The Elusive Fairness of Taxes
“One more thing, none of them want to pay taxes again… ever.” That’s Bruce Willis negotiating his terms to save the planet from an asteroid in Armageddon, a movie that made a ton of money, all of which was taxable.
Although the main reason to enact a tax is to raise revenue for operating the government, not all taxes are levied for that purpose. For instance, sin taxes are levied to change bad behavior and poll taxes were levied to disenfranchise black folks. One progressive purpose of taxation is “wealth redistribution,” (progressives seem to think wealth was unfairly divvied up long ago, rather than being created and added to with each new day.)
If not flat-out unfair, almost all our taxes contain at least an element of unfairness. But is there any underlying principle of fairness involved in the taxes levied strictly to raise revenue? In other words, why do we tax what we tax?
To answer that, we must first be clear about what we tax. The two main categories of what we tax are assets, i.e. wealth, and what let’s call “transfers,” (not to be confused with the “transfer tax,” which is essentially a processing fee).
Asset taxes include property and real estate taxes, and they pose a problem for fairness. Consider two houses sitting side by side. The owners of these two houses both use the same roads, sewers, police, and other public amenities and services. But one of the houses is taxed considerably more than the other. Why? It’s because the government assessed it as being worth more. But so what if it is worth more, both houses may cost the government the same. Indeed, the less-valued house may cost the government more.
Whereas state and local governments rely on asset taxes, the federal government gets most of its revenue from transfer taxes, which are collected when wealth passes between parties. These include wages, interest, estates, gifts, dividends, etc. The big transfer taxes for the feds are income and payroll taxes, which usually account for around 85 percent of all federal revenue.
The problem with transfer taxes is that government taxes on both the front end and the back end; i.e. when wealth is received and when it’s passed on to someone else. So with every transfer, the government skims off a little (or a lot). The faster money circulates the more money transfer taxes rake in. If money circulated fast enough, transfer taxes could confiscate all of it.
So, you get taxed when you receive money, when you spend it, and then when you leave it to your heirs or give it away. And on top of that, you’ll get taxed every year on your major assets, and for as long as you own them, even if they sit unused, even if all you do is occasionally look at them, like works of art.
If Congress wanted to stir up another revolution, it would levy an asset tax on one’s net worth, including bank accounts. That was Liz Warren’s brilliant idea in her failed campaign for president. However, the “billionaire’s tax” may not be as unpopular as Liz, as Ron Wyden, her colleague from Oregon, has been pushing for a tax to capture unrealized capital gains, a tax on potential income.
Some of the more unfair taxes involve double taxation, such as the tax on dividends. Dividends are paid out of company profits, which are already hit by corporate taxes. The tax on dividends is doubly irksome because if dividends weren’t doubly taxed, corporations might be more inclined to pay them.
Estates and gifts are also doubly taxed. But what are we taxing here? Estates and gifts don’t involve the creation of wealth nor do they incur any cost to the government. They merely concern the transfer of ownership from one party to another; a change in titling. How can the government justify getting a cut?
How fair is it that you can leave your estate tax-free to certain government-approved entities (e.g. charities and colleges), but cannot leave your estate tax-free to your family and loved ones? If a man can’t hand off his fortune to his family, haven’t we taken away one of the main motivators for taking risks and starting up a business? We would do well to remember that as recently as 2001 the exclusionary amount on estates was a mere $675,000 and the top rate was 55 percent.
Such depredations have spawned an entire industry devoted to sheltering income, wealth, and estates from taxes. But this can’t be healthy; investment choices should be made on factors other than their tax ramifications.
Surely the fairest tax is one where everyone pays the same. It’s called “capitation” (the head tax) and is provided for by Article I, Section 9, Clause 4 of the Constitution. But, if capitation were the sole source of revenue to the federal government, it would amount to $19,848 for every man, woman, and child in these United States. That’s the 2020 total federal outlays of $6.55 trillion divided by 330 million residents. Just to settle their 2020 tax bill to the central government, a family of four would have had to pay the feds about $79,393. Since few could pay it, as a major source of revenue capitation is a nonstarter.
But capitation is fair. And capitation illustrates a salient point when contrasted with our other taxes: Only the government can charge folks based on what they can afford to pay. The government certainly doesn’t allow private enterprises to charge folks different prices; a billionaire pays the same for a gallon of milk as does a pauper. But if you were getting your milk from the government, they’d need to know your income before knowing how much to charge you.
The biggest source of revenue to the federal government is the Individual Income Tax. Democrats endlessly squawk about the need for the wealthy to pay their “fair share” of this tax. But the bottom 50 percent of tax filers account for about 3 percent of income tax revenue, while the top 5 percent of filers have paid close to 60 percent. The bottom quintile actually has a negative effective income tax rate, while the top 1 percent has paid close to 40 percent of total income tax revenue. How fair is that?
Well, it’s not fair. But it’s inescapable. The rich pay more taxes because they’re the ones with the money. There is no higher principle of fairness involved in setting tax policy and tax rates; the government “needs” your money and has the power to grab it. The only “principle” involved is that the beast must be fed. The beast is Congress and it is insatiable.
Upper-bracket taxpayers shouldn’t obsess about the unfairness in our tax codes. (Fairness is not for this world.) Taxpayers hit by the top tax rate should just be thankful it isn’t 91 percent, as it was as recently as 1963.
What all taxpayers should be just as concerned about as taxes is Congress’s spending. Because the less Congress spends, the less it “needs” our money. Congress’s infernal spending has spawned a fiscal Armageddon not even Bruce Willis can save us from. Congress’s out-of-control spending is why so many things are taxed, it’s why we have so many types of taxes, and it’s why fairness is a luxury Congress just can’t afford right now.
Congress has succeeded in creating a tax system that Americans both despise and fear. For when IRS agents enforce the tax code, an average taxpayer can easily be deemed a criminal. Congress might keep that in mind the next time they need the expertise of a crew of real criminals to save the planet from an asteroid.
Jon N. Hall of ULTRACON OPINION is a programmer from Kansas City.
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