Regressive Taxes

Great Debates
1

There’s been a lot of talk lately, most of it from Democrats, to the effect that the rich do not pay enough in taxes in the America. The line of argument is often that the rich derive great benefits from the government, so they ought to pay their fair share of taxes to the government. But for some reason this argument always focuses on income taxes, at least in my experience. Our income tax system already is progressive, but those making the argument generally don’t mention other, regressive taxes that hit the poor and middle classes harder than the rich.

Social Security and Medicare are both funded by payroll taxes at a flat rate: 12.4% for Social Security and 2.90% for Medicare. However, those flat rates only apply up to a maximum, which for the current year is $110,100. Salaries or other income above $110,100 are not subject to payroll taxes. Thus the taxes that fund these two programs are regressive. They take a larger percentage of income from the poor and middle class than from the rich, and the richer a person is, the lower the percentage that he pays. To compound the injury, the rich liver longer on average than the poor and middle class, so they get benefits from these two programs for a longer period.

Taxes on tobacco are another example of regressive taxes. A fixed amount is charged per pack, the poor are more likely to smoke than the rich, so on average the poor pay more tobacco taxes than the rich.

Likewise with a tax on soda that’s a reality in a few places and proposed in many more. Lawmakers often identify soda as a health threat, but actually in terms of calories and sugar it has a lot less than many other drinks. However, lawmakers show much less interest in taxing drinks that are more popular among the upper class, while soda is more popular among the poor.

If we want to make the tax burden more progressive, we could focus on eliminating regressive taxes rather than making the income tax more progressive.

2

Many liberals want the cap on FICA removed or raised.

3

I don’t see any real justification for a progressive tax, in that the rich man doesn’t breathe more air, need more army to protect him, need more post office to deliver his mail, more CDC to keep him from contracting Ebola, etc. In fact, poor people consume far more government resources per capita than rich people.

I realize that in order to work, the existing system has to be strongly progressive. But that isn’t ipso facto justification for it.

The distinction regarding the regressive taxes that you correctly point out are disproportionately imposed on the poor, is that those taxes are consumption-based and voluntary. If you don’t want the tax, you don’t buy the associated good. Now, this would be unfair if there were no, in economist-speak, “substitute goods.” But in the cases of cigarettes and soda, substitute goods definitely exist. In fact, a tax on such goods is a perfect way to incentivize reduced consumption of them.

4

Let’s take these in order.

I’d certainly be in favor of lifting the cap on these two taxes, AND in favor of means-testing for both social security and Medicare. The reason you don’t hear about these two proposals very much, IMO, is the massive voting power of the folks who would be negatively impacted by them: rich people vote a lot, and old people vote a lot, so it’d be very, very difficult to campaign on these proposals.

Indeed, but this is something of an investment tax. There’s excellent research showing that, the higher the tax on smoking, the less people smoke. And the less people smoke, the less they pay in medical bills for smoking down the line. So even setting aside the misery-cost of getting rid of these taxes, it makes sound economic sense.

So many things wrong about this.

First, looking at your list, it includes drinks with fat and with alcohol–already not an apples-to-apples comparison.

Second, it includes items that, unlike sodas, have some nutritional value: milk and orange juice, despite the health risks associated with them, do have some nutritional value. Apple juice and lemonade often have Vitamin C added, giving them at least a nominal nutritional value.

Third, it includes items such as homemade cocoa and red wine that are traditionally consumed by the cup, not by the Big Gulpie size. The chart should examine serving size, not equivalent measures.

Fourth, it includes items that are already taxed, e.g., red wine.

Fifth, a study that looks at the caloric intake of the “average soda drinker” is totally off-base: when you’re looking for the health effects of taxing soda, you ought to be looking at the caloric intake of overweight or obese soda-drinkers. I’m a soda-drinker, and soda comprises nearly 0% of my caloric intake, since I drink diet soda almost exclusively; I’m also not overweight. What a tax does to my soda consumption is not part of the necessary study.

Finally, your link’s claim that sin taxes don’t work is contradicted by the best review of studies I could find. It appears that Reason Magazine, as is their wont, is cherry-picking research to support their beliefs.

In short, the regressive nature of soda-taxes might be a bit of a problem, but it’s more than offset by the potential health (and income) benefits that may accrue to folks who over-rely on soda as a drink.

5

Just to clear up an error in the OP. There is no cap on the amount able to be taxed on earnings in regards to the medicare tax. The cap is for the social security portion of FICA taxes only.

