Robin Hood, the Pareto Principle, and the 47%

It sounds like such a good idea: the wealthy should help support the less fortunate by paying their "fair share" in taxes.  But what does that mean, "fair share"?

Consider the following chart from the National Taxpayers Union website:


Now, I am no math whiz--unlike my son who is already deep into vector calculus as a high school junior, I didn't even know such mathematics existed until I was a sophomore in college--but it seems to me that there is very little in the data provided here that would upset Robin Hood.  We hear all the time how the top 1% are depriving the bottom 99% of their "fair share" of their earnings, but it looks to me like there are some disparities here worth noticing.  To whit: as the Pareto Principle would predict, the top 25% of earners pay 87.30% of all of the federal income taxes* in the country.  The top 50% pay 97.75% (leaving the next 3% to make up the rest, thus bringing us to the infamous 47% who pay no federal income tax).  So half of the country pays all of the federal income taxes--but 25% of the country pays nearly 90% of the taxes, leaving the second 25% to pay only 10%. 

Look again, it gets even more interesting.  The top 10% pay 70.47% of the taxes, which means, again, that the next 15% must be paying only 17.47%.  What exactly is our goal in saying that the "rich should pay more"?  Should the top 1% pay 70% of the taxes so that the next 49% only pay 30% of the total?  But the top 5% are already paying over half (58.66%).  Not, to be sure, over half of their income (which sometimes seems to me to be the goal for those who say the rich should pay more), but nevertheless over half of everything that the federal government takes in by way of personal income taxes.  Let's put it another way: the top 5% of earners in the country are paying for over half of the government sponsored programs upon which the other 95% depend.  Is this fair?  Perhaps, but where does one draw the line?  Just so you know, I am not in the top 5%, nor even in the top 10% of earners, which means I must be benefiting more than I contribute, too.  Should I pay more so as to be contributing my "fair share"?

It seems to me that those who are calling for us to tax the rich even harder than we have been need to be clearer about what they actually mean by "harder."  Without the "rich," without the top 10% of earners, we would have only 30% of the money that the government is looking to spend [correction: that it takes in from personal income tax].  It does sometimes seem to me that the present administration's goal (or, rather, ideal) is to tax everyone earning over $112,124 a year (i.e. the top 10% of earners) such that no one takes home any more disposable income than that.  As if to say, "90% of the country lives on less than $100,000 a year, why can't you?"  I know, I know, the goal here is increased revenues, but I can't help but feel sometimes listening to the rhetoric that it is more than that. 

*Which is not to say all of the taxes: there are also state taxes, property taxes, payroll taxes, sales taxes, and so forth.  Feel free to fill in the blank with the ones I've missed.  [And, of course, there are always the corporations.  But I am talking about individuals here.  And small businesses who pay taxes at the personal income tax rates.]

Comments

  1. Sticking to the federal level (i.e. excluding property taxes, state taxes, and sales and use taxes), your analysis omits payroll taxes (Social Security and Medicare), not to mention corporate taxes and other sources of government income (e.g. customs and import duties). So it's simply not true to say that "without the top 10% of earners, we would have only 30% of the money that the government is looking to spend."

    In FY 2010, the individual income tax provided 42% of total federal tax revenue (source). Therefore, if the top 10% of earners' taxes were excluded, federal taxes would be 70.6% of their FY 2010 level. That's a big chunk of change, but the loss is only 30.4%, not 70%.

    Besides, speaking as one of the top 10% (by household, not individually): what are the people at the top going to do? Move to another developed country, in which case their tax burden is likely to be higher? (Of course, there they might get better value for money: compare the relative condition of French or British roads with that of American roads.) Or move somewhere that has much lower taxation, but an equally lower standard of state service?

    Finally, you wrote: "It does sometimes seem to me that the present administration's goal (or, rather, ideal) is to tax everyone earning over $112,124 a year (i.e. the top 10% of earners) such that no one takes home any more disposable income than that." What's your evidence for that? The new French president has proposed a 75% marginal tax rate on income over € 1 million per year. Is there the least shred of evidence that the moderate, centrist Obama administration* has proposed anything remotely approaching that? Note that even under the French plan, someone earning € 4 million would take home well over € 1 million in post-tax income, even if none of that € 4 million were sheltered from taxation. Our current top bracket, to compare, is only 35%.

    * The American right likes to label Obama and his administration as radical socialists. As a social democrat, I wish that were the case. But his most radical plan has been a form of universal health care, more or less in the 19th-century style of Otto von Bismarck, whom one would be hard pressed to slot into the category of socialist.

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  2. My question was about what constituted a "fair share" for the upper income brackets to be paying. I noted that the chart only breaks down personal federal taxes. Even if more of the federal income comes from corporate taxes, the question remains what it is "fair" for the rich to pay.

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  3. Large American corporations have very low effective tax rates. Best to forget that as a point of discussion. Incidentally, the revenues from corporate taxes as a percent of GDP are lower than in, say Ireland, a supposed bastion of enlightened corporate tax policy (funny to see how they're doing economically).

