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What Constitutes a "Fair Share"?

Economist N. Gregory Mankiw ponders whether the rich pay their "fair share" of federal taxes.

The C.B.O.'s most recent calculations of federal tax rates show a highly progressive system. (The numbers are based on 2004 data, but the tax code has not changed much since then.) The poorest fifth of the population, with average annual income of $15,400, pays only 4.5 percent of its income in federal taxes. The middle fifth, with income of $56,200, pays 13.9 percent. And the top fifth, with income of $207,200, pays 25.1 percent.

At the very top of the income distribution, the C.B.O. reports even higher tax rates. The richest 1 percent has average income of $1,259,700 and forks over 31.1 percent of its income to the federal government. . . .

When the C.B.O. studies the tax burden, it includes all federal taxes, including individual income taxes, payroll taxes and corporate income taxes. In its analysis, payroll taxes are borne by workers, and corporate taxes by the owners of capital. For the richest 1 percent of the population, 9.3 percentage points of their 31.1 percent tax rate comes from the taxes that corporations have paid on their behalf. . . .

None of these calculations, however, say whether the rich are paying their fair share. Fairness is not an economic concept. If you want to talk fairness, you have to leave the department of economics and head over to philosophy.

Justin (mail):
Does the CBO consider investment income?
Does the CBO even bother to figure out how much of the country's income the nation's top 1 percent make, with or without investment income?

Or is this just thoughtless propaganda masquerading as an idea?
7.15.2007 7:58pm
Justin (mail):
By the way, while one expects Mankiw to have an agenda which would lead him to hide such obvious errors in his analysis, one would think Professor Adler would put enough thought, or indeed, "fairness" into his post to point them out instead of just reposting without criticism.
7.15.2007 8:00pm
Barry P. (mail):
Justin:

You might want to consider reading the article in question before opening your big yap.
7.15.2007 8:06pm
Jonathan H. Adler (mail) (www):
Justin --

One would think that readers would click on the link to see whether Mankiw addresses investment income before posting such criticisms.

JHA
7.15.2007 8:08pm
Barry P. (mail):
I should add, just what, exactly, are the "obvious errors" in Mankiw's analysis, given that it isn't his analysis, merely his citation of a CBO report?
7.15.2007 8:08pm
Justin (mail):
Quick research, btw, got me the following answers.

Yes, it does - but because the richest 1% make over 40% of all investment income, it actually skews this the wrong way. The richest 1% make, depending on how you calculate it, make somewhere between 17-27%. So the richest 1% do pay slightly more than an absolute flat tax/0 deduction system, but the system is not *that* progressive.

Note: This is quick google research, so someone can feel free to update with more accurate information. I spent about 5 minutes doing this, surely Mankiw or Adler could have put in the same time.
7.15.2007 8:10pm
Brett Bellmore:
I've always figured the "fair share" was the amount of taxation which would pay for the government services you actually benefit from. Of course, by that standard most even moderately wealthy people are wildly over taxed.
7.15.2007 8:12pm
Justin (mail):
Those people who are attacking me missed the point of my criticism. By adding investment income, one is adding in all sorts of taxes that the rich pay much of (because, as noted above, the top 1% of America make over 40% of all investment income), even though they are paying it at a tax rate that is at or lower what many middle to upper middle class Americans pay on their ordinary income.

To then present the 1% = 31% of income, without giving their readers the correct comparison number (what percent of income the top 1% of income holders have), is beneath even the most modest journalistic standards.
7.15.2007 8:13pm
Adam J:
Seriously? A highly progressive system? That's pretty funny. Has the guy ever heard of a tax shelter? They aren't exactly cost efficient for the other %99, but they sure save the top 1% from alot of taxes. And with the ludicrious complexity of the federal tax code, there's certainly plenty of holes to shelter your money in.
7.15.2007 8:14pm
Justin (mail):
Brett,

Since property is a creation of the state, I think you should rethink your argument quite a bit.
7.15.2007 8:14pm
juris_imprudent (mail):
Justin displays the knee-jerk reaction that I expected before I even opened the comments.

Here's a fun way I've discovered to shut up the average leftie whining about the rich not paying their fair share - ask them what percentage of the total tax burden the rich should shoulder. The response is almost invariably less than under the current situation. This works regardless of the slice (top 1%, 5%, etc.) you choose as the illustration.
7.15.2007 8:17pm
Barry P. (mail):
Justin: you are missing the point in the most basic possible way. The article isn't saying that "the top 1% pay 31% of all taxes, whereas they make 40% of all income, thus they are paying less than their fair share."

Instead, the article describes what fraction of their income they pay as taxes, as compared to what other earnings quintiles pay as a fraction of their income. As income increases, the share of income paid as taxes increases. The percentage of income that the top percentile makes is irrelevant to the analysis. Indeed, according to this analysis, a larger share of income held by the top 1% would lead to an increase in total tax revenues.

I'm kind of stunned that you can't make this differentiation.
7.15.2007 8:22pm
Justin (mail):
I should make at least one clarification: I do at least appreciate that Mankiw did at least calculate the percentage of income, something this oft-repeated argument fails to even bother to calculate, and it looks more like "wow, the top 1% pay Z percent of the nation's taxes, how unfair!" So Mankiw (and Adler) deserve some credit for including that portion into the debate.

But I do think given the most basic declining marginal value of wealth that we should have some basis as to what the top 1% are earning relative to the other brackets. Without that, you are missing a massive area of perspective. In a central debate about inequality, its an important qualifier.
7.15.2007 8:23pm
Jody (mail):
property is a creation of the state

I need to inform that to my German Shepherd. He seems to think he owns the front yard and aggressively defends it.

Or more accurately, the state provides a mechanism for resolving proerty disputes.

Sans state there's still property. It's just messier.
7.15.2007 8:25pm
Barry P. (mail):
Nice to see you backpedaling so rapidly, Justin.

And why are you lefties so obsessed about "inequality"?

Here's a quick thought experiment: assume that all of the wealth in the world is equalized over the entire population. So let's say eveybody in the world has, say, $10,000 each.

Now, over the course of a year, 500,000 people voluntarily pay Pearl Jam $20 each to watch them in concert. Now Pearl Jam has $10 million, while everybody else still has about $10,000.

Now answer: is this distribution somehow "inequitable"? Should Pearl Jam be punished for producing something so many people are willing to pay to consume?
7.15.2007 8:32pm
Reg (mail):
"Since property is a creation of the state"

This is especially funny when posted on a libertarian blog.
7.15.2007 8:56pm
ifoughtthelaw (mail) (www):

Now answer: is this distribution somehow "inequitable"? Should Pearl Jam be punished for producing something so many people are willing to pay to consume?


No. Pearl Jam should be punished for Vitalogy.
7.15.2007 8:59pm
Jared McLaughlin (mail) (www):
I think that the first question in fairness is not to look at the amounts, but the principle. On what principle are the people taxed? What is the principle behind income taxation? It would seem to me that the principle is that the ability of people to earn an income is due to the structure provided by the government in its system of laws, and its infrastructure in the form of highways and ports.

Some people even hold wildly dangerous and error prone ideas such as property being the creation of the state. This may explain it. If that were accepted as the principle, however wrong and facist leaning the idea, then fairness judged on this scale might seem to exist.

Some have suggested a scale based on how much direct benefit, as opposed the indirect benefit I mention, and individual recieves from the government. This may be more equitable. I think that the best answer stems from the cause. Government exists to secure the rights of the individual, something from which all benefit directly and indirectly, so the tax ought to be levied on the individual at any equal amount to all. Wealthy individuals would pay the same as anyone else. Tax relief for those in poverty could be granted, but all those able to share the burden ought to carry it equally.
7.15.2007 9:00pm
jb9054 (mail):
Is there another good or service in our society for which how much you pay to get it is determined by how wealthy you are? The only other service that comes to mind is higher education, where the effective price does change radically depending on your income or wealth. In no other transaction is there generally any inquiry into how much you can presumable afford. If you want a loaf of bread, ticket to a ballgame, Pontiac, dry cleaning, or whatever else in or economy, you pay whatever the seller asks or you do without. With government, the seller decides that you will buy it (on pain of loss of liberty), and then has the chutzpah to tell you what your particular price is. Why do we put up with this? I know that it took a constitutional amendment to get to this point. What a dumb idea!
7.15.2007 9:01pm
ifoughtthelaw (mail) (www):

I've always figured the "fair share" was the amount of taxation which would pay for the government services you actually benefit from. Of course, by that standard most even moderately wealthy people are wildly over taxed.


