47% not paying federal income taxes - what should the distribution be?

Great Debates
41

A large number of these poor people paying property tax, cigarette tax, gas tax, and phone tax are only doing so with tax credits from the government. All thats happening is the government are taking money from poor person A with one hand and returning it to him or her with the other; all the while employing a vast bureaucracy to do so. A bureaucracy which encurs costly overheads with each and every different form of tax implemented and each and every tax rate.

In no way can many of these poorer people be described as paying their fare share. Not when the tax credits are set against their taxes paid. The difference between their accumulated taxes paid into the pot and their accumulated tax credits received from the pot will be a negligible amount. And this from the working poor we haven’t even got to the idle poor yet. This is before these people and their families have used the resources and services provided by the state. I wouldnt like to put a percentage figure on the number of people in this position. The bottom 33% doesn’t seem unreasonable to assume are either taking from the system or contributing next to nothing. Well, if the bottom 33% are receiving far more than they are giving then the lions share must fall on the ones above.

42

Apparently, you missed my post.

My sample family on $20k of income has $6000 in refundable credits.

They paid $1500 in payroll tax. Let’s pretend their entire salary goes to items subject to sales tax (which it might, after the rent assistance and food stamps). At 10% sales tax, that’s another $2000 in tax.

So I guess all that’s left is for them to pay $2500 in tax on cigarettes. I sure hope they’re puffing away so they can do their part.

43

You start off with a truth, that people respond to incentives, and then follow that with statements that you seem to be making up as you go along.

Why do you think someone working 40 hours a week, and is suddenly taxed a little more on that income, would start to work only 35 hours a week? That doesn’t make any logical sense to me. But it does to you and I’d like to know why. Because from my experience, everyone seems to get used to a certain income and if that income drops due to an externality, they don’t tend to work less.

44

Note that these taxes are mostly consumption taxes. So this is a fair argument against them.

How do you define “fair share.” The expected utility of an extra dollar for these people is much higher than it is for Bill Gates - so similar tax rates are extremely unfair. The reason that more of the tax burden falls on those above is that those above have a lot more money to pay taxes, and their tax burden is much less painful than it would be for those below.
What is unfair is the system we have today, where rich people like Romney are ashamed to release what they pay in taxes. (And it ain’t because they pay too much.)

45

Eh?
What’s the percentage of income taken away in total taxes for someone making $20,000-a-year vs. someone making $20 million-a-year?

46

When there were high incremental tax rates, people at them found all sorts of tax shelters to hide their money in. I think there is less of that these days. And there are extreme cases. I know someone who retired from AT&T at 75 after 55 years of work because the financial incentives for him to work just disappeared. (Or at least that’s what he said - he was still healthy.)

At some point the expected utility of the extra dollar you make working more hours will decrease compared to the wear and tear on your life. Incremental tax rates may affect this a bit, but not much. In any case people in top brackets don’t get paid hourly, so they work longer for other reasons than being strictly compensated for it.

47

But be sure to interpret your answer with reference to the expected utility curve.
A $1,000 tax bite on the $20,000 earner will surely mean he can’t pay bills or worse.
A $1million tax bite on the $20 million earner may reduce his investments, but is unlikely to affect his standard of living at all, assuming he is in control of his spending.

48

Defining fair share is indeed difficult and I wouldn’t pretend to have an answer. My use of the term was in response to another poster using it earlier.

I think your doing a disservice by bringing up Bill Gates. If we were to tax that sort of income on a much larger scale then it would still be small fry in terms of the whole tax intake of the country(and likely to be for one year or so only). What the very top 1-2% pays (or does not pay) in tax does not substantially effect the fiscal wellbeing of the State. It is the middle to upper tiers where the vast majority of taxable wealth and income lies.

Whats a fair share? I’d say contributing more than you recieve is as good a definition as any. After all we cant all take out more than we put in. Making sure as far down the income decile as possible pay more in than they take out is a worthy goal. Even if the amount paid by many of these individuals is rather small. But more importantly it should be transparent. Right now its not at all obvious quite how far up the income decile the “takers” are. I suspect this lack of transparency is intentional. Going this route of making sure everyone as far as possible pays in more than they take out is in my opinion only possible if much of the welfare state is done away with. Welfar should not be stopped completely. However, it really should be targetted at the very poorest in society. Right now it has become a State bureaucracy whose job it is to take money from increasingly higher up the income bracket and then give it back to the very same income bracket via a different route. Once again with all the overheads this entails.

