our income levels do each of us become criminal? At what point of our earnings and at what level of sustenance and necessity or level of luxury do we break the laws of the state and face the consequence of our actions?
I feel no need to go out and try to “protect” the rich from taxation, as they have far more resources than I do and have done a marvelous job of protecting themselves and I am sure, will continue to do so without my help. As far as the question of whether we should “tax” the rich, perhaps we should stop “giving” to them first. That alone would probably do wonders to curb our deficit spending.
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Posted By: rwilymz
Date: July 27, 2011 01:13:15 PM
There's quite a factual inaccuracy and glossed-over reality in your piece.
the institution of the payroll tax and the myriad exemptions and rate adjustments of certain “types” of income such as capital gains have led us to a place in which we tax the poor rather handily while allowing those who earn enough to afford professional guidance in avoiding taxes to come out smelling like a rose.
Here it is.
From the latest tax data [2009] available, 47% of Americans workers pay no federal income tax whatsoever. It is possible to earn slightly over $50K annually and not have to pay a single penny in federal income tax. Many people, in fact, who pay zero federal income tax are entitled to get tax refunds of what they didn't pay.
This 47% are not paying federal income tax because they are breaking the law; they pay no federal income tax because they are following the law. The facile notion of "sharing the burden" would seem to be socialist code for "piling the burden up on one end". Prosperity is effectively being outlawed.
We do not, in any rational investigation of reality, "tax the poor rather handily".