So public assistance should be funded entirely by taxes paid by people on public assistance? Brilliant!
7.15.2007 9:06pm
Public_Defender (mail):
One measure the CBO doesn't include is the percentage of taxation on truly disposable income. Factor in even a minor allowance for food, clothing and shelter, and I bet lower income people pay an astronomically higher share of their disposable income than the richest 1%.

For the richest 1 percent of the population, 9.3 percentage points of their 31.1 percent tax rate comes from the taxes that corporations have paid on their behalf. . .

When corporate owners are sued, they claim that the corporation is its own legal entity. But when it comes to taxes, they want to treat corportation as an alter-ego.

Sorry, unless you take responsiblity for the corporation's actions, you don't get credit for the taxes the corporation pays. You asked the government for a separate entity. You got one. Stop whining that you got what you asked for.

That leaves a 21.8% tax rate for the richest 1%. That's not exactly soaking the rich.

I've always figured the "fair share" was the amount of taxation which would pay for the government services you actually benefit from. Of course, by that standard most even moderately wealthy people are wildly over taxed.

The wealthy get enourmous benefits from the government's protection of their property rights. Also, the wealthy depend heavily on government-provided security, law and order in order to stay in the top 1%.

Sans state there's still property. It's just messier.

A lot messier. Anyone want to buy property in Iraq? Or in any other country with no effective government? I didn't think so.
7.15.2007 9:14pm
Steven Lubet (mail):

For the richest 1 percent of the population, 9.3 percentage points of their 31.1 percent tax rate comes from the taxes that corporations have paid on their behalf. . .



Is a comparable percentage added to the tax burden of middle income people whose pension funds invest in the same corporations? Is another 7.1% added for the employers' share of social security that is also paid "on behalf" of working people? Are state property and sales taxes added (not federal, but still comprising a hefty share of income for the middle class)?
7.15.2007 9:26pm
frankcross (mail):
The possibly bogus part of this is the assumption that corporate taxes are paid by owners of capital, a big percent of their share. That is very contested, as a considerable chunk may be passed on in consumer prices, which would be paid mostly by the poor.
7.15.2007 9:37pm
s806:
I think there is a large difference between Warren Buffet and someone who lives of 300k/year. Targeting only capital gains harms the investor who lives off his high by most standards annual salary.

I'm tired of hearing about the Top 1%, the problem is that action directed at that evil class necessarily creeps down to the modestly wealthy.
7.15.2007 9:44pm
volokh watcher (mail):
It's rough trying to live on $800,000. I know personally . . . because my college buddies who went to WS tell me so. (Yes, as a Wharton undergrad, I foolishly went to law school instead of Morgan Stanley.)

Indeed, Barry P., it sure is tough making a go of it on that amount after taxes. Damn we're screwing these people.

No doubt if we cut taxes and give my friends, say, $1 million after taxes they'll feel like the government isn't stealing them blind.

And just exactly what happens to the stock market -- and the personal wealth of my good friends on WS -- when our T-Bonds aren't so attractive?

Scooter, we LOVE you!!!
7.15.2007 9:46pm
Fub:
Fairness is not an economic concept. If you want to talk fairness, you have to leave the department of economics and head over to philosophy.
"Fair share" is one of those conceptual noun phrases that make English such a difficult language to learn. When used as an object in a sentence, the phrase "fair share" actually controls the verb as well as the person of the subject. For example:

I pay my fair share.

You do not pay your fair share.

He cheats.
7.15.2007 9:56pm
Reg (mail):
The idea that the rich get a huge benefit from this country's laws is one I've never really bought into. Even the worst dysfunctional hellhole of a third world country has very poor people, and a nonexistent middle class, but there is still a number of wealthy people who live much better than the rest. It seems to me that the biggest beneficiaries of a well organized country that respects property rights are the poor and middle class. It's not as if, but for property laws and well run government, there would be no rich people.

So, if you want to tax those who obtain the biggest benefit from government, you'd tax the poor and middle class first.
7.15.2007 10:23pm
Q the Enchanter (mail) (www):
"why are you lefties so obsessed about "inequality"?"

Um, well, some of us think we have merely a healthy regard for equality. At all events, if you think "equality" entails (for example) immediate redistribution of all proceeds from rock concerts, you need to read a bit more on the topic.
7.15.2007 10:23pm
Volokh Groupie:

The wealthy get enourmous benefits from the government's protection of their property rights. Also, the wealthy depend heavily on government-provided security, law and order in order to stay in the top 1%.

This is stupid. The rest of your arguments are fine, but while this may be somewhat true, the investments that these uber rich have to pay only 15% capital gains on more than compensates for any such advantage by growing the economy in a manner which couldnt be done by consumer spending.
7.15.2007 10:47pm
Volokh Groupie:
It's rough trying to live on $800,000. I know personally . . . because my college buddies who went to WS tell me so. (Yes, as a Wharton undergrad, I foolishly went to law school instead of Morgan Stanley.)

Indeed, Barry P., it sure is tough making a go of it on that amount after taxes. Damn we're screwing these people.

No doubt if we cut taxes and give my friends, say, $1 million after taxes they'll feel like the government isn't stealing them blind.


Why not take away more then? Your tongue in cheek attitude is so refreshing. It's true. I bet you could live on only 100k/annum and still get your benz every 3 years and eat at nobu once in a while. Nobody really needs more than 100k in my opinion. It's not like they did anything to earn it.
7.15.2007 10:50pm
Confused:
It's rough trying to live on $800,000. I know personally . . . because my college buddies who went to WS tell me so. (Yes, as a Wharton undergrad, I foolishly went to law school instead of Morgan Stanley.)

Indeed, Barry P., it sure is tough making a go of it on that amount after taxes. Damn we're screwing these people.

No doubt if we cut taxes and give my friends, say, $1 million after taxes they'll feel like the government isn't stealing them blind.


its great that you feel youre a morally superior human being to your morgan stanley counterparts. However why don't you just donate 700k of your 800k to the govt to make up for what you obviously feel your elitist, poor hating friends don't pay when they should have to?

Let get Uncle Warren on this train too--he's a rich guy who has all he could want, why doesn't he just donate most of his fortune to the good ol'USA to cover extended healthcare?
7.15.2007 10:53pm
Jody (mail):
The wealthy get enourmous benefits from the government's protection of their property rights.

Actually, the poor get the biggest benefit from the government's protection of property rights. The rich can hire their own army to enforce their property rights. Think lord/duke or if you prefer Ross Perot.
7.15.2007 10:59pm
sun:
Even the worst dysfunctional hellhole of a third world country has very poor people, and a nonexistent middle class, but there is still a number of wealthy people who live much better than the rest. It seems to me that the biggest beneficiaries of a well organized country that respects property rights are the poor and middle class. It's not as if, but for property laws and well run government, there would be no rich people.

This may be true at any given time, but the argument is not convincing because it does not take into account the benefits of law over time. E.g., it overlooks the great potential instability of wealth in many such scenarios (think of the potential adverse consequences of regime change for the average tycoon or robber baron in a dysfunctional hellhole). Law holds significant benefits for the wealthy who want to make secure investments or hold on to (a reasonable portion of) their wealth free from fear of complete and unpredictable confiscation, as well as benefits for those who aspire to become wealthy. The universal truth that good fortune is distributed unequally doesn't prove anything either way about the benefits of law.
7.15.2007 11:10pm
Ted Frank (www):
That is very contested, as a considerable chunk may be passed on in consumer prices, which would be paid mostly by the poor.

Since taxes are on profits, rather than revenues, I don't see how this is possible. If corporations could increase profits by raising prices, a profit-maximizing corporation would do so regardless of the tax rate. Increasing or decreasing taxes on profits does not affect marginal cost, so the tax rate should not affect the price charged.

(Compare and contrast expenses based on revenues, such as litigation expenses or carbon taxes, which correlate with the amount of product sold. These expenses can be expected to be passed on to consumers as marginal cost increases.)
7.16.2007 12:03am
abu hamza:
Simple question: does the tax rate recited for the poorest fifth (4.5%) include the part of their wages taken for fica and medicare?
7.16.2007 12:12am
J. F. Thomas (mail):
It's not as if, but for property laws and well run government, there would be no rich people.