49

Voyager is on the right track. “Skin in the game” isn’t a measure of what you pay, but of what you expect to receive. I have skin in the game with respect to the success or failure of my bank; it’s not because I make a deposit every month, but because of the amount already deposited that I expect to get back someday. When it comes to government, someone with a $10-million dollar retirement account doesn’t have skin in the game like someone who’s expecting a Social Security check so he can afford to eat after he retires.

50

Bill Gates is just a popular example. And I can define fair share. A fair tax system would more or less equalize the pain in paying taxes. Mitt Romney or a hedge fund manager whose income is being taxed at capital gains rates is feeling less pain than me, and I’m feeling less pain than a very poor person who gets hit with almost any tax.
I hope you’re not saying that there are tons of poor lazy men out there getting welfare. After all the cuts welfare these days is mostly paid to people who cannot work. To go back to my original comment in this thread, if you want to have more people giving and fewer taking, then give more people jobs and pay them better.
We hardly have a welfare state in the US, but until we have jobs available for all we’ll need to help lots of people. Remember, during the Bubble even people considered hard core unemployed got jobs. The best way to cut the deficit is to have more people paying and fewer people taking, which happens when they have good jobs.
How to get there isn’t obvious, I know. But the alternative is to let them starve or to keep the system as it is.

51

Thanks for those examples. They are better than mine since they show that middle and upper class people depend on the government also, not just the poor. And even the guy with the $10 million retirement account depends on the government for the stability that will preserve the value of his account.

52

Well you can do that but you’ll find many of those top earners you tax at higher rates will skeddadle. They will move to Canada, the Cayman Islands, Switzerland and elsewhere. The richest Swedes are now staying in Switzerland for tax purposes, the French have moved to Belguim etc. The increase in taxes will barely, if at all, make up for those who will end up paying no tax in the US. However, I am all for closing tax loopholes that many top earners take unfair advantage of. Many of these loopholes are introduced for the best of reasons, usually they end up as a scam.

Are there tons of lazy men out there getting welfare? I dont know about tons but there are a significant amount of them. Enough to do the state finances a bit of damage. However, these men and women are not the real problem. The real problem are the whole clump of people who take more out of the system than they pay in. This goes surprisingly far up the income bracket. Whilst every section of society has people like this the worrying problem is the working class and indeed in some countries the lower middle class. Far too many of these individuals and families are taking more than the are putting in.

Why should “we” pay these people better when its the government who are increasing the cost of living by putting taxes on so many goods and services in the first place? If you have a working poor family receiving tax credits of x dollars a week; this family just happens to be paying the government back roughly the same amount in dollars on sales tax, alcohol tax, cigarette tax etc every week. It is the government increasing the cost of living that is making so many working people poor to begin with.

53

So, under your tax plan, would a person buying a share of stock in a company pay a tax on that purchase? Or are those purchases conveniently exempted?

54

You’re assuming your conclusion.

Consumption increases. Consumption increases even with consumption taxes. This is just straight up factual, there is nothing to argue here. The Europeans tax everything to support their social democracies, and that includes extremely high (and non-progressive) consumption taxes because they need the money and they’ve squeezed near as much as they can out of income, as Hollande is learning in France. VATs hang around 20% in Europe, and budget pressures have increased them in recent years, for example the UK raised their VAT from 17.5 to 20% in early 2011. Here’s the graph for their consumption expenditures after that tax increase. There will not be stagnant or decreasing consumption in a country with positive working-age population growth and gradual implementation. Economies grow over time. Consumption grows over time. Even most recessions aren’t characterized by drops in consumption expenditures. Investment is hit hard, while consumption merely grows more slowly.

What we’re talking about is the relative mix of spending. We’re talking about changes along the margin. This is a spectrum, shifts along a trend-line, not binary thinking of up or down.

We could implement a policy where income taxes are lowered somewhat, and a progressive consumption tax is introduced which collects roughly same number of dollars from roughly the same group of people so that government revenues are stable. So what happens? We can easily imagine that consumption expenditures stay exactly the same, since the same incomes were earned, the same taxes were taken, and preferences for goods haven’t changed. People would be exactly as well off as before. They earn the same income, they pay the same taxes, they buy the same things. We can easily imagine that.

But people respond to incentives.

