President Obama and congressional Democrats are avidly pursuing a sweeping agenda they claim is justified by the need for greater “fairness.” This invites scrutiny of the various programs to verify if they do, in fact, promote fairness.
“Free from bias, dishonesty, or injustice” is the standard meaning of fairness, which requires treating people similarly, perhaps not identically, but certainly not with purposeful difference. Apply this test to the tax changes proposed in President Obama’s budget, and it seems clear he wants to punish higher-income earners for the benefit of others, namely lower and middle-income earners.
Let’s understand the pre-Obama tax status quo. In 2006, the most recent year for which comprehensive IRS statistics are available, there were 135.7 million tax returns with a total of $8.1 trillion in income (technically called adjusted gross income) and a total of $1.0 trillion paid in income taxes after consideration of tax credits.
The top one percent of earners claimed 22.1 percent of all the adjusted gross income that year, but they paid 39.9 percent of all income taxes.
In other words, the richest of the rich in 2006 paid nearly double the proportion of their income in income taxes. Such a disproportionate burden makes it tough to argue that the tax system is rigged to benefit the rich.
Perhaps more striking is the burden placed on the 13.8 million earners who represent the top 10 percent of Americans. In 2006, the top 10 percent earned almost half of all the income (47.3 percent) but paid a full 70.8 percent of all income taxes. Put differently, 13.8 million taxpayers paid almost three-quarters of the entire income tax bill in 2006.
Another way of looking at the burden of income taxes is by the average tax rate faced by different groups. The average tax rate (ratio of income taxes after credits to adjusted gross income) for the top one percent was 22.8 percent. For the top 10 percent it was 18.9 percent. For the bottom 50 percent it was a near non-existent 3.0 percent. The figures make it abundantly clear that income taxes, the largest source of government revenues, are markedly punitive the more one earns.
The normal response from those who want yet higher taxes on the wealthy is that lower and middle-income earners also pay payroll taxes, which is true. However, payroll taxes largely go to fund what is supposed to be a social insurance fund. The grand bargain behind the program, as espoused by FDR, is that people pay into the fund and then receive a near-proportionate benefit. Those arguing for reform of payroll taxes are essentially promoting the abandonment of that grand bargain in order to achieve even greater redistribution of income.
It is a strange concept of fairness that requires some people to pay more taxes so others can benefit from programs they no longer pay for. Consider also the radical plan to shift power away from workers and employers to unions, known as the Employee Free Choice Act.
In the name of fairness, this bill eliminates the requirement for a secret-ballot vote to approve the installation of a union, which is considered a mainstay of fair elections and a protection against retaliation. In other countries, such measures have proven to be a bonanza for union bosses but costly for average workers and the economy as a whole. Thus, on union membership, payroll taxes, and income taxes, the administration’s policies fail the basic fairness test.
President Obama is a man of boundless eloquence but proclaiming a policy to be fair does not make it so. To achieve the brighter future the President and everybody else wants will require a different and decidedly fairer approach.
Jason Clemens is the Director of Research at the Pacific Research Institute.