But then you have people like Bill Gates, who owes his entire fortune to the intellectual property rights created by the government. His product would be worth absolutely nothing without the government. And of course the rich, especially those who work for Defense contractors or agribusiness concerns, earn a lot more from government contracts than they ever pay into the system.

As for the numbers themselves, they are really skewed. If the rich get the taxes paid by corporations on their behalf credited, then of course the poor and middle class should have their employers' share of medicare, social security and unemployment insurance credited to them. Which of course means anyone who isn't eligible for the EITC and earns a salary is paying at least 20% of his income in Federal Taxes, and that is even before the Federal income tax kicks in. And of course for a person of moderate means who owns a car, the federal gas tax represents a significant burden.
7.16.2007 12:19am
Elliot123 (mail):
As long as there are smart people, stupid people, industrious people, and lazy people equality is a pipe dream. Always has been.
7.16.2007 12:33am
Steve2:

Nice to see you backpedaling so rapidly, Justin.

And why are you lefties so obsessed about "inequality"?

Here's a quick thought experiment: assume that all of the wealth in the world is equalized over the entire population. So let's say eveybody in the world has, say, $10,000 each.

Now, over the course of a year, 500,000 people voluntarily pay Pearl Jam $20 each to watch them in concert. Now Pearl Jam has $10 million, while everybody else still has about $10,000.

Now answer: is this distribution somehow "inequitable"? Should Pearl Jam be punished for producing something so many people are willing to pay to consume?

1) Doesn't that presuppose allowing people to voluntarily purchase tickets? Why that assumption, as opposed to say, the assumption that the 500,000 people simply register to have their annual concert attendance ration used for Pearl Jam tickets?

2) More to the point, why do you call it "punishing" Pearl Jam to not pass on the $20 from every ticket to them? If you take equitable distribution as the basis of what's moral and right, then they had no right to (in this hypothetical's case) anything in excess of the $10,000, regardless of how many people are willing to pay how much for the product they prosute. So keeping them from having what wasn't theirs to begin with...
7.16.2007 1:18am
TJIT (mail):
s806 said:
I'm tired of hearing about the Top 1%, the problem is that action directed at that evil class necessarily creeps down to the modestly wealthy.
Excellent point. The AMT was designed to hit only the wealthiest families in the US. It is now chewing on the middle class in high tax states.

The reflexively jealous always aim at the wealthy and inevitably end up hitting the middle class.
7.16.2007 1:40am
TJIT (mail):
J. F. Thomas says:
But then you have people like Bill Gates, who owes his entire fortune to the intellectual property rights created by the government.
Apple has intellectual property rights, and a system that is more stable and user friendly. If you assertion was correct they would have the market share not Microsoft.

The fact that they don't shows that bill gates owes his fortune to more then government enforced intellectual property.

Plus in the process of getting his fortune gates immeasurably increased the wealth of the world. His fortune is a cheap price to pay for all the benefits he and his company have provided.
7.16.2007 1:51am
Anon Lawprof:
Bravo, Ted Frank! Micro 101, but so many people get it wrong... Bravo.
7.16.2007 2:27am
c.f.w. (mail):
The Mankiw piece is about percentages in a code, as opposed to what gets actually paid after deductions, calling fee income capital gains, etc.

Mankiw also ignores the most regressive taxes - sales tax of 8 % or so plus property tax, passed on to renters.

For precedent about what is dysfunctional inequality, one might spend some time with Will and Ariel Durants fine Story of Western Civilization, Book 3, Ceasar and Christ (I am up to tape 18 of 26 tapes and nothing much about Christ yet). The Durants made a pretty convincing case (in 1944) about gobs of wealth to small numbers of citizens leading to collapse of the Republic.

Another way of looking at what is fair is who got the benefit of the funds paid in to government. Our current electoral system disenfranchised say 75 million of the poor - those who are under 18. Allow all of them to vote, directly or through parents and proxies, and the fairness (or perceived fairness) of distribution might improve.

Another step forward would be to remake the Senate to something more proportionate to population. Say every state gets at least two Senators but after that, it is one Senator per one million people. 75% of our population was in 20 states (40% of states), as of 2004. There were 9 states with under 1 million population, 17 with under 2 million.

Mankiw and his ilk (Tyler Cowenm for e.g.) tend to be so enthralled with social science of the last 30 years that they forget (or do not try to consider) lessons from history about dysfunctional income/wealth inequality.
7.16.2007 3:52am
Public_Defender (mail):
For those who contest that the wealthy get more benefit from government than the poor, if the US government collapsed today, how many billions would Bill Gates and Warren Buffet lose? How many billions would someone making $14K a year lose?

Yes, the rich would mostly still come out on top, but they would lose a lot more money than poor people.
7.16.2007 6:14am
Brett Bellmore:

So public assistance should be funded entirely by taxes paid by people on public assistance? Brilliant!


Look up the difference between "justice" and "mercy": I took the "fair" in this discussion to be about the former, not the latter. That the poor receive services they don't pay for is, of course, not "fair", it is an instance of mercy. Or, if you're more realistic, vote buying in a democracy. But there isn't anything "fair" about charging people for goods they don't consume, don't need, don't want, and may find actively offensive, just because you can kill them if they refuse. "Progressive" taxation is an exercise of power, not morality, and the terminology we use to discuss taxation is the left's greatest triumph.

All this underscores the basic point: "Fair" is not an economic concept, it is a concept in philosophy/ethics, and it's meaning is fundamentally contested. Anybody who claims to be able to objectively calculate if somebody is paying their "fair" share of taxes is either an idiot or being deliberately disingenuous.

Generally the latter.
7.16.2007 7:31am
J. Kindley (mail) (www):
Regarding equality, Thomas Paine had some momentous words on this in his essay Agrarian Justice:

"There are two kinds of property. Firstly, natural property, or that which comes to us from the Creator of the universe,-- such as the earth, air, water. Secondly, artificial or acquired property,-- the invention of men. In the latter equality is impossible; for to distribute it equally it would be necessary that all should have contributed in the same proportion, which can never be the case; and this being the case, every individual would hold on to his own property, as his right share. Equality of natural property is the subject of this little essay. Every individual in the world is born therein with legitimate claims on a certain kind of property, or its equivalent."

And later, a summary of the rationale for the geolibertarian, Georgist, "single-tax" thesis: "Man did not make the earth . . . "[I]t is the value of the improvement only, and not the earth itself, that is individual property. Every proprietor therefore . . . owes to the community a ground-rent . . . for the land which he holds," or Land Value Tax (LVT).

No other kind of tax is legitimate according to the geolibertarians, whose philosophy, readily found by a Google search, I highly recommend to my fellow Volokh readers. The highly regarded philosopher of natural rights, Hillel Steiner, among others, has also recognized that inheritance taxes appear to be legitimate, the idea as I understand it being that a dead guy doesn't have a natural right to possess or dispose of property.
7.16.2007 8:26am
Jody (mail):
For those who contest that the wealthy get more benefit from government than the poor, if the US government collapsed today, how many billions would Bill Gates and Warren Buffet lose?

What happened in Venezuela or in Zimbabwe or in any of the other countless government collapses? My recollection is the rich fled (with their money) while the poor got screwed real hard.
7.16.2007 8:30am
Barry P. (mail):
Steve 2, I'm glad I don't inhabit your world.

I'm surpised that so many here took a simplified expository parable literally. It was just an example designed to illustrate a more complicated reality, folks.

Q: I'm amused that you think our disagreement stems from my ignorance. Of course, quite the opposite is true: as an impressionable amd impassioned young undergrad a couple of decades ago I was very concerned with all issues of social justice, especially finanacial inequality. However, a lifetime of reading, thinking, living in the real world, and (perhaps most importantly) travelling arond the world led me to modify my conclusion that first-world income inequality was a problem of any meaningful magnitude. It is not. The size of the pie is a lot more important than who gets what, if everybody gets enough, and in the anglosphere, basically everybody gets enough to live comfortably on. I'm a lot more concerned about wildly bimodal income distributions in third-world countries.
7.16.2007 9:07am
paul lukasiak (mail):
"Instead, the article describes what fraction of their income they pay as taxes, as compared to what other earnings quintiles pay as a fraction of their income."

except it doesn't really. Mankiw says that the top 1% pay 31.1% of their income.... but later admits that number is a lie because he treats corportate taxes as if they were income for the rich. The actual percentage of income paid by the top 1% is 21.8%

More to the point, of course, is that Mankiw looks only at the federal tax burden when calculating the tax burden on income classes. When you add the impact of all taxes on people, the numbers look much worse.
7.16.2007 9:13am
paul lukasiak (mail):
Wow... I just read Mankiw, and he's even more intellectually dishonest that I thought. He starts talking about how Warren Buffet claims that his tax burden is 17.7%, and his receptionist's tax burden is 30%... numbers that reflect TOTAL tax burden. But Mankiw claims that Buffets numbers don't stand up to scrutiny, then uses CBO number that do not include federal excise taxes, and assume that if their were no corporate taxes every penny currently paid in corporate taxes would be distributed as dividends.