We’d see people rush to make purchases immediately before the increase (this always happens), and then we’d see a big drop in consumption immediately after (this always happens). Then consumption spending would return close to the previous trend with a subtle shift into more saving/investment instead of consumption along the medium term (this is assuming non-insane behavior from the central bank). Over the super long term, we would see higher consumption in the country with a saner tax policy because they would have built up a larger stock of productive capital. Tiny increases in growth compound over time.

I thought this was already covered in Frylock’s thread about dropping the income tax entirely, which (I agreed) is not a feasible plan.

Checking again… yes, it was covered. But to reiterate: There is no need to track consumption directly. The government would track assets, a bit similar to the way tax-exempt retirement accounts are monitored. If you previously had 50k, and you report 50k of income, and there’s 25k in your accounts at the end of the year, you must have consumed 75k. A lot of the administration involved is in honestly reporting income, and that’s something tax authorities are already built to do. There’s obviously more than that – it would take some doing to implement – but it’s not so intrusive as you imply.

55

I’m talking tax rates like we had in the '90s. Remember them? Poor ruined economy, rich people fleeing like crazy. 90% tax rates drives all sorts of bad responses, but we don’t have to go there. If you think Silicon Valley execs are going to flee to Switzerland if you raised their taxes a few percent you’re nuts.

Welfare reform in the '90s cut down on a lot of what might have been problems. As for really poor people getting money to stay afloat - that is the whole point.
There is something scandalous here - but that is that people working two jobs still need assistance. But we’ve had that discussion plenty of times already.

Yeah yeah, those damn poor people are blowing all their money on alcohol, so much so that their payments go to tax (making one wonder where they get the money to pay for the actual alcohol.)

How come we’re stuck in the '80s? Increasing cost of living? Have you looked at the inflation rate recently? I track inflation through science fiction magazine prices. They were stable in the '50s and early '60s, with one or two increases. In the late '60s through last decade they seemed to rise every other month. They’ve been stable now for years. The problem today is that workers get crap raises, and the minimum wage still hasn’t caught up with the inflation we did have. Actually we could do with a bit more inflation than what we have, but we’re not in as bad shape as Europe.
People get stuck in a rut of the worst things of the past. Inflation is out of control! Not really. The deficit is soaring! No, the deficit got significantly cut. Why not get excited about the real problem, income inequality. There are plenty of gains in the economy, they just all go to the rich.

56

Of course consumption increases with increasing population. I’m worried about consumption per capita. And enough increased consumption to use up excess capacity and offer a big enough ROI to make investment feasible.

Incremental consumption tax increases don’t hurt too much. I’m not away of big problems from sales tax increases either. But we’re talking about a tax transfer from where the tax is never “owned” by the person to one where it is owned. The brilliance of withholding is that the endowment effect does not cut in. Increase car prices by 20% and you’ll see it. (And we’d have to hide the tax like they do in Europe. Will the anti-tax people accept that?) This could be a very significant psychological change.

We can. And mathematically they will be in the same state. They won’t feel that they are, since they will see themselves paying significantly more for major purchases. As soon as they get that paycheck they own that money. Now they are losing it.

So we see less consumption in the medium term and higher consumption in the long term? How does this transition take place? Why would the increased capital from lower consumption be invested in production as opposed to other forms of investment? Before the crash we saw capital fly to high return investments that were marketed as low risk. After the crash we saw capital fly to very low return investments which were safe. Why would the future be any different?

Well, assuming there is a basic deduction for necessities that are not to be taxed, you are assuming that all consumption is treated equally. Say I pay down my mortgage by $10K. Is that consumption, or does the government track my mortgage account also? And this assumes no special treatment of any consumption. That is not going to be politically feasible. If it were we could simplify the tax structure today at much reduced risk. I think everyone pretty much agrees that this would be a good thing (except tax lawyers, perhaps) but it isn’t happening.
Oh, and how is a tax bill at the end of the year based on consumption outlined above going to work? Will the government require withholding to cover it? Otherwise you are going to run into a lot of tax bill issues, just like you would if you eliminated estimated taxes and withholding for income tax. And if you took the money in advance, there goes your consumption increase from lower income taxes.

I heard some people from the retail industry talk about the flat tax (which I know this isn’t exactly.) They were not at all thrilled by the idea.

57

I was under the impression US income tax highest rates were broadly the same today as they were in the 1990’s. I could be wrong but im sure they are not substantially lower.