6

The strongest argument I can think of for it is that everyone should experience equal pain from taxation.

I’ve used this example before, say a village is building a bridge. Everyone has to work on it because it is for the public good. But some people are young men and some people are elderly women. You can’t expect the old women and the young men to lift the same amount. Ideally, you want each to be the same level of tired at the end of the day.

So they young man (the rich guy) lifts many loads of stone and timber (taxes). Whereas the old woman (the poor person) lifts few loads of stone and timber (taxes). But at the end of the project, both hurt the same.

This is similar to taxation because someone who makes 20k a year would be destroyed by a ten percent tax. But someone who makes 200k a year wouldn’t even notice it.

7

It is of course the right-wing that keeps the debate focused on the less-regressive income tax. Buffett paid a lower federal tax percentage than his secretary when Social Security, etc. was included but right-wingers quickly conflated “federal income and payroll taxes” to mean “federal income tax.”

Some months ago, a sentient Doper posted a link to babble by a right-winger-with-a-PhD. (Hi, Dr. Love)

, and it took several reply/rejoinders before he grasped the distinction. His blogger pretended to make the same mistake but … here’s the real annoyance … after spending half the blog refuting the claim Buffett didn’t make, he revealed that he knew the distinction between income and total taxes all along. :smack:

8

I doubt that there’s any way to even inaccurately measure the amount of pain a given amount of tax imposes. To say that the 200K/year guy “wouldn’t even notice” it isn’t necessarily true, nor would taxing the 20K guy necessarily “destroy” him. In any case, you seemed to be arguing that a fixed percentage tax–by definition, neither regressive nor progressive–was the fairest. Then you said the above.

The present argument against a fixed percentage tax is simply that the percentage necessary to fund the government would be too high for the low earner, whose income is only very slightly disposable. This is true. However, the solution is not “impose a progressive tax” but rather, “mandate that government spending be limited to the extent that the fixed percentage tax does not impose an undue burden on low earners.” A possible solution could be a negative income tax.

9

To be clear, I’m arguing that a progressive tax is fairest. The idea being that the level of pain should be equal. Or as near to equal as we can approximate.

I’m okay with someone who makes 20k a year paying 5% and someone who makes 200k a year paying 30% (for instance). Since the person with the lower income needs each specific dollar more.

The real argument for a progressive tax is that your 200,000th dollar means less to your well-being than your 20,000th.

10

I don’t believe Buffet pays a smaller percentage of his income because he pays no social security tax after $100K or whatever the cutoff is, though that could be true for some, Buffet’s tax is based in large part, if not almost completely on the capital gains tax which is 15%. We can see that the maximum tax rate is 35% or so and that is all Buffet pays (plus the negligible $7650 or so in SS tax.) For him to be paying at a lower rate than his secretary she would have to be paying more than 28% plus 7.65% social security which means she would have to have taxable income in excess of $174,000 or so (for 2011.) So she would pay the same SS tax as Buffett and he would pay 35% on the remainder while she would pay less unless she ourearned him, unlikely and irrelevant.

I believe Buffett supports increasing the capital gains tax to 18%. He also has stated, as a counterpoint to Republican arguments that an increase in capital gains would discourage investment, that he has never taken the effective tax rate on his income into consideration when deciiding whether or not to make an investment.

11

Seems like perfect justification to me. I’d rather not have a broken system.

12

[quote=“greenslime1951, post:3, topic:627760”]

I don’t see any real justification for a progressive tax, in that the rich man doesn’t breathe more air, need more army to protect him, need more post office to deliver his mail, more CDC to keep him from contracting Ebola, etc. In fact, poor people consume far more government resources per capita than rich people.

I realize that in order to work, the existing system has to be strongly progressive. But that isn’t ipso facto justification for it."

The rich man may infact breathe more air if he has more property, e.g. a 5500 sq. ft. home in Bloomfield, MI, a $12 million dollar fixer-upper in La Jolla, CA, a townhouse in Belmont, MA, and an 11 acre $3million dollar lake front property at the oldest resort in America, Lake Winnipessaukee, NH. The federal government enforces clean air standards all over the country. It is reasonable to assume that someone with this much property would require that much more enforcement than someone living in a studio apartment e.g.

He also might need far more army to protect him since he is much more likely to find himself travelling abroad or owning property abroad or having bank accounts or mutual funds abroad.