The idea that corporate taxes come out of the pockets of the rich is dubious at best --- if one wishes to divide up the corporate tax pie, there is an excellent argument to be made that it should go to those who purchase the goods and services sold by corporations --- that businesses include their anticipated tax burden when looking at their projected bottom line, and price their goods and services accordingly.

A question.... has the CBO always included this rather questionable assumption that corporate taxes would be counted as "income" for stockholders? Or is this a more recent phenomenon that came about through GOP control of Congress -- a way of "jiggering the books" to make the tax burden on the wealthy appear higher than it actually is?
7.16.2007 9:29am
David M. Nieporent (www):
For those who contest that the wealthy get more benefit from government than the poor, if the US government collapsed today, how many billions would Bill Gates and Warren Buffet lose? How many billions would someone making $14K a year lose?

Yes, the rich would mostly still come out on top, but they would lose a lot more money than poor people.
In absolute terms, that's certainly true. But they have a lot more money to lose, too.

Government collapse? Like the favorite anti-libertarian example, Somalia? Of course it's better to be rich in the U.S. than rich in Somalia, or poor in the U.S. than poor in Somalia. But you can live comfortably in Somalia if you're rich. How about if you're poor? That's another story. If Gates and the $14K per year person each lose 95% of their income, Gates has lost a lot more, but the poor person is now lucky to survive.
7.16.2007 9:30am
Angus:
Agreed with paul lukasiak. Someone is going to have to hear a convincing argument as to why corporate income taxes should be counted as individual income taxes. For example, even if Microsoft pays a lot of corporate income taxes, it shouldn't count as though Bill Gates personally paid those corporate income taxes. His pay is different than Microsoft's gross income...

Given that this report was issued in the final days of the Republican-run CBO, I'm a little suspicious of what looks to be number-juggling in favor of the wealthy. No one really believes that the CBO is "non-partisan", do they?
7.16.2007 9:30am
byomtov (mail):
Since taxes are on profits, rather than revenues, I don't see how this is possible.

But taxes on profits are, indirectly, taxes on revenue. Profits are a part of revenue. More revenue, in general, means more profit.

the investments that these uber rich have to pay only 15% capital gains on more than compensates for any such advantage by growing the economy in a manner which couldnt be done by consumer spending.

You mean these uber rich people build factories and otherwise start businesses regardless of whether there is a demand for the products? They won't be rich long.
7.16.2007 9:59am
justanotherguy (mail):
It seems to me that they way the CBO does the numbers shows an inherent bias and has a larger effect than corporate taxes. How the CBO treats payroll taxes dramatically changes the results.

If payroll taxes are not included because they are viewed as a forced savings plan and only income taxes are counted then the picture changes dramatically. Including payroll taxes in the totals makes a statement about the government providing more than a safety net but something more socialist/communist.

However if one looks at who funds the costs of government and not the forced retirement and medical system, then looking at income taxes shows that 50% basically pay nothing but have a considerable share of the income. The top portions of the income earners pay fall disproportionate to their share of income.

Of course by adding corporate taxes and payroll taxes the CBO confuses this picture. Hiding the fact that bottom 50% of income earners vote but do not pay for the costs of those votes (payroll taxes come back to bottom income earners due to the progressive nature of SS)is something that one party wants to hide.
7.16.2007 10:09am
Houston Lawyer:
We now have the highest corporate tax rates in the developed world. They are kept this way by the Democratic party, who take their economic view from Marx.

In ancient times, a tax rate of 20% was applied to slaves. Current "progressives" would gladly apply double or triple this rate to the "wealthy" solely to satisy their envy.

I estimate that next year my federal income tax payment will be five times the amount I pay for my home mortgate. I don't feel that I'm getting my monies' worth back.
7.16.2007 10:14am
Jeff Boghosian (mail):
I wonder if "fair share" could be determined empirically by, say, how easy it is to set up meeting with the President or Senator, or the difficulty in getting out of a traffic ticket or a charge for murder. It would still be subjective based on what criteria we choose, but it seems less arbitrary than simply choosing a percentage out of the air.
7.16.2007 10:18am
David M. Nieporent (www):
The idea that corporate taxes come out of the pockets of the rich is dubious at best --- if one wishes to divide up the corporate tax pie, there is an excellent argument to be made that it should go to those who purchase the goods and services sold by corporations --- that businesses include their anticipated tax burden when looking at their projected bottom line, and price their goods and services accordingly.
Add Paul Lukasiak to the list of people who not only flunked Econ 101, but are proud of that fact. You need to re-read Ted Frank's comment above.
7.16.2007 10:27am
Duncan Frissell (mail):
Actually, since the bottom quintile spends twice what they earn and much of that is black market income, the bottom quintile is probably undertaxed. Tax the Poor!
7.16.2007 10:41am
jallgor (mail):
Maybe I missed it but I am surprised that nobody here has questioned the rationale behind a progressive tax system in the first place. Why do people with higher incomes get taxed more or at least why do people believe they should be even if they are not?
7.16.2007 11:21am
Elliot123 (mail):
byomtov: "But taxes on profits are, indirectly, taxes on revenue. Profits are a part of revenue. More revenue, in general, means more profit."

Taxes are levied on profit, which is revenue less costs. Revenue tells us nothing unless we also know costs.

If we consider profits as part of revenue, what do we consider losses to be?
7.16.2007 11:34am
jrose:
It is strange that those who wish to allocate corporate income taxes to the consumer aren't pushing to have those taxes reduced, since by that model they are highly regressive.

By any honest allocation (including allocating some corporate taxes to labor) of federal income, social insurance, corporate and excise taxes, we have a progressive federal tax code. However, maybe Buffet and Reich are including state and local taxes? Certainly, the degree of federal-tax progressivity rises and falls as you would expect based on the who was the President.
7.16.2007 11:34am
frankcross (mail):
First, there's plenty of economics on this that suggests that taxes may be passed forward (or backward or sideways). See for example Don Fullerton's Who Bears the Lifetime Tax Burden? I think it's pretty clear that the tax is not borne entirely by ownership, though the extent of the effect is disputed. Though the analysis is a little higher level than Econ 101.

The corporate income tax is pretty unwise, IMHO, but unlikely to be changed
7.16.2007 11:43am
frankcross (mail):
Ok, this is rich. I found Mankiw on his blog, last year, suggesting that labor bears 70% of the corporate income tax.

He might have mentioned that in his assessment of tax incidence.
7.16.2007 11:47am
byomtov (mail):
Taxes are levied on profit, which is revenue less costs. Revenue tells us nothing unless we also know costs.

Yes, Elliott. I know what profit is.

The point that Ted Frank was getting at is that a new tax that does not vary with revenues should not affect prices, for the reason he cites.

But a tax on profits does, in general, vary with revenue. It's not perfect, and it's indirect, but there is a relationship. A firm that doubles its revenues is likely to increase its profits as well. Not certain, but likely. So it's not accurate to say we know nothing. We just don't know everything.
7.16.2007 11:58am
plunge (mail):
Mankiw was correct on his blog, and obfuscating now. You can't figure out the final tax burden on something just by looking at who pays it.

You also can't honestly assess tax burden just by looking at federal taxes alone (since state taxes tend to be much more regressive) or by ignoring things like implicit subsidies such as not taxing employee health coverage (highly regressive), the EITC (highly progressive by design) and so on.

It's also highly dishonest to talk about tax rates while failing to note who has most of the income. If a small group of people hold the vast majority of the income, then it is pretty much irrelevant whether you want to be "fair" or not: ANY system of taxation that manages to garner even close to enough funds is going to take mostly from the rich by definition: there just isn't enough money elsewhere to be found, even if you tax the poor at 100%.
7.16.2007 11:59am
uh clem (mail):
DO the rich pay their fair share in taxes?

