FACT: Rich People Pay Drastically More Than Their “Fair Share”

August 6, 2017

FACT: Rich People Pay Drastically More Than Their “Fair Share” Image via Paul Biryukov / Shutterstock.com

As a candidate, President Trump repeatedly promised that he would get a tax reform bill passed that would reduce rates for most Americans. This past spring, he doubled down on his promise with a plan that would reduce the current personal income tax brackets from seven to three, double the standard deduction and repeal the alternative minimum and death taxes.

Is that plan fair? Liberals and media critics say no, but they never bother to define what “fairness” means.

In reality, wealthy taxpayers already pay most of the tax revenues, and a truly fair tax reform would tax all workers at the same low rate.

The left always drums up the same tired argument

Immediately after Trump released his tax plan, critics called it “a boon for the rich” that delivers a “windfall for “the wealthiest.” None of this is true, of course, especially with a doubled standard deduction.

However, it is not surprising that his tax plan is being criticized as unfair. The left plays the fairness card every time taxes are discussed, taking every opportunity to suggest that the rich are not paying their fair share.

Hillary Clinton is a good example. As a presidential candidate in 2016, she wanted to raise the highest federal income tax rate to 43.6 percent. Apparently fearful of being out-leftied by his opponent, Senator Bernie Sanders upped the ante with this stunning statement:

At a time of massive wealth and income inequality, we need a progressive tax system in this country that is based on the ability to pay. It is unacceptable that major corporations have paid nothing in federal income taxes, and that corporate CEOs in this country often enjoy an effective tax rate that is lower than their secretaries.

The United States has one of the most progressive personal income-tax systems in the industrialized world, and yet Sanders suggests we “need a progressive tax system.”

Unfortunately, the rhetoric of the left is resonating with the general public. According to a 2015 opinion poll by the Pew Research Center, most Americans believe that “wealthy people do not pay their fair share of taxes.”

There is just one problem with this rhetoric: it never tells us what “fair share” really means.

How much is a fair share?

Perhaps there is a good reason for the left’s ambiguity surrounding their “fairness” buzzword. To most people, fairness is quite simple: everyone contributes to the best of their ability. To see what this means in practice, consider the following example.

Ten people are going to build a house together. They need 1,000 bricks to build the outer walls. Without knowing anything about the individuals involved, the fair way to bring the bricks to the construction site is for each person to carry 100 bricks.

But let us assume that Joe is much stronger than the average person, and that Jack is weaker. It would not be fair, would it, to ask Jack to carry the same load as Joe? So if Joe carries 150 bricks, Jack 50 and the rest 100 each, the responsibility for carrying bricks is fairly distributed, is it not? Everyone contributes according to his ability.

Now, let us translate this definition of fairness into money. Together, Joe, Jack and eight other people make a total of $1,000 per month. Big, strong Joe makes $150, while Jack makes $50 and everyone else $100 each.

The town needs a sheriff, whom they will pay $100 per month. How should they distribute the tax burden? If everyone should contribute according to his ability, then Joe should pay $15 per month, Jack $5 per month and everybody else $10 per month.

This fair tax rate is also a flat tax rate. It is easy to understand and morally appealing.

Yet our current tax system is entirely different, with seven tax brackets where the highest rate of 39.6 percent is almost four times the lowest rate of ten percent.

A few wealthy taxpayers bankroll most of the government

The practical effect of this tax system is that a small group of taxpayers shoulder a disproportionate tax burden. As economist Walter E. Williams explains, the top-ten percent of income earners pay 70 percent of all federal income taxes, while the bottom-50 percent pay as little as 3 percent.

But America’s income tax system is unfair in other ways too. As we established, a fair tax system would ask everyone to pay according to their ability. However, today most taxpayers pay less than their ability, while a small group of taxpayers pay far more than their ability, measured as their income.

According to IRS tax filing data, in 2014 Americans filed 148.6 million individual income-tax returns. Of those returns, 142.3 million reported an income of less than $200,000. Together, those tax filers earned almost $4 trillion, out of which they paid just over half-a-trillion dollars in taxes ($575 billion).

Their income was equal to 58 percent of all income reported. The taxes they paid, on the other hand, was only 42 percent of all taxes.

The rest of the income, $2.9 trillion, was earned by those who made $200,000 or more. Out of their income, which was 42 percent of all income earned, they paid 58 percent of all individual income taxes.

Put differently: taxpayers earning $200,000 and more, paid 38 percent more taxes than they would have done, if the tax system had been fair.

Does this mean that we should raise taxes on lower income workers and cut them for higher income workers? No, of course not. Nobody should have to pay more in taxes.

But until we have a truly fair tax system – one where every taxpayer pays the same percent of their income – we will simply have to accept that future tax cuts will benefit both lower income earners and those who make a lot of money.

Sven Larson

Sven Larson is an economist specializing in macroeconomics and the welfare state. He has worked for several free-market think tanks and is the author of "Industrial Poverty" a book about the European economic crisis. His forthcoming book "The Rise of Big Government" explains how egalitarianism conquered America. He has a Ph.D in Social Sciences with a Major in Economics from Roskilde University, Denmark.