What is a “Fair Share” for Taxation?

Posted on November 2, 2012

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© Josh Sager – April 2012

The quintessential question surrounding tax policy in the USA today is simple on its face, yet complex when one actually gets into the issues: What constitutes a “fair share” for each and every American to pay in order to keep our government running each year? Should every American pay the same sum of money? The same percent? A scaled percent? A tax on consumption? In reality, there is no objectively fair way to decide who should pay what in taxes, as this judgment hinges upon a sense of personal fairness.

A progressive tax code (ex. US income taxes) requires the rich to pay a higher percentage of their income than the poor—usually in the form of a stepped rate of increase with an upper limit. Those with means, access and resources can better afford to pay than those who are less fortunate, thus those who support this method of taxation see it as fair to ask more from these people. As opposed to other tax codes (regressive taxation, consumption taxes, etc.), progressive taxation benefits the poor and gives them the greatest return for their government, while delivering less to the wealthy in proportion to what they paid in.

A regressive tax code (Ex. US payroll taxes) is a tax code where the percentage of taxes paid by an individual decreases as they make more money. The rationale behind this type of taxation is that, as people make more money, their taxes increase, even if the percent decreases (Ex. 10% of $100,000 > 20% of $25,000). Those who support this method of taxation believe that the rich should pay less into the system, as a percent, because it is “unfair” to charge them more than other citizens.

In addition to percentage based taxation, there are consumption based taxes that are used to keep a government running. A consumption tax can be put on a good (or type of good), wherein the government gets a small amount of money each time the good is bought. These taxes are highly regressive, but only apply when an individual voluntarily enters the market. Sales taxes, the gas tax and sin taxes (cigarettes/alcohol/gambling) are probably the most common consumption based taxes in the USA, and ones that most Americans are familiar with. The idea of fairness that drives consumption taxes is that, while taxing income takes from everybody who is working, consumption taxes only take from those who buy things (regardless of how they made their money).

Ultimately, my ideal of fairness in taxation breaks down into a two part test:

1) How much money is needed to keep the government running properly and to provide all necessary services for the health of society?

The funding of the government is not a static sum of money—the money necessary to run government programs fluctuates based upon the types of programs run by the government (adding/subtracting programs), the changing prices of goods (Ex. increasing healthcare costs), and any catastrophic event (Ex. war/natural disasters). Due to the constantly shifting costs of government operation, there is no empirical formula to calculate the money each person should pay in taxes in order to keep the government running. Despite the impossibility of determining long term governmental funding costs, the government must predict how much money will be needed to fund operations and, in order to prevent uncertainty due to tax rate instability, maintain relatively stable tax rates. Ideally, the government would set its tax rates to fulfill short/medium term funding predictions, allow for extra funding in case of emergency, and to pay down whatever debts the government has accrued in the past.

2) What taxes and tax rates are necessary to provide the money calculated in part #1 and to ensure that everybody pays a rate which does not burden them, yet ensures that they pay into the system?

I am a supporter of a very progressive style of taxation, where, when all taxes are taken into account, nobody pays a lower percentage of their income to taxes than anybody in a lower bracket. I would set the top rate at 75%, the rate where productivity begins to decrease due to decreased marginal returns from taxation, and scale all taxes based upon the top bracket: Essentially, the top rate is attached to the lower rates and cannot be lowered independent of all others (thus reducing the use of lobbyists to simply cut taxes on the wealthy). The rates of taxation under this plan would be applied to the sum of capital gains and income, so that those who invest must pay a proportional rate with those who work for a living (Ex. $50,000 income + $50,000 capital gains = $100,000 in income).

Ultimately, I see the entire debate over tax rate fairness to be a relative argument. In regard to fairness, the real amounts of money raised through taxes are less important than the distribution of who the money is coming from. Do we ask the rich to pay a reasonable percentage of their income as taxes, or do we want to ask the working class to pick up the slack by paying a higher percentage of their income?