I would suggest that it depends on how one defines "rich".

Looking at the top 1% may be instructive, but it might be more instructive to look at the top 1% of the top 1%. You know, the kind of folks who have the clout to put their own customized tax loopholes into the tax code.

Collecting the data will be hard, as one can't just crunch the numbers from their 1040s.
7.16.2007 12:02pm
Don Miller (mail) (www):
I have a fascination with the whole tax code. I never bought into the whole progressive/regressive naming of tax policy. Progressive was specifically chosen to make people think in terms of "Progress", Moving ahead.

The purpose of the Income Tax system in the US is more about social engineering these days rather than as a means of collecting revenue. "Loopholes" and "tax shelters" are specifically designed to reward certain behaviors and punish others. The classic tax shelter is the mortgage interest deduction. It rewards home ownership. But more than that, it rewards carrying debt on your home. In some cases, people delay paying off their mortgages specifically to avoid losing this tax deduction. It is poor decision making, but you can't prove that to them. (Here you give the bank $3000 in interest and the government will charge you $1000 less in taxes).

The funny thing is income tax isn't a tax on wealth. It is a tax on the accumulation of wealth. It slows the movement of people into the ranks of the wealthy. Super wealthy multi-generational family fortunes aren't taxed on their wealth. They are only taxed on their taxable income per year. Tax shelters such as trusts and municipal bonds protect their wealth.

I am a fan of eliminating all income taxes. I am a fan of a Federal Sales Tax system with my own version of social engineering. I would exempt Food, Medicine, Clothing Items under $100, Primary Home, and Investments (Stocks, Bonds, Mutual Funds, etc).

The truely poor, would pay little to no sales tax because the absolute essentials of life would be exempt. Accumilation of wealth wouldn't be taxed. Spending would be taxed. The more money the wealthy spent, the more they would pay. Tourists from other countries would help support our government. The underground economy would almost completely disappear. It wouldn't matter if employers paid someone under the table because the government would collect their money when the person bought stuff.

Since most states already have a sales tax, the Federal government could greatly reduce its tax collection apparatus by relying on the States to do the tax collection.

It won't happen though. Congress would lose too much power.
7.16.2007 12:06pm
uh clem (mail):
Some posters have suggested that it is unfair to base the tax rate on one's income level.

Is it also unreasonable to base the tax rate on how one earned the money? That is, if I dig a ditch for Eugene and he pays me $1000, I've gotta pay income and payroll taxes on it. But if he just gives it to me as a gift, the rate is zero. In between you've got dividend income (not subject to payroll tax), capital gains (taxed at a lower rate), estate tax (low rates with high deductable at the moment).

What difference should it make how you got the money? Shouldn't income be income for tax purposes, regardless of the method of acquiring it?
7.16.2007 12:09pm
Elliot123 (mail):
If we want to talk about passing the tax burden around, then I guess we can also say labor passes the burden back to its employers through its wages. Then we can say employers pass it to consumers through prices. Then consumers pass it back to employers through wages...

The notion of passing the burden can be used to support any player in the game. Just stop passing it where it supports your position.
7.16.2007 12:11pm
Ted Frank (www):
A tax on profits doesn't vary with revenues in that a profit-maximizing price at a 0% tax rate is going to be the same as the profit-maximizing price at a 30% corporate tax rate, ceteris paribus.

Mankiw's point about the 70% is that the corporate income tax imposes costs on labor because of adjustments to the location of capital that are twice that of the tax actually paid by capital, not that labor directly pays the tax. The two points are not at all inconsistent: the corporate income tax is simply that inefficient.
7.16.2007 12:18pm
TyWebb:

Look up the difference between "justice" and "mercy": I took the "fair" in this discussion to be about the former, not the latter. That the poor receive services they don't pay for is, of course, not "fair", it is an instance of mercy. Or, if you're more realistic, vote buying in a democracy. But there isn't anything "fair" about charging people for goods they don't consume, don't need, don't want, and may find actively offensive, just because you can kill them if they refuse. "Progressive" taxation is an exercise of power, not morality, and the terminology we use to discuss taxation is the left's greatest triumph.

This ignores the possibility that not having to deal with human suffering is a public good. I don't particularly like panhandlers. Nor do I enjoy seeing someone sleeping on cardboard as I walk home from a night out. If we are to believe certain studies that link poverty and crime (e.g., Steven Leavitt), my concern with keeping people out of the poverty line grows.

Also, (and I realize this is largely hypothetical), if we agree that all men are created with the same potential for greatness, while that does cut in favor of merit determining income, there has to be some concern for giving those individuals who have little control over household income (i.e., children) the chance to be educated at the same level regardless of the economic status of their parents. With property taxes controlling school funding, this seems a difficult proposition. I'm all for competition among adults, and actually, I'm all for it among kids, too. In a discussion about income distribution you can't ignore that (a) education leads to higher income, (b) children of wealthy families have far less substantive and procedural obstacles to education at every level than poor children, (c) income and wealth distribution causes this inequity, and (d) because of the inequity, children of higher families are more likely to get an education regardless of their merit for actually deserving the educational appointment.

See that leveling the playing field for children regardless of income level has benefits for all Americans as well--the merit of people in higher education increases, and the utility of those people in the workforce increases on a commensurate level. Surplus increases.

Don't suggest that income distribution doesn't benefit the rich and middle class at all--it may not benefit you the way you want it to, and it may not seem "fair" that you work for all your money and someone gets a handout, but there's definitely a public good in there somewhere.
7.16.2007 12:20pm
Aultimer:

Houston Lawyer:

I estimate that next year my federal income tax payment will be five times the amount I pay for my home mortgate. I don't feel that I'm getting my monies' worth back.


How much would you pay to have the private army defend you from communist China taking everything you own for the benefit of the people?

Anyway - the top 1% really do have alternatives if they don't like the tax deal they're getting. The transaction costs aren't workable for most of the income spectrum, but if the tax burden is so bad, the wealthy can move - especially the portion that makes money chiefly from investment as that gives a good bit more freedom in selecting a domicile. Since they aren't fleeing in significant numbers, I'd say the tax burden on the top 1% is about right, maybe a little low on investment income.

Oh, any "tax burden fairness" analysis that doesn't consider local sales taxes is pointless.
7.16.2007 12:39pm
EIDE_Interface (mail):
Justin (mail):
Brett,

Since property is a creation of the state, I think you should rethink your argument quite a bit.
7.15.2007 7:14pm


Well that's pretty Marxist. Has no place on a libertarian blog such as this.
7.16.2007 12:42pm
EIDE_Interface (mail):
TyWebb:

People pandhanldling or living in a cardboard box are mentally ill. There are plenty of shelters for those needing assistance, those on the street CHOOSE to be there. They are mentally ill, and/or drug/alchohol addicts. Prove me wrong.
7.16.2007 12:44pm
Bruce Hayden (mail) (www):
Surprisingly a lot of good thoughts here, despite being a contentious subject for a mixed crowd politically.

First, I really don't know the best way to handle FICA, etc. If we consider them a tax up front, then they should be a negative tax when the benefits are received. But that would mean that seniors would have a negative net tax rate. Of course, many of think that they are a drag on the economy, but...

Secondly, for a long time, I didn't buy into the redistributionist argument. To me, giving a lot of people a free ride, because they don't make as much money, but do make significant demands on public goods like police, fire, etc. isn't fair. Why shouldn't everyone be paying at least something for their public goods?

But I am not reading an interesting economics book, with a title something like, Winner Take All Economy, and the general thesis is that in the past, a lot of people could make a living, or at least some money, by being locally good at something. Thus, you had the best singer in the county getting asked to sing at weddings, etc. Now, they have been relegated to obscurity. Rather, we listen to the best in the country, or maybe even the world.

The result is that the best in the county gets nothing, but the best in the country gets much of what was going to the best in the county around the country. Ditto for theater, sports, etc. Seventy five years ago, the pretty good actor could make a marginal living acting. Now, we have thousands of aspiring actors making nothing, and the top actors making tens of million per movie.

If the ones winning in this sort of competition were really outstandingly better, then the fact that they walked away with most of the money wouldn't be worrisome. But most often, they aren't. The difference in a lot of Olympic events between Gold and Silver is less than a second. A fraction of one percent. And the gold medal winner gets the endorsements, while the silver medal winner often gets his name in history books. All for a fraction of a second, getting up on the wrong side of the bed, or even just what seed they drew.

