Static Government Means Dynamic Citizens.

Static Government Means Dynamic Citizens
How Obama gets the class-warfare math wrong.
by John Hayward 09/20/2011

Since the President has kicked off another round of class warfare tedium by calling for the rich to “pay their fair share,” it’s a good time to review how much “the rich,” at various levels of evil, actually fork over in taxes. From a summary of calendar year 2008 by The Tax Foundation:

Each year from 2005 to 2007, the top 1 percent's constantly growing share of income earned and taxes paid set a record. That trend reversed in 2008. In fact, the income share for the top 1 percent of tax returns was lower in 2008 than in 2000, largely due to differences in capital gains.

Another indicator of this reversal in the income and tax shares of the top 1 percent is that during 2007, the top 1 percent had actually paid more in federal income tax than the bottom 95 percent, a comparison that was much remarked on a year ago. But the diminished income of the top 1 percent in 2008 means that the comparison no longer holds. During 2008, the bottom 95 percent (AGI under $159,619) paid 41.3 percent of the total collected, a larger share than the 38.0 percent paid by the top 1 percent (AGI over $380,354).

The top-earning 5 percent of taxpayers (AGI over $159,619), however, still paid far more than the bottom 95 percent. The top 5 percent earned 34.7 percent of the nation's adjusted gross income, but paid approximately 58.7 percent of federal individual income taxes.

For the past few years, the IRS has also been presenting data on a small subset of the top 1 percent, the top 0.1 percent (the top 10 percent of the top 1 percent). In 2008, this top 0.1 percent filed 140,000 tax returns, reporting nearly 10 percent of all adjusted gross income earned and paying approximately 18.5 percent of the nation's federal individual income taxes. The average income for a tax return in the top 0.1 percent was $6.0 million in 2008, while the average amount of income tax paid was $1.36 million, indicating an average effective individual income tax rate of 22.7 percent. Both the income figures and tax figures for this group in 2008 were down significantly from 2007 levels.

The adjusted gross income for the top 5% is $159,619, while the top 1% begins at $380,354. Since this is adjusted gross income, the top 5% tracks fairly closely with the greedy “millionaires” Obama wants to hit with higher taxes. They earn 34.7% of the nation’s income, and pay 58.7% of income taxes… but they’re not “paying their fair share.”

Meanwhile, the bottom 50% of income earners account for 12.75% of the nation’s adjusted gross income, but paid only 2.7% of income taxes.

As always, good luck getting President Obama, or any other socialist, to tell you exactly what the optimum “fair” amount paid should be, or what logical calculation of “fairness” helped them arrive at that number. You won't have any more success getting them to explain why such a large number of people should be exempted from paying income taxes entirely. “Fairness” is a crowbar used by greedy politicians to bludgeon outnumbered segments of the population. As you can see, it has nothing to do with matching the percentage of income earned to the amount of government “burden” income groups are expected to shoulder.

Not only is our “progressive” tax system grossly unfair, but too much of it has been hidden from taxpayers. This is especially evident in the case of corporate taxes and capital gains taxes.

Corporate taxes are paid by consumers, not corporations. The tax amounts are built into the purchase price of goods and services, as companies pass them along to customers. Because the vast majority of Americans never see these taxes, they don’t have the knowledge required to arrive at informed opinions about raising them. If all corporate taxes were instead collected in the manner of sales tax, as a line item on your receipt at the time of purchase, Americans would be much less sanguine about paying the highest corporate tax rates in the world.

Capital gains taxes are also hidden, because they are a double tax. Dollars have to be earned before they can be invested. These dollars are taxed once when earned, then again when investments earn a profit. Yet another layer of taxation is hidden within the effect of inflation upon capital gains. It can take a long time to see profit on an investment, during which time inflation eats away the value of the invested dollars… but the capital gains tax doesn’t take that into account.

This leaves most Americans reacting to class-warfare appeals based only on the portion of the tax system that Big Government acolytes choose to show them. Even then, the language of “fairness” is used to obscure how much each income group is actually paying, while terms like “millionaire” are twisted to distort the true identity of income groups.

Stripping away this confusion would lead us to a more static method of collecting government revenue. As it stands, elaborate deduction mazes, alternative minimum tax snake pits, and confiscatory tax rates produce a lot of dynamic behavior. In other words, people with money work very hard to avoid paying those high tax rates, and most of their avoidance strategies result in less of the job-nourishing economic growth we need.

It’s also immoral, and contrary to the spirit of our Constitutionally limited government, to turn the process of taxation into a desperate flight through the murky woods of an incomprehensible, ever-shifting tax code. The process of leveling taxes and granting exceptions should not be a source of power for politicians. It should be a simple, transparent process in which free people decide how much they are prepared to pay, and what they expect their government to accomplish with the funds it is given. The process of paying lower, flatter, simpler taxes becomes static: taxpayers don’t dramatically change their behavior to get around the tax code.

Taxpayers should be the masters of the government they have consented to fund, not the confused and frightened targets of political fox hunts. We should be looking for the most straightforward and painless way to fund the necessary expense of government, not listening to political elites lecture us on how much of our property we should be allowed to keep. Taxation, in other words, should be a means, not an end. If Americans would be a dynamic people, it’s time for them to decisively reject class warfare, and insist on a static government.
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To read another article by John Hayward, click here.