    Something you're also ignoring here is that you're dealing with federal income tax rates which apply to earned income. The very wealthy pay much lower effective tax rates since much of their income is not earned as salary for work. It comes in the form of capital gains, interest and dividends. Essentially a lot of their income, much of which is earned by others' work, is taxed at very low rates.

    This isn't directly related, but I noticed that one of your justifications for voting for Romney is that you feel he has a better idea of how to fix our current economic malaise. Yet you have also stated that you know little in particular about economics. I would be fascinated to have you explain how you reconcile those positions. If you have little understanding of the functioning of the economy, how can feel qualified to have any opinion on the potential outcomes of a given candidate's proposed policies. If you were being honest with yourself, shouldn't you ignore economic issues entirely in your evaluation of your voting choices?

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  4. Heh. This is exactly why I didn't want to get into this whole discussion. How do I "feel qualified to have any opinion on the potential outcomes of a given candidate's proposed policies"? I don't. But then neither, I suspect, do 99% of the voting population (a.k.a. everybody other than Paul Krugman, according to some). Which tends to suggest that nobody should vote--unless you believe that a population voting its self-interest will actually eventuate in a systemically-favorable outcome, which as I understand it, conservatives do.

    What I pose in the above post is not a policy, but a philosophical question: what do we mean by "fair share"? I actually am ignoring economic issues in my evaluation of my voting choices. How I am voting has much more to do with each candidate's vision of our country, as I think I said in another comment thread. Here I am contesting President Obama's rhetoric about "fairness" and what we think that it might mean for the "rich" to pay their "fair share." How much is "fair"? Are we children, looking to get our half of the cake from our mother? Or is there some other criterion to be applied? What should that be?

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  5. Correction: "voting their self-interest through the marketplace." But please don't go adding all of the complications that I know this concept entails; I only mean to say that nobody votes with perfect knowledge of any issue or any candidate. We vote and hope.

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  6. Maybe you should start by laying out precisely your definition of 'fair' and proceeding from there.

    Here's a place to start thinking that is actually not as far from reality as it should be.

    Suppose that the entire population is 10 people. Suppose, also, that 9 of those earn $10 and pay 50% in various taxes. Suppose the final person makes $1,000 (incidentally, if this seems extreme, it isn't, since the income ratio here is the same as it is for a perfectly respectable, say, professor, making $100,000 vs e.g. Mitt Romney). Suppose this final person pays only 5% in taxes. This alone is the majority of all taxes paid. But, is it a fair burden? I say no. And I'll expand on that if you want. It seems to me that you would say 'yes', or perhaps, that it is even more than fair.

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  7. The problem as I understand it, is that we tend to think of "fairness" in terms of static amounts, but what if the one making $1,000 uses that money to start up a business that then pays the other 9 people's salaries? Is it fair to make sure that the one can't afford to pay them?

    My error, which you have already pointed out, is that I was assuming "federal income tax" covered all earnings, not just salaries. I knew it didn't cover all taxes, but the few dividends I have ever earned (e.g. on cds) were taxed at the same rate as the rest of my income, so I simply assumed that that was what the chart was showing. Now, if you consider the difference in "fairness" also has to do with what people have to do to earn their incomes (salaries plus everything else), then we are in a whole different conversation about market value. I don't know what is "fair" under these terms. Is it really "fair" that some of my colleagues (in my department, so comparing apples with apples, as well as I can) get paid more than I do (I don't know how much more, our salaries aren't public) simply because their work has attracted more attention than mine? Is it fair for some people to have enough money to invest to make money in ways other than having to negotiate for their salaries?

    But to answer your scenario, no, of course it doesn't seem fair. But as I hear what Governor Romney is saying, this isn't his idea of fair either, thus his argument about closing loopholes on deductions. As for the rich who are making millions on capital gains, interest, and dividends, the only direct encounters I have ever had with people at that income level is as donors to the organizations for which I have worked (e.g. the Houston Grand Opera, or my current employer). If you will, they already "tax" themselves with these kind of donations. My entire career has depended on this kind of funding, whether through fellowships for my education and research, or through the existence of the institutions at which I have studied. Is it fair to penalize them for supporting this kind of enterprise?

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  8. Charity isn't taxation. It's discretionary spending. It just happens to be discretionary spending that is actually tax-deductible (up to a certain point). Making a discretionary contribution to an opera house or a museum that (though culturally important) will be used and appreciated by the relative few, is not the same thing as paying taxes to fund the construction and upkeep of roads, schools, the military, government business lending programs, government research funding, healthcare (finally for the majority), etc. that will benefit the many including the payer.

    There's actually an interesting point there. You seem to believe that the government is inefficient in allocating funds vs, say the 'market'. But here, you're essentially arguing that private individuals will make more socially efficient allocations. I can't think of a single reason to believe that that would be true. I would like it if you could explain the mechanism by which you believe this should work.

    I'm also not interested in what 'seems' fair. I want to know precisely what you believe to be fair.

    Incidentally, which deductions does former-governor Romney plan to eliminate? Many deductions are taken by low-income families (many of these deductions were, in fact, instituted by Republican administrations). Would it be fair to eliminate these deductions in the federal income tax code and increase the financial burden on a group of people who already have to put up with largely regressive taxation at the state and local level? The federal income tax code is essentially the only progressive component of our tax system.