After reading that book, I have much less problem with overtaxing the big winners in our economy. Not the attorney making $200k, but rather the news anchor making $2 million. Or the quarterback making $10 million. Partly, because the extra money is a windfall, due to the winner take all aspects of our economy, and partially because tax there is unlikely to affect incentives - whether that quarterback takes home $10 million or $7 million won't really affect how many HS students try to follow in his footsteps.

And maybe that could be the criteria - where on the curve is someone - is the curve somewhere near a straight line, where marginal incentives are important, or where the curve is nearing vertical, where marginal incentives are irrelevant.
7.16.2007 12:46pm
rarango (mail):
Dont we have to consider, as Paul L suggests, the total tax burden? Federal, state and local; sales and excise taxes. Federal taxes may take up a portion, but I assure you that my city and county taxes are nearly equal to the federal tax.

And would someone please tell me: what is the appropriate tax burden that should be paid by "the rich."
and to make your job easier, do it as a percentage of total wealth, not income. And after you do that, justify if for me and a waiting world.
7.16.2007 12:51pm
JosephSlater (mail):
I'm no libertarian, but I would think that those who were might think that claiming that certain ideas "have no place" on a blog (to they exent that claim implies such thoughts shouldn't be posted) isn't particularly "libertarian."
7.16.2007 12:51pm
JosephSlater (mail):
So who, exactly, is going to pay the $500-700 billion we've already spent on the Iraq war? I mean, Bush can pretend it's not a budget item and all, but in the real world, that money needs to come from somewhere.
7.16.2007 1:03pm
TyWebb:
EIDE Interface:

People pandhanldling or living in a cardboard box are mentally ill. There are plenty of shelters for those needing assistance, those on the street CHOOSE to be there. They are mentally ill, and/or drug/alchohol addicts. Prove me wrong.

I don't have to, since what you said has nothing to do with my point. I don't care that they choose to be there. I simply don't like that they're there. I get utility out of the government paying for basic shelter and treatment of their disorder or addiction, especially the folks who have developed a drug problem (see studies linking poverty and drug use to street crime). Now, at least part of that utility might be seen as paternalistic, but I'm not sure that paternalistic utility isn't at times just a derogatory phrase for public good.

Further, the fact that people choose to be homeless does not mean that everyone chooses to be poor. I simply chose one of many examples of phenomena that lead me, as an affluent person, to prefer income redistribution. Care to comment on my other example, the extra leg up that rich children get and don't deserve? Or were you just looking for a bit of angry snark to start your afternoon?
7.16.2007 1:05pm
Houston Lawyer:
Missing in this discussion is the fact that the vast majority of the taxes we pay to the federal government is just taking money away from productive people and giving it to others deemed to be more deserving. 95% of the tax receipts come from the top 50% of the earners. We have large portions of the population in favor of higher taxes because they don't pay them.

Higher tax rates also lead to tax avoidance measures, both legal and illegal. Lower rates raise compliance. Lower rates that apply equally put everyone in the same position.
7.16.2007 1:08pm
Elliot123 (mail):
That money will come from the general fund which is supported by income tax, corporate tax, Social Sceurity tax, excise tax, estate tax..... It's impossible to exactly isolate it to any single sector sector.
7.16.2007 1:12pm
plunge (mail):
A great and fun book that deals with this subject in a pretty contentious and engaging way is Fair Play, by Steven Landsburg.
7.16.2007 1:51pm
markm (mail):
Ted Frank:

A tax on profits doesn't vary with revenues in that a profit-maximizing price at a 0% tax rate is going to be the same as the profit-maximizing price at a 30% corporate tax rate, ceteris paribus.

That 30% tax will often discourage investment in the first place. That is, if I needed a payback of $X per year on a proposed investment of $Y, now the company must make (X/0.70) in profits for X to be left to pay me after taxes. You get smaller or fewer production plants, running less efficiently with older equipment and less of it. You may see the same effects on distributors and stores. You end up with fewer and probably lower-quality goods selling for a higher price. It's mathematically possible but rather unlikely that this will balance out to the same profits, but it's certainly going to hurt the consumers who pay higher prices for fewer goods. Workers will probably be hurt also, since there will be more pressure on the companies to cut back costs, including wages and benefits.
7.16.2007 2:03pm
byomtov (mail):
A tax on profits doesn't vary with revenues in that a profit-maximizing price at a 0% tax rate is going to be the same as the profit-maximizing price at a 30% corporate tax rate, ceteris paribus.

I don't see why.

Suppose you buy widgets for $10 and sell them for $15, making a gross profit of $5/widget. Out of this you have some fixed expenses to pay that do not vary with the number of widgets sold. There is no corporate tax. Presumably you have determined that $15 is the profit-maximizing price. If you try to raise the price sales will drop too much, and lowering it will not increase sales enough to compensate for the lower revenue.

Now suppose a 20% tax is imposed on profits. Each additional widget you sell for $15 costs you a dollar in tax. There is no reason at all why the profit-maximizing price should still be $15. In fact, your marginal cost curve has risen, so the price will be higher than before.
7.16.2007 2:07pm
Maureen001 (mail):

Confused:
It's rough trying to live on $800,000. I know personally . . . because my college buddies who went to WS tell me so. (Yes, as a Wharton undergrad, I foolishly went to law school instead of Morgan Stanley.)

Indeed, Barry P., it sure is tough making a go of it on that amount after taxes. Damn we're screwing these people.

No doubt if we cut taxes and give my friends, say, $1 million after taxes they'll feel like the government isn't stealing them blind.

its great that you feel youre a morally superior human being to your morgan stanley counterparts. However why don't you just donate 700k of your 800k to the govt to make up for what you obviously feel your elitist, poor hating friends don't pay when they should have to?

Let get Uncle Warren on this train too--he's a rich guy who has all he could want, why doesn't he just donate most of his fortune to the good ol'USA to cover extended healthcare?


Dingdingdingding!

Income tax calculations are a mandatory minimum number; anyone can pay more than that sum, if he or she so chooses. If Mr. Buffet feels so badly about the amount he is paying, he is certainly free to pay more. That is his choice to do or not do.

However, when he or others propose that anyone else should pay more money in order to assuage the sense of guilt they themselves feel, in lieu of simply writing a bigger check themselves, that is out of line, IMO: get your grubby paws out of my pocket and keep them out!

I'd be willing to bet that mine is not the uncommon sentiment.
7.16.2007 2:24pm
jrose:
However, when he or others propose that anyone else should pay more money in order to assuage the sense of guilt they themselves feel, in lieu of simply writing a bigger check themselves, that is out of line, IMO: get your grubby paws out of my pocket and keep them out!

I'd be willing to bet that mine is not the uncommon sentiment.


Maybe that is why Buffet is calling for legislation that requires you to pay more (thus allowing his secretary to pay less)?
7.16.2007 2:36pm
paul lukasiak (mail):
Add Paul Lukasiak to the list of people who not only flunked Econ 101, but are proud of that fact. You need to re-read Ted Frank's comment above.

please see Byomtov's comment above for a succinct explanation of why Ted Framk is full of it.

Or keep pretending that companies don't do "after tax" profitability projections.
7.16.2007 2:37pm
Jay Myers:
TyWebb:

This ignores the possibility that not having to deal with human suffering is a public good. I don't particularly like panhandlers. Nor do I enjoy seeing someone sleeping on cardboard as I walk home from a night out.

But you can give to private charities or stoop to helping people yourself in order to attain your preferences. Suppose I don't mind stepping over human detritus, to adopt the stereotypical liberal view of Republicans. By what justifications should I be taxed in order to pursue your preferences? What if I view mandatory taxation to support social goals that I oppose or which could be pursued privately to be robbery at gunpoint? Why must I give money to the federal bureaucracy?

If we are to believe certain studies that link poverty and crime (e.g., Steven Leavitt), my concern with keeping people out of the poverty line grows.

