“Fair” Taxes?

04/04/2024

        Regarding the discussion over "fair" in the larger conversation about tax. Fair is the term used by multi-millionaires like Steve Forbes when they are shilling for Flat Tax schemes. The word fair to them means everyone pays an equal percentage. Perhaps a better way to look at "fair" would be that a taxation scheme should not unreasonably disadvantage any sector of the population at the advance or another.

Steve Forbes proposed that everyone should pay a flat 10% of income as taxes and all would be well with the world. Let's use reductio ad absurdum to show the point. After all isn't that "fair"?  On that basis, let's take an obviously uncommon situation. Consider that of a man with a $5 million income (read "The Big Short" if you think those people aren't around!) also consider the gardener who works for him at $12.00 an hour, which is Florida’s minimum wage.

        The gardener works a solid forty-hour week and earns a whopping $24,000 annually, which sadly is considered above the federal guidelines for a family of two, which is $20,440. But wait, there's more. Unless the employer is a scofflaw or the gardener is an independent contractor who refuses to pay them, there is the issue of Social Security and Medicare taxes. For the hapless gardener, all of his pay is subject to FICA and Medicare withholding,  (7.65% total)  so he is hit for a total of $1,836 off the top. He now has $22,164 left, on which a 10% flat tax will take him to $19,948, and into the poverty classification. Remember, he works hard, arguably harder than the employer, certainly with fewer perks, possibly no health care benefits, and shorter lunch breaks. Assuming both parents work 40 hr minimum wage jobs and have two children, even the cheapest child-care costs will push them back below the poverty limit. 

        His employer, on the other hand, also pays FICA, but only on .23% of his income, because Social Security withholding maxes out at an income of $118,000 annually. So, the "flat taxers" omit the dirty little secret, which is that the laborer earning $18,000 actually pays 6.2% of his wages for Social security, while his far wealthier boss actually only pays a measly 0.14% of his. Fair? What do you think?  Now, consider this as a risk/reward exercise: the laborer pays 6.2% of his income for his entire working life, but will have his Social security income calculated based on his actual earnings. The millionaire will only pay 0.14 % of his, but will likewise have his Social Security based on his actual earnings. (up to the max legal payment limit, currently $45,864 annually)   

        Now let us consider the $5 mil guy. He "earns" $5,000,000 annually but stops paying Social security at $118,000, so he pays 6.5 times as much into FICA, but he earns 277 times as much! And he will reap much higher benefits. Still fair? Huh?  As for Medicare, the rate is constant regardless of income, so they both pay the 1.45% Medicare withholding. Adding all this up, the $5 mil guy pays FICA and Medicare a total of $77,347.  deduct an additional 10% ("flat" remember), tax and he is left to struggle by on “only” $4,430,388! Of course, this assumes no offshore or tax dodge shenanigans to hide income.   So, the issue is: Whose lifestyle, or more to the point, quality of life, is affected most by the 10%? flat tax? Is the impact "equal" or "fair"?   I would submit that it is not. Even after both reach retirement, assuming the gardener and his wife both worked the same jobs for the same pay, they will barely be able to reach the poverty level - without children. Then, the rich man says "Well, he should have saved for his retirement!" Really? There simply is no marginal, or savable income at $18,000 per year. IRAs, flexible spending accounts, investments....? These are just letters and words to the average laboring person in America. And remember, this doesn't even consider the cost of healthcare.

        A flat tax is inherently unfair for those who are already close to the margins and haven't been born, to use an appropriate word, lucky, or not as intellectually gifted. People just like that built much of the infrastructure of this country while living in or close to poverty. We can do better, and a tax structure steeply graduated at the top would help us to do so.

        Finally, to hear the whining of the trust fund candidates, you'd think we pay the highest taxes ever right now. Trump actually said we were "The most highly taxed developed country in the world. The two following graphics show his perfidy and ignorance.

 

As the graph above shows, among developed nations, only Mexico, Chile and Korea have lower taxes than the US, which Trump says is the most highly taxed. No, just plain, no!

As this graphic shows, US corporate tax rates are also below the OECD averages. Flat isn’t fair and the "One percenters" aren’t suffering!  Amen.