How Fair Is Paying Your Fair Share?

What if the next time you bought a pair of shoes exactly like the person ahead of you in line, but you had to pay an extra five or ten bucks in sales tax because of your income?  Or what if the next time you bought groceries, you had to pay sales tax on that pound of hamburger, but the person in the line next to you didn't because you earn more?  And what if when you die, because you were frugal and saved a lot of the money you earned during your lifetime, your estate was taxed higher than more irresponsible people who wasted their incomes and had nothing left?  Does any of this sound like paying your "fair share"?

That term, "fair share," seems to get a lot of press these days.  It's always been around, but since 2011, when billionaire Warren Buffett proposed his so-called "Buffett Rule," which states that anyone earning more than $1 million should pay at least 30% of it in taxes, it has become much more popular in liberal political circles.  The idea sprang from Buffett's observation that his secretary paid a higher income tax rate than him.  Note the subtlety in this observation – a higher tax "rate," not higher taxes.  I'm certain he paid a lot more in dollars to the IRS than his secretary did.  But should he have to pay a higher tax rate?  His fair share?

What is a person's fair share?  The top 1% of taxpayers in the U.S. pay 44% percent of all income taxes collected, and the top 20% of earners pay a whopping 84% of all taxes.  This is while 45% of adult taxpayers pay nothing at all.  Yes, there's no question that some people are less fortunate than others, and some people truly need financial help – but almost half of the population?  And what about that top 1%?  With that very small group paying roughly half of all of the taxes, does anyone believe they use anywhere near half of all the services provided by the government?  Do they get their fair share of government programs?

Yes, it's a ludicrous argument, because clearly Warren Buffett or Bill Gates does not need housing or food assistance.  And yes, they should probably pay more in tax dollars than someone living on minimum wage.  But how much more should they pay?  Millions?  Billions?  Ah...they should pay their fair share.  Proponents like to ignore the dollars paid and point instead to the tax rate paid as a percentage of income, so let's look at it that way.

According to the non-partisan Tax Policy Center, the top 1% of earners pay an average tax rate of 23% of their income.  This is clearly below the Buffett Rule, since this group averages an annual income of around $2.1 million per year.  But that 23% is seven times the average tax rate paid by the other 99% of the population.  While we can always search to find a specific millionaire and compare him to a specific minimum wage worker to "prove" the worker pays a higher tax rate, in aggregate, it simply isn't true.  It's not even close!

There's another angle that is often used to sell the fair share idea.  It's the perception that people with high incomes don't work hard.  For example, Hillary Clinton's campaign website quotes her as saying (italics mine):

It's outrageous that multimillionaires and billionaires are allowed to play by a different set of rules than hardworking families, especially when it comes to paying their fair share of taxes.

It may be true that lower income occupations have a disproportionate share of physical work, but that doesn't necessarily mean they're harder.  A person collecting trash or digging a trench may sweat more, but after eight hours, he can shower and relax.  An international bond trader, or Fortune 500 CEO, or even a moderately successful small business owner works a lot more hours than nine to five.  Should hard work be exclusively measured by how many calories are burned?  If that's the case, then a lot of professional athletes – earning millions in income, by the way – are hard workers and deserve lower taxes.  It should be their fair share based on physical effort, right?

If Warren Buffett and Hillary Clinton think their tax rates are too low, then why don't they pay more?  Asked this question about President Obama when he said he should be paying more in taxes, his press secretary dismissed the question as a "gimmick."  Really?  A gimmick that was established by the Treasury Department and has been around for over 170 years?  Since 1843, the Treasury Department has maintained a special account called "Gifts to the United States" where individuals can voluntarily pay more than they legally owe in taxes.  Last year, the total collected was a little less than $4 million nationwide.  Maybe that was Warren Buffett's fair share?

Kevin Cochrane teaches economics and business at Colorado Mesa University, and is also a permanent visiting professor of economics at The University of International Relations in Beijing.

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