Welfare reform did cut down on a lot of problems(im glad you acknowledge there might have been problems). However, further welfare changes once again increased the problem. Emergency Unemployment Compensation was enacted as thecredit crisis took hold. This gave extra benefits to the unemployed. Whilst it helped out many unemployed people it also aided many in staying out of employment. If you dont believe me look at the figures. EUC expired on December 2013. In the six months after EUC was stopped nearly three times the number of people found work than had found work in the six months before December 2013 when EUC was in place. Someone was fiddling the system.

Sorry, I did not mean to suggest the unemployed were blowing their money on booze, cigs etc. I tried to mention a variety of taxes the poor paid, some of it paid on necessities some of it going on “enjoyment” and yes, cigs and booze are an enjoyment. Part of their and our lifestyle choices are taxed by the state. Taxes we then hand back to them in what is just one big inefficient merry-go-round of money transfers.

I’ll have to disagree with you that we need inflation. Inflating the input costs of any production process or service is not beneficial other than as the temporary indicator of shortages. Inflation as a goal in itself is just wrong. At what point in human development has it ever been better for society as a whole when the price of daily living increases? or a single widget, a brick, rent, corn, potatoes, a tyre, or metal? When is it good that we pay more for these things?

The deficit is very worrying, far more worrying than you realise. The true deficit is far greater than the headline 2.8% of GDP. Historically this 2.8% headline figure is not vast. However, it all depends on what part of the economic cycle the US economy is in. A further five years of growth and the current deficit(and CBO predictions)is at best almost manageable. Even this is best case scenario is extremely doubtful. The real worrying scenario is if the US is currently near the top of the economic cycle; then a 2.8% deficit is not nearly so impressive. 2.8% deficits were the size of deficits which got so many European economies into difficulty as the Eurozone crisis hit. Deficits of 3% or so were all very well whilst things were rosy. As soon as the economic troubles hit these deficits were shown to be far, far too big. A deficit of 3% during an economic downturn is acceptable, a deficit of 3% during a boom year is fiscally extravagent and bordering on incompetent.

58

I am an accountant and I always find this argument about federal income tax to be myopic and disgusting, especially when those that make it disregard the FICA taxes. Social Security and Medicare are income taxes. Unlike the other federal income tax, Social Security and Medicare have no floor, but they do have a ceiling. Regular income tax grants a portion of your income tax free as an exemption, and another portion tax free as a deduction. The net result is that people who earn less than the exemption amount, plus the standard deduction amount pay no federal income tax.

They do however pay FICA. A lot of my clients are self-employed. Most don’t own a business, but rather work as contract 1099 employees. FICA taxes amount to over 15% of their income. Even if they have an adjusted gross income of $1,000 and thus pay no “income” tax, they still have to pay the IRS $150. Half for FICA, and half for the self-employment tax, which is the employer portion of the FICA taxes.

I don’t have any rich clients, so I can’t really recall what the cap is now, but it’s in the neighborhood of $225K. If you earn more than that the IRS basically says, “We’re good, you keep it.” It’s gross.

59

I’m not sure why you have this impression. It follows directly.

  1. Taxation is a disincentive to the behavior being taxed.
  2. An income tax is a tax on the productive work that created the income.
  3. An income tax is a disincentive to work.

That’s it. It’s a three sentence syllogism, with two premises and a conclusion. There is literally nothing more to it.

Well, this is all relative but I didn’t say “a little more”. If they’re taxed only a little more, then they’ll work only a little less.

I used 35 hours compared to 40 not because it was “little”, but because I was thinking about European/American differences and 5 is a nice round number.

Our lives are not a random sample. Our experience is not going to be reliable enough to answer a question like this. This is a similar problem from earlier in the thread of using Bill O’Reilly as a stand-in for the economic decision-making of literally millions of people. Bill’s not a random sample, either.

For something a little more data-driven, we can look at Ed Prescott’s paper on why Americans work harder than Europeans. Again, this is average. I know plenty Europeans who work plenty hard, but personal experience does not count. An anecdote is often worse than no data at all because our minds fall too easily into the trap of extrapolating from an unrepresentative experience. We need to cast our nets wider, and to think about choices on a spectrum instead of the binary decisions of people we happen to know. This is a pdf, but I took the time to present at least one of the interesting tables.



Table 1. Output, Labor Supply, and Productivity
Relative to United States (U.S.=100)
                           Output       Hours Worked    Output per
Period    Country          per person   per person      Hour Worked
1993-96      Germany        74            75              99
             France         74            68             110
             Italy          57            64              90
             Canada         79            88              89
             United Kingdom 67            88              76
             Japan          78           104              74
             United States 100           100             100

1970-74      Germany        75           105              72
             France         77           105              74
             Italy          53            82              65
             Canada         86            94              91
             United Kingdom 68           110              62
             Japan          62           127              49
             United States 100           100             100

The US is normalized at 100, and the other countries (not just Europe) are percentages of US. This is two different periods to emphasize two different tax regimes.