To paraphrase Mark Twain, suggesting that poverty is linked with crime is a slander on the poor. Rich and middle-class people commit plenty of crimes and money is often the motivation.
7.16.2007 3:11pm
Crust (mail):
Is Mankiw just playing dumb when he asks the following?
One might wonder how Mr. Buffett gets away with a tax rate of only 17.7 percent, while a typical millionaire is paying so much more [31.1% for the top 1%].
As surely he knows, the 31.1% number from the CBO includes an imputed share of corporate taxes, whereas Buffett's 17.7% number does not. Indeed, Berkshire Hathaway -- the source of substantially all of Buffett's income -- pays a higher effective tax rate than many corporations. So if you were to make an apples-to-apples comparison according to the CBO's definition, Buffett's tax rate would almost certainly be much more -- not less as Mankiw strangely claims -- than the average for the top 1%.
7.16.2007 3:45pm
Crust (mail):
Argh, let me take back the previous comment, since Mankiw goes on to make more or less exactly the same point I did! Next time I should read the entire article before commenting...
7.16.2007 3:49pm
Aultimer:

Maureen001

Income tax calculations are a mandatory minimum number; anyone can pay more than that sum, if he or she so chooses. If Mr. Buffet feels so badly about the amount he is paying, he is certainly free to pay more. That is his choice to do or not do.


Mr. Buffet gives away LOTS of money he has no obligation to give. However, he's clearly libertarian enough to believe that the government isn't the best organization to distribute his gifts, so he rationally does otherwise.
7.16.2007 4:12pm
markm (mail):
Maybe that is why Buffet is calling for legislation that requires you to pay more (thus allowing his secretary to pay less)?

He could just raise his secretary's pay, giving him or her more money after taxes as well as putting more money into the federal general fund. Repeat for the rest of his employees, and it ought to take care of Buffet's guilt without taking money away from the rest of us.

Not that I agree that giving the idiots and control freaks in DC more money to play with is a good thing...
7.16.2007 4:21pm
Crust (mail):
markm:
He could just raise his secretary's pay, giving him or her more money after taxes as well as putting more money into the federal general fund. Repeat for the rest of his employees, and it ought to take care of Buffet's guilt without taking money away from the rest of us.
Oh come on. Buffett's issue is not his secretary or his employees more generally; he just used his secretary as an example. He believes that the after-tax income distribution is too skewed and this should be corrected in part by raising taxes on the wealthy. Now it's fine to disagree with him, but there's no point to drawing cartoons.
7.16.2007 4:39pm
Hattio (mail):
Elliot state;

Taxes are levied on profit, which is revenue less costs. Revenue tells us nothing unless we also know costs.

If we consider profits as part of revenue, what do we consider losses to be?

Oooh teacher, I know. Costs minus revenue? Just because some firms don't make a profit doesn't mean that profit is not a part of revenue. Manufacturing is a part of costs, but just because some firms don't do any manufacturing doesn't make this any less true.
7.16.2007 4:47pm
jrose:
Presumably you have determined that $15 is the profit-maximizing price. If you try to raise the price sales will drop too much.
Does that mean that (15-10)X > (15+a-10)Y, where X is the number sold at $15 and Y is the number sold at $(15+a)?
Now suppose a 20% tax is imposed on profits. Each additional widget you sell for $15 costs you a dollar in tax. There is no reason at all why the profit-maximizing price should still be $15.
Wouldn't it still be true that 80%*(15-10)X > 80%*(15+a-10)?
7.16.2007 5:19pm
Steve H (mail):

Houston Lawyer:

I estimate that next year my federal income tax payment will be five times the amount I pay for my home mortgate. I don't feel that I'm getting my monies' worth back.


Houston Lawyer, if you are a lawyer, aren't you making most of your money from the fact that the government provides us with a legal system? If that is the case, then I think you're probably getting a pretty good deal for your tax dollar.
7.16.2007 5:26pm
chris c:
Efforts to put the top rate much higher than 35% always result in creative tax dodges (often created by very liberal minded lawyers). better to make the system as basic as possible, w/ rates that don't beg for dodging but rather encourage compliance.
7.16.2007 7:02pm
Public_Defender (mail):
By what justifications should I be taxed in order to pursue your preferences? What if I view mandatory taxation to support social goals that I oppose or which could be pursued privately to be robbery at gunpoint? Why must I give money to the federal bureaucracy?

It's called democracy. I have to pay taxes to support the death penalty, even though I find it morally repugnant. Those who oppose Bush's war on whatever-he's-fighting-now have to pay taxes to support the war. I have to pay for roads to places I don't think need roads. Etc., etc., etc.

As to whether the goals could better be pursued privately, well, that's a democratic decision, too. As others have pointed out, we could use private armies to enforce personal safety. In some Muslim countries, a lot of criminal "justice" is meted out privately.

Nothing is really an inherent government function. Deciding whether to move something into the governmental sector is a policy decision.

As Scalia might say, if you don't like what your taxes pay for, pass a law.
7.16.2007 7:43pm
CrosbyBird:
I am a fan of eliminating all income taxes. I am a fan of a Federal Sales Tax system with my own version of social engineering. I would exempt Food, Medicine, Clothing Items under $100, Primary Home, and Investments (Stocks, Bonds, Mutual Funds, etc).

The truely poor, would pay little to no sales tax because the absolute essentials of life would be exempt. Accumilation of wealth wouldn't be taxed. Spending would be taxed. The more money the wealthy spent, the more they would pay. Tourists from other countries would help support our government. The underground economy would almost completely disappear


You had me until the very last line.

With the federal sales tax you are proposing, the underground market would explode. People do all sorts of things to avoid sales tax already; imagine if the sales tax was in the 15-20% range as opposed to the roughly 5-8% people pay now. Smuggling would be insanely profitable.
7.16.2007 7:47pm
frankcross (mail):
In a perfectly competitive, self-contained market, prices will be set at cost + the minimum necessary profit for investors, given the risks of investing. As investing is taxed, that profit is reduced, requiring an increase in price to compensate for the taxation.

Now, our markets are not perfectly competitive, nor are they self-contained. But the general principle still applies.
7.16.2007 7:55pm
Elliot123 (mail):
byomtov:"Now suppose a 20% tax is imposed on profits. Each additional widget you sell for $15 costs you a dollar in tax. There is no reason at all why the profit-maximizing price should still be $15. In fact, your marginal cost curve has risen, so the price will be higher than before."

In the model presented, the marginal cost curve doesn't move with taxes. It is fixed and flat. If the profit maximizing price is $15 with no tax, then the price that will maximize 80% of profit will be the same.

Hattio: "Just because some firms don't make a profit doesn't mean that profit is not a part of revenue."

It is unfortunate that some very intelligent people have to be reminded of elementary principles of economics and accounting. Sometimes a teacher is needed. Profit is a function of both revenue and cost. It's not a part of either. Revenue and cost are independent variables which must be known before profit can be derived.
7.16.2007 8:02pm
Hattio (mail):
Elliot,
Revenue is the amount of money you bring in. If you take Revenue and subtract costs, you get profit. Thus profit is a subset of revenue. Another way to state this is that profit is a part (component) of revenue.
However, nothing in what I said implies that Revenue and costs aren't independent variables that you have to know before you can determine your profit. Indeed, the fact that you take revenue, and subtract costs in order to get profit shows you that profit is a part of revenue...it's precisely that part which is not costs.
7.16.2007 8:59pm
TyWebb:
Jay Myers:

But you can give to private charities or stoop to helping people yourself in order to attain your preferences.

I do these things. The idea that you would lecture an anonymouse person on their civic responsibility without seeing their pro bono work or philanthropy reeks of presumption, or at least bad argument.

Suppose I don't mind stepping over human detritus, to adopt the stereotypical liberal view of Republicans. By what justifications should I be taxed in order to pursue your preferences? What if I view mandatory taxation to support social goals that I oppose or which could be pursued privately to be robbery at gunpoint? Why must I give money to the federal bureaucracy?

In addition to performing the above mentioned civic tasks, I, along with a concerted portion of Americans, vote for politicians that enact policies of wealth distribution on a national level because that is our preference. There was a majority of them in the House for approximately 40 years until the mid 90s. You must give money to the federal bureaucracy because it asks for that money from its citizenry under duly enacted laws. Don't like it? Vote for politicians that will change it or get out. I don't like plenty of laws that have been enacted in the past decade or so, but I follow them at gunpoint, as you say. Might makes right.

Now, I'm not suggesting that might makes right in a moral sense. Nor, obviously, am I condemning your ability to make policy or morality arguments in favor of doing away with progressive taxation. My argument was simply this: people on this thread were suggesting that no rich person gets utility out of social engineering, and therefore they shouldn't have to pay for it. I suggest that perhaps, many of them do get utility out of the social engineering, and they simply haven't thought about it that way. There may be people who have considered the issue and still don't believe they are maximizing their utility, but so far, they haven't been heard loud enough to change the status quo.