I would also venture to say that the wealthy person gets more mail, though I admittedly have no citation, but if Bain Capital e.g. sends prospectuses and shareholder information to anyone, that expense is being subsidized by other taxpayers, since we know the post office operates at a loss.

However the most important benefits the wealthy man gets is the use of a well educated population to help him staff the businesses he starts as a job creator, and the roads that must be maintained so he can get his goods to market, and the diplomatic sevices he needs to make sure his goods are fairly received and marketed abroad, and the justice system he makes such frquent use of in the event of a law suit involving him or his business, the enforcement of laws relating to any copyrights and patents he might hold etc. etc. etc.

I would venture to say that you are mistaken about the allocation of government resources. Particularly when it comes to corporate welfare which usually benefits only the wealthy shareholder types.

13

Actually it can be easily done by asking people at different income levels if they would spend money on various things and how much. I could look up some studies if you want - this kind of thing happens all the time. But you can see it for yourself. When you were a kid getting an allowance, how much was a dollar worth to you? How much is is worth now? Romney demonstrated this quite nicely when he dismissed his lecture fees - more than most people make - as trivial - which they are for him.

Not being a burden on low earners means being negligible for high earners. And the cuts would actually hurt the low earners quite a lot. So that is not much of a solution.

14

This is an old argument. Since it was made by Adam Smith, you could say that it is actually older than capitalism.

I haven’t seen anyone address this argument in quite the same way Smith did, so let me attempt to get his point across. The reason you can say that the rich benefit more from government is from a pretty easy hypothetical. Take a wealthy person, and now take a poor person who owns nothing. Now collapse the government. Having nothing to lose, the poor person loses nothing, and indeed may have an easier time procuring capital through theft, violence, whatever. He wins, in theory. The wealthy person has a lot to lose, and how does he defend himself? There are no police, there is no military, and the currency he might use to pay bodyguards is worthless without a government to back it.

Not to go on a complete tangent, but this is one of the main purposes of welfare, food stamps, etc. As much as some people like to decry “freeloaders,” it’s really about taking people with nothing to lose and raising their standard of living to the point where they actually do have something to lose. Desperate people do stupid things, and social nets reduce the number of desperate people.

15

Saying that money is worth less to rich people and therefore taking more money from them is justified is not much of a solution either. At the very least, it leads to class warfare. And who is to say that a given amount of tax is “negligible” for a given person?

I did mention that a negative income tax could redress an imbalance in the fixed-percentage tax.

16

You were making a pretty good point up until this. For some reason you then decided to recite a populist shibboleth regarding eeeeevil corporations blah blah.

What on earth is “corporate welfare”? And are you aware that most of the “shareholder types” of a major company aren’t wealthy? They hold shares in retirement portfolios, person funds, college savings accounts, etc. The beneficiaries of whatever corporate welfare is are the ordinary joes who own stock in the company that receives it.

17

The thing is, regressive taxes raise revenue better than progressive taxes because they are harder to avoid, more economically efficient in most cases, and there are just more middle class people than rich people.

If Democrats want to pretty much shield the middle class from taxation, and that seems to be where they are headed, what with even cutting the payroll tax now, then they will have to accept a pretty small government.

18

But still regressive, as it only applies to earned income. On dividends, interest and rental income, no Medicare tax. Those types of income are highly skewed toward the upper income brackets.

19

To play devil’s advocate, you could argue that who really wins under a Rule of Law society is the upper middle class. If you collapse the government, the upper class can afford private security, have enough money and property to survive not having a job, and are well connected enough to try to come out ahead in the new social order. Whereas the upper middle class still need to work, cannot afford to protect themselves from the masses, and is not politically connected except at the local level.

And who pays the highest tax rate in America? The upper middle class. You could say that it works out.

20

I think that in the early stages of Communist takeovers, you get a situation where the government does in fact break down for awhile. And who tends to suffer the most? The middle class, as the previous poster said. The rich just flee to greener pastures. The poor gain a little bit, they had nothing, the government gives them a little something, just enough to win their allegiance for awhile. And the middle class loses everything. And with the rich people gone, they are often set up as the scapegoats for the public’s rage.

That’s why i snicker whenever American middle class folks talk revolution. Middle class folks will be the ones against the wall blindfolded. Besides, how can the middle class have a revolution? Tuesday? No, that’s bad, kids got soccer practice. Thursday? Ugh, can’t do it, special screening of Dark Knight rises.