What's Fair - Tax Increases v. Spending Cuts

May 28, 2014

 The Congressional Budget Office (CBO) projects that the Federal deficit will eclipse $1 trillion for the fourth year in a row in 2012. There is increasing agreement that the deficit needs to be reduced. Continuing to let the deficit spiral out of control will ultimately have disastrous consequences for the US.

 

The Obama administration proposes to stem the tide, in part, by raising taxes. In support of his proposal to increase taxes, President Obama has been very vocal, crying out for the richest Americans to pay their “fair share.” That’s a clever way to put it. It’s an easy statement with which to agree. Who would suggest that those at the top end of the economic spectrum should pay less than their fair share? For that matter, shouldn’t all Americans pay their fair share? We can probably agree that they should. The question becomes, what is fair?

 

Before you read any further, ask yourself, “What would be fair for the much maligned top 1% of income earners to pay in Federal Income taxes?” Surely, the top 1% of income earners should pay at least 1% of the taxes. After all, they control approximately 1% of the votes in the country. If every income earner paid the same dollar amount, the top 1% would pay 1% of the taxes. But, these are the highest income earners, so perhaps it would be fair for them to pay more in dollar terms than the other 99%. Should the top 1% of income earners pay 5% of the taxes, 10%, 15% or even 20%? What do you think is fair?

 

While what is “fair” is clearly debatable, what’s not debatable are the facts. The IRS reports that in 2010 the top 1% of income earners paid 38% of the Federal income taxes! In dollar terms a member of the top 1% on average paid more than 60 times what an average member of the 99% paid. Clever readers will be saying, wait a second, those are big numbers, but we need a bit more context to judge what’s fair. We need to know what percentage of the Adjusted Gross Income in the country went to the top 1%.

 

We agree. That is important context. The answer is that the top 1% of income earners garnered 20% of the country’s Adjusted Gross Income. Some might say that if the top 1% earns 20% of the income, they should pay 20% of the taxes. That sounds fair. Yet, this group paid 38% of the taxes―almost twice the percentage of income they earned.

 

On the other end of the spectrum, approximately 47% of income earners paid no Federal income taxes whatsoever. This group controls almost half of the votes in the country. They share in all of the many benefits of being an American. Does it sound fair that almost half of all income earners get a free ride―that they have no skin in this game at all? We certainly acknowledge that there are many taxes other than Federal income taxes, in fact, far too many. To be sure, the bottom half of income earners will pay some of these taxes. However, when President Obama is proposing to raise Federal income taxes on the top 1% of income earners, he conveniently leaves out the fact that almost half of all income earners pay no Federal income taxes whatsoever.

 

What’s fair when it comes to taxing Americans? Should the top 1% be asked to shoulder more than the 38% of the burden that they are already carrying? Should income earners who pay no Federal income tax be asked to pay at least something? Obviously, there is no definitive answer to this question. However, we don’t think the solution to our country’s economic difficulties lies in increased taxes. We think that it lies in spending reductions―real reductions in spending. Politicians from both parties often talk about cutting spending. Unfortunately, that’s mostly smoke and mirrors.

 

Here’s how it works. Let’s assume that the Federal government is going to spend $3.6 trillion this year and is planning to spend $3.8 trillion next year. If instead the government spends $3.7 trillion next year, politicians will pat themselves on the back for having reduced spending by $100 billion. In fact, spending was not decreased at all. Actually, spending increased―just not as much as was originally planned. Would this kind of financial hocus pocus work with your household budget? It certainly wouldn’t work with ours. What’s needed is honesty from our elected officials and a real spending decrease not an increase that Washington labels a decrease because it might have spent more.

 

It’s well documented that the Federal government wastes massive amounts of money. The scandal with excesses in the GSA is just the latest in a long list of abuses. Between crony capitalism, pork barrel projects, union appeasements, overly generous benefits for government employees (including congress), carve outs, and unnecessary entitlements; the size of government continues to grow unabated year after year.  It’s no accident that five of the ten richest counties in America are suburbs of Washington, DC. Reducing the deficit, lowering unemployment, and getting the economy back on track will require some difficult decisions. Cutting Federal spending won’t be easy, but in the final analysis, that is what’s fair!

Share on Facebook
Share on Twitter
Please reload