Saturday, September 8, 2012

Income Taxes & Fair Shares

Years ago I was driving to the airport in LA and was listening to a talk radio show in which the host played a tape of street interviews with random passers-by, asking each what percent of all federal income tax was paid by the filers with the top 10% of income – i.e., the top 10 percenters.  The results were astounding.  Most people thought well below 10%, and many were in the 1-2% neighborhood.  That is, most people thought that the top 10% of earners paid far less than 10% of all taxes – that they paid far less than their fair share.

Well, according to the 2008 IRS data using adjusted gross income, the top 10% of filers had almost 46% of all income, but paid, not 1-2%, or even 20 or 30% of all income taxes.  With 46% of the income, they paid 70% of the taxes.  The top 1% of earners has 20% of the income but pays 38% of all taxes. 

Now, let’s say 100 people need a road and they build it for $10,000.  Each uses it equally.  Should each contribute equally and pay $100 each?  Would that be fair?  But let’s say these 100 people have different incomes.  So, what if we require each to contribute a fixed percentage of income, so that the higher the income the greater the contribution to the cost of the road.  What if a tax of 10% on everyone’s income paid for the road, with some people paying very little and one person paying 20% of the entire cost.  Would that be fair to everyone?

Let’s take one more step.  What if some people insist that those with higher incomes pay even more than a flat 10% rate for all, which already would have higher earners paying more than their equal share of the road.  Let’s say these critics say that as a person’s income goes up, the percent of income he or she pays for the road should go up progressively, so that the top earner has 20% of the total earnings but should pay 38% of the entire cost of the road, while almost half of the people, who, remember, use the road equally, pay almost nothing.  Now, would that be “fair”?       

Would it be fair if, of all people equally using the road, one person, through his or her hard work and thrift, has 20% of all earnings but foots 38% of the cost of the road?  Finally, what if in fact that was the case, but that one day those paying little to nothing demanded that that the one high earner pay even more than 38% of the cost of the road?  Boy, would that be “fair”?  What if the 55 lowest earners, with 55 votes of the 100 total, voted to make the top 5 earners pay the entire cost of the road?  Would that be fair?  What would be a fair percentage of the road that the top 5 earners should pay for?

Once we move past an equal dollar share paid by all who use the road equally it get a little cloudy.  Once we move past an equal percent of income share paid by all, it gets very murky.  Is “fair” whatever a majority decides?  Is there any limit to how much of the road the top 5 or 10 earners should be made to pay for?

What if at some point the top 10 earners stopped using the road and moved elsewhere.  Would that be fair to those who remained?   
John M Greco

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