When it comes to taxation there are two perfectly valid points of view on what is "fair". Unfortunately, they are incompatible. Isn't that the way of things?
Let's start out be saying that I don't believe there are many reasonable people who are willing to argue that the current tax system in the US couldn't be improved. Nobody seems to feel the system treats them fairly, and it contains lobbied-for loop holes for a variety of special interests.
With that said there are two basic versions of "fair" people cite:
- Everybody pays the same (say as a percentage of income)
- Everybody pays based on their ability to pay
If you believe everyone should pay the same percentage, then having a graduated tax rate scale imposed on you feels very unjust. After all, you work hard for the money you earn (presumably), so that hard work shouldn't be punished by forcing you to pay "more than your fair share".
If you look at things from the so called "ability to pay" point of view, then you probably look at pay in terms of the degree of negative impact. If you live at or below the poverty line, you have no disposable income, and a tax rate of 5% will dramitically impact your quality of life -- it will sap your ability to procure things most of us would consider "essential". Even if you are making it in the middle class and 10% of your pay you can count as "disposible income" -- that 5% tax rate has trimmed your quality of life by significantly decreasing your ability to spend on "perks". The impact to your quality of life is still much less than the person who is subsisting. Now let's take someone who is well off -- say they make twice as much as our previous person, but have higher fixed costs so we won't count 50% is disposible, but perhaps 25%. The 5% tax decreases their ability to have the nice things in life far less than it impacts our middle class example -- only one fifth of their disposible income is affected rather than half. Now look at that in dollars. Say our middle class example makes $60,000 and of that $6,000 is fun money of which we take $3,000. Our well off example would then be at $120,000 in salary and of that $30,000 would be discretionary of which we would tax out $6,000. Even though the rate of impact is %20 instead of 50% in total dollars, so 2 1/2 times, the remaining pool of money is $24,000 compared to $3,000, or a whopping 8 times.
So with that lens a person would say you should tax the person subsisting little, if any, and that you can fairly tax the person making $120,000 a higher percentage than you tax the person making $60,000. "Fair" would be measured not in the relative dollars taxed, nor in the relative percentage taxed, but in the relative impact on quality of life. (Such a person might posit that money is a means to a comfortable life and not an end in itself.)
There are terms applied to taxation systems: progressive, flat, and regressive. Progressive systems tend to ask more of those to whom this impacts their life less. Flat systems would tax everyone at the same rate. Regressive systems end up drawing a higher percentage of income from those who make less.
You might think we would never levy a regressive tax, but in fact we have two today. One is a sales tax (or Value Added Tax aka VAT, which has other names as well), and the other is property tax.
Why is sales tax regressive? Because the less you make, the higher percentage of your income you must spend just to get by. Below the poverty line, saving money is rarely even an option and thus you spend every dollar you take in. As you become more and more well off, you have more discretionary income, and a higher and higher percentage gets saved (hopefully). So a sales tax tends to tax the poor at a higher percentage rate (of income) than the middle class, and the middle class higher than the upper class.
There are variants that avoid taxing "essentials" (groceries and shelter for example). These help spare the poor, but are still regressive between the middle and upper classes.
Property tax works similarly. The less you make, the higher percentage of your income tends to go towards housing -- the primary item taxed. Even if you don't own your home, the landlord is taxed on the value of where you live and your rent will be adjusted over time to recoup this expense of the owner.
So calls for a national sales tax are destined to hurt the poor and provide a windfall to the rich. Got a way to make the masses understand that? Polls show an awful lot of people who would be hurt by such a plan support it. I believe this is because there is resentment of a handful of folks and businesses who can take advantage of tax loopholes to pay very little -- much less than "their fair share" under either of the above interpretations.
Whether you think graduated tax rates or flat tax rates are what represent "fair", I urge you to reject sales, consumption, value add, and property taxes. All of these are in fact regressive and hurt those least able to afford it.
- K
Afterword:
As an aside, I find it interesting that Europe has taken this model despite being seen as largely Socialist -- of course that may mean there are better safety nets at the bottom at least, but it still stings a middle class. And Socialism actually involves the degree of public/private ownership of assets and funding of necessities, despite what campaign ads might teach you, and so perhaps it isn't so contrary after all.