We can see the US has the highest rates of output per person, per capita GDP, in both time periods. Japan and Canada made some progress in closing that gap. The European countries generally did not. Next, we can see that most of the countries listed had people working more hours than in the US in the 70s. Only the Japanese were working more in the 90s. The US was much more productive (output per hours work) than every country except Canada in the 70s. Every country except Canada made great productivity gains in those two decades. The French were actually 10% more productive, but they worked so fewer hours that their per capita GDP remained at 75% the US level. The apparent mystery here is why the formerly industrious Europeans start working less.

But it’s really not that hard.

Prescott uses a stripped-down “real business cycle” model to compare predicted and actual values of the labor supply given the different average income tax rates paid by the population. And hey, sure enough, the estimates aren’t bad. Obviously not the whole story but it doesn’t need to be. We already knew that humans respond to incentives. Taxation is a disincentive. It’s as straightforward as that.

Of course, this doesn’t say anything about ideal policy. It’s a choice their governments have made. I don’t mind people having different preferences about policy, even if I disagree. But even given different policy preferences, we have to face the same economic reality that taxation is a disincentive. Income taxes are a disincentive to work. There’s no dodging that point.

I’d like to point out, too, that I have made no arguments about magical job growth explosions, or tax revenues magically being higher when taxes are lowered, or any of that nonsense. This is a subtle process and it takes some time.

60

Per capita consumption increases, too. It just takes longer.

Most of the rest of your post is just a stretch toward contrariness that I do not understand. For one example, yes, withholding will have to continue roughly as it does now. Obviously. But it doesn’t involve any new administrative infrastructure, so why even bring it up? Tax authorities already know how to do withholding. They would continue withholding, most likely in a government trust fund holding sovereign bonds. Obviously. There is no other way for it to function, and they already know how to do it.

These practical concerns are important, sure. But most of them have obvious answers, and tax administration isn’t relevant to the economic points I was making.

A increase in the capital stock (with technology) will increase economic growth.

An increase in economic growth will lead to a big difference in total output over time.

An increase in total output will lead to higher total consumption, even if consumption as a percentage of GDP is lower.

The result will be higher per capita consumption. A slightly smaller slice of a much bigger pie is still more pie.

This is the story of our civilization.

Investment is production.

There are no other forms of investment in this context. To invest is to produce investment goods. That is literally what it means. This is the economic definition. I was explicit about the definition I was using. I have been, from the beginning, talking about production.

“To simplify: Consumption is what we fritter away today. Investment is our production geared to the future.”

I understand that this is jargon, and that jargon is incredibly annoying in its esoteric pretension. But I need to be precise, which is why I clearly stated that I was talking about tangible goods, the “stock of productive capital”. I am talking about goods that are used to make other goods. I have been talking about components of GDP. GDP is production.

I am talking about long-term trends in growth.

I am not talking about a brief business-cycle fluctuation.

This is a GDP graph.

That is an increase from two trillion to sixteen trillion in real output over more than half a century.

It is so large an increase that most of the business cycle fluctuations, which were very important to people at the time, barely even register. The crashes are extremely painful, but they are mere molehills next to the long-run mountain of economic growth. We’re all interested in the business cycle – I study macro and monetary policy, which is short-run all the way – but growth is a deeper and more fundamental subject.

I can ask you the very same question.

I’m not talking about a temporary business cycle. I’m talking about the long-term trend.

This is a graph of investment, which is a component of GDP.

This is physical investment. It is production. Generally speaking, these are newly produced goods that will help create other goods (with a few exceptions). This is much more volatile than consumption. But still, the trend is upward. This is the capital stock. Investment is the flow of production that increases our stock of physical capital: factories, trucks, containerships, etc etc etc. When we have more physical capital, we have more tools to help us create more stuff.

Sometimes we make a mistake. We build the wrong stuff. Our investment production is misplaced. The system hiccups. Investment is much more volatile than consumption. But then… we recover. This has always been the case. I am not arguing that the future will be different, I’m saying it will be the same.

You are the one who is arguing that the future will be different.

That’s not an inherently indefensible position. But it becomes problematic for your argument if you don’t realize that that’s what you’re arguing.