What Tax is Fair?

Member Group : Lincoln Institute

There is an old saying in politics: "we you stand usually has a lot to do with where you sit." It is a callous concept – implying that most of us cannot see past our own parochial concerns – but one rooted in reality. And it clearly has been on display as of late.

Over the course of the seemingly endless economic debate in which we are now entangled – a debate that is going to be the focus of our national discourse for the foreseeable future – one concept keeps popping up that has everything to do with where one sits: Fairness.

The term "fairness" is seemingly a simple one – an idea so universal in human experience as to not need an explanation or definition. And if we were on a playground we might be able to agree on what is "fair."

But politics is a whole different type of juvenile nonsense, and "fairness" – like so many other simple concepts corrupted by government action – is a lot more complex when one is setting national policy. In political parlance "fairness" assesses a whole host of factors that exceed the definition – factors that really have little to do with fair.

Which is why I get so incensed whenever I hear the phrase "we want everyone to pay their fair share" – especially when it is uttered by someone seeking to make the system, well, LESS fair.

After all, "fair," by almost any definition, pays no attention to the concept "ability to pay" – "fair" means all parties sacrifice an equal amount. It certainly does not mean anything close to what the President claims when he says "we want people to pay their fair share" – an ironic phrase when all he really wants is more from some.

The fact is the President – and all politicians – aren’t at all interested in "fair," and the proof is everywhere. Consider:

Is it fair to tax saved money (that was already taxed) because the owner died? The estate tax may be politically logical and a valuable revenue instrument, but its imposition has nothing to do with "fair" – especially when every dollar in an estate was already taxed once.

Or is it fair to tax the gains from wise investments when we don’t allow deductions for the losses from unwise ones? The resulting policy adds increased risk to the wrong side of the equation and, as a result, reduces investments. Fair? Hardly – even if capital gains taxes are in some cases reasonable.

How about this for a fundamental flaw in the "fairness" argument: Is it fair that the top 1% of wage earners pay 37% of the income taxes? They don’t use 37 times the services of the remaining 99% of the country. They don’t place 37 times the burden on societal resources. And they certainly do not require 37 times the entitlements. Is the tax burden on the wealthiest amongst us appropriate? Possibly. Is it fair? Not by any definition I know.

Or think of it this way: Is it fair that the bottom third pays no federal taxes at all (when they are among the largest consumers of benefits)? Of course it’s unfair. It may also be the right policy – but that is a different debate than fairness.

Tax policy and fairness is a tough match. The tax code is not – nor has it even been – built on a concept of overall fairness.

But if, like the President, alleged "fairness" is your goal, there are ways to do that.

If you want to make it an equal proportion, OK – that means a flat tax. Under a flat tax the rich would still pay more in taxes – it’s the percentage that would stay the same. Under this structure everyone pays the same proportion in taxes, while the amounts differ with income. This is "fair," even if it might seem inequitable to the left.

Or we could go for the most pure form of fair – equal shares. Under that method we would take the total federal budget and divide it by the number of people in the country and then assign each a share of the bill – about $11,800 per person per year. The average family of 5 would face a near $60,000 tax bill – against a median income around $40,000.

That is "fair," even if it is absurd. But, as I noted above, a taxpayer’s view of one’s "fair share" has a lot to do with where one is sitting.

The fact is the ongoing debate in Washington has NOTHING to do with fairness – it has to do with political reality. The fact is the wealthy are viewed by most as having a greater ability to pay, and that ability to pay makes taking it from them "fair." But the resulting implication — that the 37% the top 1% (or 67% the top 10%) pays in taxes is unfair to the remaining 90-99% — is beyond ridiculous.

That doesn’t mean the progressive tax system is wrong – but it’s got nothing to do with "fair." Politicians don’t want anyone to pay their "fair share," they want someone else to pay their constituents’ share. Ok, maybe that is too callous. But the fact is the Democrats are demonizing people paying the most in taxes under the guise of "fairness."

It is an absurd line of attack. And it is one that makes villains out of very people we are asking to give up even more. Perhaps, as he is preparing his next campaign speech, the President would be kind enough to remember that fact.

I am Scott Paterno, and that is the uncomfortable truth.