Saturday, November 1, 2008

Do the rich pay too much in taxes?

I wrote the following in response to a post on Gather on how much the rich pay in taxes.

The US has had a progressive tax rate for a century. Through both Republican and Democratic presidents and congresses. So this is a false story to begin with.

Add in the fact that the actual effective rates paid at the highest income levels are much lower because they have access to tax shelters that lower income levels do not have. So while the theoretical tax rate might be, say, 38% for the rich versus 15% for the less rich, the actual rate might be less than 20% for the rich (most capital gains are taxed at 15%, and since the vast majority of the income of the very rich is capital gains, they actually pay only 15% on most of their wealth).

But all of this is irrelevant anyway.

How much do you make in a year? Are you in the top 1 or 2% of the very wealthy in this country? Do you really care that 1% of the superrich might have to pay a little bit more than the really poor?

Let me put it a different way.

Say basic housing, food, education, transportation, etc. costs are $32,000 a year. Of course, it can be more than that if I buy two big expensive houses and have several cars and vacation in Fiji, but lets just say that basic needs require around $32,000 a year to pay the bills.

Now assume you have a normal job that pays $40,000 a year. How much free cash do you have? You know, for extras, like buying your kids an ice cream cone occasionally. Or loading up the car to go camping. Or paying for that operation that you suddenly need.

Now assume you make $2,000,000 a year. How much free cash do you have over and above the $32,000 basic needs?

The difference here is that the lower income person has just enough to meet his basic survival needs. Any unexpected expense could wipe out everything. The rich person has so much excess over the basic survival needs that he can afford to buy bigger and nicer cars, bigger and nicer houses, bigger and nicer vacations. He can also stash money aside to cover unexpected contingencies. There is nothing wrong with that. More power to him. But the point is he has a lot of discretion as to how to spend his excess cash while the poorer person doesn't have much excess cash at his discretion. So if gas prices go up the poorer person might not be able to afford to put gas in his car, which might mean he can't get to work, which might mean he gets fired. The richer person simply grumbles a little more when he fills up his tank (or more likely when his assistant fills up the tank).

The other implied insult of all of this talk of "unfair taxation of the rich" is that somehow the amount of money you make is directly proportional to how hard you work. The rich are rich because they work harder and/or smarter, while the poor are poor because somehow they are lazier and/or stupider. This isn't often said out loud, but it is implied that somehow the rich are more worthy than the poor (otherwise they wouldn't have gotten rich, right).

This ignores the obvious fact that luck plays some role in the path we take. Someone born into a family of Admirals, for example, may have a path to the Naval Academy despite poor grades and behavior, whereas someone born into the family of steelworkers would have a tougher time both getting access to the needed elementary education as well as the proof of eligibility to the Academy. (You can substitute any profession and any well respected higher education institution)

Basically, if you start in a hole you can still scramble to the highest reaches. But if you start half-way up the slope it's a lot easier to get to the top.

The point is that wealth is not solely a function of how hard and/or smart people work. External factors outside an individual's control can also be very important. Any individual can reach the top if they work hard and smart and catch a break here and there. And we should all strive to do so. But consider how many otherwise intelligent and hard working people drop out of the race after the first 200 hurdles when they see others starting the race with only 10 hurdles to go. This is a source of frustration for many.

So whenever I see someone whining about the tax structure I have to remind them that this is the structure we have had for a century. It was put in place because some people have so much excess wealth that they can afford to help cover the costs of those who do not have enough to put decent food on the table (or even have a place to put that table). The alternative is to simply let people fend for themselves, which means that some children will be starving to death. We made a choice in this country many years ago that we wouldn't allow people to die simply because someone decided to put more money in their own pockets.

No, the discussion shouldn't be on whether the rich get taxed too much, but rather on how to help all Americans improve their own conditions. Let's help people get educated and trained and jobs. The more education people have the better is their chance to get and keep a good paying job and take care of themselves. And help contribute to the tax base so that the wealthy don't have to pay more. It's basic economics. Raising up the masses helps raise the econony helps increase the revenues helps the government reduce the debt (payment of interest on the national debt is one of the biggest expenditures of the government). It helps us all.

So let's not argue in general terms for something that will help a few hundred people. Let's focus on helping the other 300 million Americans enhance their education, which will enhance revenues, which will reduce costs, which will help the wealthiest among us.

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