What are fair taxes? No politician seems willing to actually try to define a standard to determine what is fair, so years ago I decided to figure out what seems fair to me. Now all the political pundits are jawing about the Bush tax cuts, fairness, class warfare etc. To me it's just a rehash of a battle of glittering generalities that I've been hearing for decades. I think it is way past time we came up with a standard for what constitutes a fair tax.
When I figured out what seems to me to be fair and applied that standard I concluded that wealthy people are not pulling their weight - or, to put it in a different way there are a lot of things taxpayers like me are paying for that rich folks get a lot more benefit from than we do.
Class warfare? No. All that class warfare hooey is a smokescreen to protect their ability to keep picking our pockets. Here is how I got there - my challenge to the reader who thinks I am on a rant here is to tell me where I am wrong.
First step - define a standard for "fair" taxes.
In day to day life what is fair is determined by matching payments to benefits. You pay according to the benefit you receive. Suppose your next door neigbhor comes to you and says he thinks we should go together and hire 4 security guards. 1 to guard each of our houses and the neighborhood, and the other 2 to guard your neighbors fast food franchises in various locations out of the neighborhood. "We should split the costs 50/50," he says, "thats fair". We would both be paying the same amount, but he would be getting 3 guards out of 4 to his benefit. Clearly not fair. But if he pays 3/4 and I pay 1/4, its fair.
I see no reason the same basic reasoning shouldn't apply to government, so I conclude that to the extent possible the people who benefit from a program should pay for the program in proportion to their benefit.
Obviously you can't do that for some things such as welfare, or school lunch programs for poor kids, but for the vast bulk of the Federal budget it seems to me that should be the applicable standard.
So how do Federal taxes stack up on this fairness standard?
Some taxes stack up pretty well.
Payroll taxes that are paid by employees and employers to fund unemployment insurance, social security taxes and Medicare all benefit the people that pay the taxes - particularly with Social Security what you get out is pretty directly related to what you put in. Gasoline taxes, when used to build and maintain highways, are an excellent match.
Income taxes don't stack up so well. Roughly 1/2 of the income tax payments we send to the IRS go to defense spending. Do we all benefit equally from defense spending? I decided to investigate that question and here is what I found.
I looked at Germany as country similar in development and per capita income and wealth. I also looked at China and Russia, our perceived principal competitors in the world at the moment.
Geography -
Germany, Russia and China all live in historically dangerous neighborhoods. Germany is bordered on three sides with countries it has gone to war with periodically for centuries. China is also surrounded on the north, east and south by countries from which invasions have been launched for a millenia. Russia is surrounded on the west, south and east by countries from which invasions have been launched for millenia. The US? We have oceans - effectively moats -on 2/3 of our borders. The notion of Canada invading the US borders isn't even on the table and the idea of Mexico invading doesn't bump my probability meter off the no chance peg very far.
Yet despite the fact Germany, Russia and China all live in more dangerous neighborhoods, in total Military spending:
Germany spends about 8% of what the the US spends
China spends about 16% of what the US spends -
Russia spends about 10% of what the US spends -
If we combine the budgets of our perceived potential enemies, Russia, China, and then include Iran and North Korea, what they are spending amounts to less than 33% of what the US spends. When US expenditures are combined with spending by a couple of our closest allies it amounts to nearly 50% of the total defense spending in the world.
Then I wondered how to convert total spending to something measurable on the fairness meter?
I decided to compare per capita income to per capita defense spending.
Looking specifically at Germany income per capita is about $41,000 per person and for the US about $46,000 per person. Income is reasonably similar. But in defense spending the difference is staggering. Per capita spending on defense in Germany is about $425 per person. Per capita spending on defense in the US is about $1900 per person.
Don't think I picked out Germany to bolster my case. All the data is available online - its like this for almost every country in the world (other than Israel) and for most countries the difference is even more glaring.
Why is defense so expensive for us? Why is the average German citizen spending $425 a year for defense and we average Americans spend $1900?
The answer seems to be because we as a country want to project our power around the world to protect our economic interests. We have engaged in 3 wars in the oil rich middle east in the last couple decades even while scores of small wars were taking place in Africa or Southeast Asia that we ignored. We have military bases all over the world. Our military expenditures are so large because we want to protect our commercial interests overseas such as our financial and oil industries.