To paraphrase Mark Twain, suggesting that poverty is linked with crime is a slander on the poor. Rich and middle-class people commit plenty of crimes and money is often the motivation.

Now there's the mark of someone who doesn't care about hard evidence--a quotable quote. I'm betting you're a pain to watch baseball with: "You don't need on base percentage and a good range factor to be a good shortstop--look at David Eckstein! He's clutch!" Statistics will be much more helpful to a valid point than Mark Twain quotes.

FYI, the Bureau of Justice Statistics reports a significantly higher rate of property crime against those with household incomes of $7500 or less. Fairfax County and Long Island have high median incomes and crime rates of less than half the national average. Multiple studies have linked income inequality and homicide while controlling for multiple conceptually relevant statistics. E.g., Matthew R. Lee and William B. Bankston, Political Structure, Economic Inequality, and Homicide: A Cross-National Analysis, 19 Deviant Behavior 27 (1999). Of course rich people commit crimes. It's just they are far less likely to do it and to be victimized by it than poor people, and are far less likely when society is less economically polarized. If that's a slander on the poor, I'm sorry. I personally don't think it is--it simply demonstrates how psychologically damaging poverty really is.

Speaking of baseball, my Pirates are on. Talk about self-inflicted psychological damage.
7.16.2007 9:06pm
juris_imprudent (mail):
Quoting the Bankston abstract "By conceptualizing homicide as a means of conflict resolution, we expect countries with a more centralized state structure to have lower average homicide rates than countries with a decentralized democratic political structure owing to the active role of the state in resolving disputes in centralized political environments."

Yes, that is how a sociologist might "conceptualize" homicide - but not anyone with a lick of common sense.
7.16.2007 11:03pm
Smokey:
The Durants made a pretty convincing case (in 1944) about gobs of wealth to small numbers of citizens leading to collapse of the Republic.
Well, the Durants' case sucks.

The Roman Republic was 400 years old by the time of Christ, and still going strong. Wealthy citizens had nothing to do with the collapse of Rome -- which lasted another 400 years A.D. The reasons for the collapse are explained very well in Gibbon's Decline & Fall.

Will & Ariel D. were socialists, didn't you know? So of course they would blame Rome's collapse, after 800 years, on wealthy citizens.

American socialists are working hard to bring down this country after only ~200 years, so capitalist Rome is still in 1st place.
7.17.2007 12:11am
Christopher Cooke (mail):
I think the article is good as a starting point for a debate: what is a "fair" taxation system? do we have one now? if not, what makes it unfair?

Personally, I think the transaction costs of our current taxation system are too high of a price to pay for the "social justice" that comes from the wealth redistribution. I would either enact a flat tax, with no deductions, or a pure sales tax system. The government is free to pursue whatever social justice goals we voters ask them to do, just leave the tax code out of social justice and social engineering, because the tax code is an inefficient way of redistributing wealth.

As for the argument that property is the creation of the state, you either believe it is created by man and government, through agreements with one another (the social contract theory) or it is created by god --- the natural law theory. I favor the social contract theory. Once you accept that premise, the notion that property is created by the system of laws we enact and enforce, and therefore subject to modification by such laws, is not radical. This doesn't mean you take away someone's property for no reason, or to give to someone else; it is just a recognition of where these rights come from. That is hardly a communist concept.

On the Econ 101 point about profit vs. revenue, during the 1990s, many firms maximized revenues, to obtain an inflated stock price (and thereby maximize the wealth of the corporate officers), without making any profits whatsoever. I don't see how you can say that profits are a "component" of revenue because you can have alot of revenue, or increasing revenue, but no profits. Indeed, I recall that one famous economist, who wrote my college textbook (Baumol) posited that many corporate leaders sought to maximize revenue, not profit. I think he may have been right.
7.17.2007 1:30am
plunge (mail):
Again, the key point is that when you tax MONEY (and not, say, blood or hair or leisure), then any system of taxation that actually raises a significant amount of funds is going to take most from the people who have most of the money. It's all well and good to say that such and such percentage of people pay most of the taxes, but it doesn't really tell you much of anything unless you know how much of the total wealth of society that percentage controls compared to the amount of money you need in taxes.

Fair Play by Landsburg has a great parable on this: imagine three people: one who likes to accumulate material wealth, one who likes to enjoy leisure and live simply, and a third that is so disabled that they cannot fend for themselves.

Of the first two people, neither is better or worse than the other: they enjoy two different lifestyles and that's great: they each do best by doing what they like, and both can be happy.

But if we suppose that "society" has a moral obligation to care for the third person, then who pays?

Well, if something is a moral obligation, then it should fall on everyone equally. But here we hit a snag. The first person is the only one who has any money in the first place. So any tax system that's high enough to pay for the care of the destitute man is going to fall overwhelmingly on the hard worker, taking from him the things he enjoys. We might say that the second person should pay just as much, but he doesn't HAVE as much, not in terms of taxable wealth. What that person has is leisure, and if we are going to tax away what little money they do have, then they aren't going to bother making much in the first place. Now, we could imagine taxing their leisure instead, but what does that really mean? It means basically forcing them to work for the government: pretty much serfdom.

We're left with a pretty lousy situation. Since I defined fairness as taking from everyone equally, but I also recoil at slavery, for all practical purposes I don't think there IS a happy solution to the problem. The hard worker is going to get the shaft, and there isn't much that can be done about it other than trying to lower the necessary revenue (i.e. lowering spending).

Unfortunately, most of the people in our society who claim to want to reduce the size of government are frauds: they want to lower tax rates for short term political advantage, but simply do not have the will or the sincere interest in lowering spending, making the current tax rate irrelevant (since lower taxes today just means more borrowing today and necessarily higher taxes tomorrow). So, like it or not, no matter what you think is "fair," the people with most of the money are going to pay most of the taxes, and no matter what you do with tax rates in the short term, the amount they ultimately have to pay isn't going to change.

The End.
7.17.2007 4:45am
K Parker (mail):
TyWebb, the statement "all men are created with the same potential for greatness" isn't largly hypothetical, it's highly ludicrous and easily refuted by a few moment's observation. Are you confusing "equality before the law" with actual capability or something?

And you're missing the point about homelessness and mental illness, which is there is already help available for lots of these folks, who by the exercise of their freedom pass it up. Are you calling to reinstate easier involuntary-committment laws?
7.17.2007 5:01am
markm (mail):
juris_imprudent:

Quoting the Bankston abstract "By conceptualizing homicide as a means of conflict resolution, we expect countries with a more centralized state structure to have lower average homicide rates than countries with a decentralized democratic political structure owing to the active role of the state in resolving disputes in centralized political environments."

Yes, that is how a sociologist might "conceptualize" homicide - but not anyone with a lick of common sense.

Homicide is the ultimate method of conflict resolution at an individual level - once you kill someone, you'll have no more conflicts with them. Successful societies put a lot into making murder unattractive: teaching that it's one of the worst violations of the moral code, giving it the heaviest penalties in criminal law, and giving catching murderers top priority in police investigations. All this is only partially successful, because murder is so effective at solving conflicts that people are apt to take the risk of thereby getting into a worse conflict with the entire law-enforcement system...

Where Bankston departed from common sense is in thinking that a centralized government is a more effective conflict-resolution mechanism than a decentralized system.
7.17.2007 9:28am
byomtov (mail):
Wouldn't it still be true that 80%*(15-10)X > 80%*(15+a-10)?

Who are you going to trust, me, or those Arabs who dreamed up algebra?

Actually, I have to concede my example was wrong. I was thinking of the case where the tax is a fixed amount, like a sales tax.

Sorry for the confusion.
7.17.2007 11:20am
Seamus (mail):
Since property is a creation of the state

Only when it's a government license (such as a copyright or patent) posing as property.
7.17.2007 12:18pm
yclipse (mail):
I think it's interesting that people always talk about others not paying "their fair share". Never "my fair share".
7.17.2007 6:14pm
PubliusFL:
"With the federal sales tax you are proposing, the underground market would explode. People do all sorts of things to avoid sales tax already; imagine if the sales tax was in the 15-20% range as opposed to the roughly 5-8% people pay now. Smuggling would be insanely profitable."

With all the stuff Don proposed exempting, the rate would likely be a lot higher than 15-20%. And that would just be the FEDERAL rate, paid on TOP of the 5-8% in state and local sales taxes.
7.18.2007 12:20pm