Our skewed tax system

Amol Kapila

As I like to say, in the context of political discussions, when people talk about the “rich”, they are generally referring to “people who make more than I do.” The term “the rich” means what people want it to mean, which perhaps means that it has lost much of its meaning. For those who think that wealthy Americans don’t pay enough in taxes, if this doesn’t convince them, then nothing will. Some tidbits:

About 47 percent [of U.S. households] will pay no federal income taxes at all for 2009….

The result is a tax system that exempts almost half the country from paying for programs that benefit everyone, including national defense, public safety, infrastructure and education. It is a system in which the top 10 percent of earners — households making an average of $366,400 in 2006 — paid about 73 percent of the income taxes collected by the federal government.

The bottom 40 percent, on average, make a profit from the federal income tax, meaning they get more money in tax credits than they would otherwise owe in taxes. For those people, the government sends them a payment.

"We have 50 percent of people who are getting something for nothing," said Curtis Dubay, senior tax policy analyst at the Heritage Foundation.

First, such a skewed tax system clearly creates a disincentive to work hard and to invest in oneself so that one’s future income will be greater. Given the federal government’s poor fiscal situation, taxes are almost certainly going up (and probably not just on the rich), creating an even greater disincentive for young people to invest in themselves. But perhaps more worrying is the fact that roughly half of Americans don’t recognize the burden of government. They think it comes for free. In fact, as the article makes clear, roughly 40 percent “make a profit from the federal income tax”. To quote George Bernard Shaw, “A government that robs Peter to pay Paul can always depend on the support of Paul.” Hence, the current structure of the tax system threatens the integrity of our democracy.

Actually, I would point out that lower-income individuals definitely do feel the burden of government. More government intervention (through barriers to trade, red tape, labor-market regulations, and even through secondary effects of taxation, such as lower investment) often tends to reduce their standard of living, although they often do not realize this. Rich people will generally find a way to get by, but poor people have less flexibility, fewer exit options, fewer contacts, etc. Hence, it would be more accurate to say that lower-income Americans suffer greatly from the burden of government (except when it comes to the direct burden of income taxes), but just don’t realize it. Often, they wrongly believe that more government is in their interest.

(HT: Chris)

Amol Kapila

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Our skewed tax system

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