We as a nation have chosen to maintain this enormous military establishment. I'm a good citizen, I am willing to pay my part, I think it does benefit us all to some extent (although it clearly makes us a target for terrorists). But seems to me that something close to the per capita figure for Germany is what I ought to be paying. The benefit to me from our ability to influence oil markets in the middle east is modest, the benefit to wealthy people who control the oil industry and the financial firms is enormous. I therefor concluded I should be paying around $425 a year and the other 3/4 of our current defense expenditures should be covered by taxes on either multinational corporations or the very wealthy people who control multi-national corporations.
How does the reality stack up?
For simplicity I just looked at defense spending and assumed for the initial calculation that for the other 1/2 of the federal budget the current tax law is fair (the IRS web site provides lots of data about who pays how much - details on my calculations follow this rant).
After juggling numbers for awhile I computed that 37.5% of the budget should be paid for by normal taxpayers like me (50% of non military items and 25% of the defense budget).
62.5% of the Federal budget should be paid for by the wealthiest persons and corporations that benefit from our military and political involvement around the globe (50% of the nonmilitary budget and 75% of the defense budget).
By my computations Corporations and the richest 1% of Americans contribute 50.4% of the total federal discretionary budget (things other than what is funded by payroll taxes).
50.4% is way short of the 62.5% they should be paying if the cost of the military is borne according to benefit.
So even before we start looking at other budget items we regular tax payers are subsidizing the wealthiest to the tune of 12% of the Federal income tax budget.
What about the 700 Billion bailout? The Cash for clunkers plan? Or all the other plans to rescue corporate America from collapse. I accept it was all necessary to avoid a complete economic meltdown - but Wall Street is now rolling in money, while Main Street is struggling. Coupled with the fact Wall Street caused the mess it seems to me those richest 1% should be paying a lot more than 38% of the cost of the bailout. They clearly benefited most from the bailout, on this part of the Federal budget I would feel it was quite fair to make them pony up about 80% of the bailout costs.
What about Federal Courts? Back when I was still a practicing lawyer I realized that maybe 98% of Federal court time is spent refereeing fights over money between really rich corporations or individuals. You can't go to Federal court to get an adoption, or to change your name, or get a divorce, or to force your neighbor to stop building his fence on your property. All those things normal people end up in court about are outside the jurisdiction of Federal Court. Rich folks should be paying most of the cost of the Federal Court system.
What about when when some polluter trying to maximize his bottom line fills the air full of toxic chemicals, or covers the water in an oil slick. I'm just a bystander, I shouldn't have to pay to clean up the mess - let the guy making money off the activity pay for it.
When you get right down to I am hard pressed to think of anything regular taxpayers get from the income tax that they doesn't involve subsidizing rich folks in the process.
And who pays for Congress...don't even want to go there. I certainly don't feel like they've done much for me lately.
Here is the raw data and calculations I used - as noted all the data came from online sources provided by the IRS, the UN or other similar organizations:
The United States spends 663 billion dollars currently on defense, 4.3% of GDP
Germany spends less than 1/12 of what the the US spends - 48 billion, 1.3% of GDP
China spends less than 1/6 of what the US spends - 99 billlion, 2.0% of GDP
Russia spends about 1/10 of what the US spends - about 66 billion , 3.5% of GDP
The combined budgets of our perceived potential enemies, Russia, China, Iran and North Korea amounts to less than 1/3 of what the US spends. When US expenditures are combined with our closest allies it amounts to nearly 50% of the total defense spending in the world.
By my calculations from figures at various Federal Government web sites, 73% of the federal descretionary non payroll budget is funded by individual income taxes, about 20% by Corporate taxes and the remaining 7% by other miscelleneous taxes.
According to the National Tax Payers Union the top 1% of Taxpayers, those making over $380,000 a year, pay 38% of Federal Personal Income taxes. So assuming these richest folks contribute 38% of the remaining 80% (giving them the benefit of the assumption they pay all of the 7% miscellaeneous taxes) (the other 20% comes from Corporations - I am also giving the Corporations the benefit of assumption all that they pay goes to defense) which works out to 30.4% of the Federal budget covered by taxes payed by the richest.