    FInally, certificates of deposit do not earn dividends. They earn interest that is, in fact, taxed as regular income at the federal level.

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  9. Yes, I realized I made that mistake on certificates of deposit, thanks for correcting me.

    I expect the government to have to tax us to pay for the military; that is the government's first reason for being, along with providing for justice for crimes against persons and property. As a medievalist, this makes sense to me: you cannot have markets if merchants can't travel safely; people cannot enjoy the fruits of their labor if others can come along and steal those fruits or, at worst, their very persons (i.e. enslave them). The tension in having a government (a.k.a. lord or king) is always between the protection he offers and what you have to pay for him to protect you. This is why we have parliament: to negotiate the taxes with the king. But, of course, in the U.S., we don't have a king, so we are effectively negotiating with ourselves for our protection money.

    How much should government be responsible for beyond the military and justice? That seems to me philosophically where we have gotten stuck over the past century or so. Until the twentieth century, schools were something that communities established themselves, usually for making sure children learned to read so as to be able to pray, but also so that they had the mathematical skills to do bookkeeping if their families were engaged in commerce; hospitals were charitable foundations (and still are, thus the Pritzker name plastered all over Chicago); research depended on all sorts of funding, some private, some commercial; and loans, well, I realize I'm not quite sure, since I don't know when the government starting making loans vs. selling bonds (you can fill me in here). (Which reminds me, the government also of course issues money.) As for roads, it is true that we all benefit from our national road system, but in subsidizing it (for the sake of the cars--I get this from Fast Food Nation), we drove out all sorts of other forms of transportation that were developed privately.

    So this is the question: why do we assume that only the government can take care of these things? You may say, because we're bigger than any medieval kingdom, but this is precisely Sowell's point (see today's quotation): it is impossible for any one person or even committee of persons to have enough knowledge to make such complex systems work better than the millions of individual people who are actually involved in them. Why do we assume that we would have no schools, hospitals, banks, or even roads if the government didn't provide them for us? The government doesn't provide us with hospitals now, nor does it own our banks. Why necessarily should it own our roads and schools?

    Is the market more efficient? Um, yes. Examples are every commodity that we buy in our stores. Clothing hasn't gone up in price in years; I remember gasping the first time I paid $100 for a pair of shoes--back in graduate school (i.e. the late 1980s). Shoes of the same quality still cost $100. The computer that I am typing on cost no more than the one I had in college, and yet is beyond amazing for what it can do compared with the machine I had then.

    As for which deductions to eliminate, I don't know which ones Romney has specified (I haven't visited the website), but I cannot see how he means to eliminate the ones on the lower income brackets. Every time I have heard him speak (i.e. in the debates), he mentions only deductions for the higher income brackets.

    As for what I think is fair, I don't know yet, which is why I was asking. I have been personally struggling with feelings of envy (see posts from this past spring), many of which had to do with feeling that the market forces governing my salary were unfair. Not to be eaten away by this, I have had to learn to think about "fairness" differently; I tried to explain some of this struggle in my post on the talents. Life isn't fair, but to say so is to suggest that God isn't fair--so maybe we need to readjust our sense of "fairness."

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  10. Just as one example, if you want to believe that the private market provides health services in a more efficient manner than a centralized national health service, then you have to deal with the empirical evidence that our privatized system produces poorer outcomes for more money than socialized systems elsewhere. Not only that, but you have to deal with the empirical fact that the socialized components of our health care system (Medicare, e.g.) provide better outcomes with lower cost than the private health care market.

    I don't think there are many who would argue for the central planning of the production of consumer goods like your clothes or computer. Those are relatively transparent markets for end consumers (though not entirely, if you take a moment to think about it, which is why there is plenty of scope for some forms of regulation). But public goods operate very differently. Not all goods yield a direct profit to the producer even if their production yields a substantial net profit to society.

    And I'm not saying that there would be no schools or no hospitals or no roads. What I would claim is that the outcomes would be significantly worse for society as a whole if there were no universal standards imposed and enforced and no coordination. Think for a moment about trying to ensure the free flow of your wonderful privately produced goods throughout the country on a set of restricted private roads and tell me that you honestly believe that outcome would match what we have achieved with a federal interstate highway system.

    'Free' enterprise produces a marvelous and unpredictable set of outcomes. But there is no 'free' enterprise without a context created by and enforced by a government.

    Now it may be that you don't mind the discriminatory outcomes that tend to result from a lack of government oversight: discretionary provision of medical care, discrimination in employment and pay, discriminatory access to infrastructure, discriminatory access to education, failure to account for externalities such an pollution and environmental destruction, etc. That's 'fine' insofar as I suppose that reflects your sense of what is fair. I can't agree that any of that would reflect a fair society as I understand it. I would also argue that it would lead to a society significantly poorer in the aggregate. But that's what this election is about.

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  11. "'Free' enterprise produces a marvelous and unpredictable set of outcomes. But there is no 'free' enterprise without a context created by and enforced by a government." I agree. I don't think that that is where we differ. The difference is who pays for things and how, not whether there are any regulations.

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