William M. Briggs

Statistician to the Stars!

About Half Will Not Pay Federal Income Tax: Plus, A Solution To This Unfairness

What’s to stop a large bloc of voters from joining forces to create laws so that they get a free ride, that they, in effect, make everybody else pay their way? That’s a rhetorical question, incidentally. The answer, for democracies has always been well known. Further, there is no way for the answer to be anything but obvious.

A CNN story that “47% will pay no federal income tax” admits an “increasing number of households end up owing nothing in major federal taxes, but the situation may not be sustainable over the long run” (emphasis mine). They continue, à la a standard course in civics:

A key reason why there is a zero-liability group at all is because the U.S. tax system is progressive. Those who bring in more money pay more than those lower down the income scale to support government functions such as national defense and social safety nets like Medicaid for those in need. That progressivity can be dialed up or down.

“Some think it’s too progressive. Some don’t think it’s progressive enough,” said Roberton Williams, a senior fellow at the [Tax Policy Center].

President Obama falls into the latter camp. He has proposed increasing the income tax burden on families making more than $250,000 and individuals making more than $200,000, while offering new measures to reduce the tax bite for most Americans making less…under Obama’s budget, he would keep the ranks of the non-payers higher than they would otherwise be.

To the source! One can navigate directly to the IRS site (link), where many helpful statistics are compiled. Shown for your pleasure is the “Total income tax share (percentage)” by year for the bottom 50 percent of taxpayers. I have shaded the Republican and Democrat presidencies using the standard red and blue.

Bottom 50% of taxpayers

In 1986, the bottom 50% were paying about 6.5% of all federal taxes. In 2006, it was already down to just under 3%. The new rate, in 2009-2010, will be something around 1%. Crudely (and linearly) extrapolating from this trend, by 2024 the bottom 50% will pay absolutely nothing. It’s worse than that, of course, because many in this group will receive a “rebate”, i.e. a gift called “earned income tax credit”, id est free money.

Pause and ponder this: half of all Americans will let the other half pay all the federal expenses of the other.

Let’s look at the other breakdowns. This plot is the same, but for the bottom 50%, 75%, etc., up to the bottom 99%. Except for a slight reversal at the end of the Clinton years, the bottom 99% have been paying less and less and less. By 2006, the bottom 99% of Americans were paying about 60% of all taxes.

Bottom 50-99% of taxpayers

And what does that imply? This picture. It shows the percent of taxes paid by the top 1% of all earners. Reagan kept their burden hovering around 25%. The big jump for these generous folks, as it turns out, started under Bush the Elder, increased until a later-year-Clinton reprieve, and then continued its inexorable climb under Son of Bush. Obama has promised to continue the Bush clan’s enlightened thinking. Again, crudely extrapolating the trend puts the top 1% paying half the bill by 2020, though it’s true Obama has promised to redouble his taxation efforts, so maybe 2015 is a better guess.

Top 1% of taxpayers

I’m sorry to point out the obvious, but this kind of fun just cannot last. Even if we confiscated all the dough from the top earners, it would not be enough to fill the growing (growling?) federal stomach. Politicians are leery of pointing this out, however, because the implications are not pleasant to that bloc of voters we talked out, the ones who demand ever-increasing government gifts.

I have no long-term solution, except to suggest a way to address the inherent unfairness of the situation. When your aunt sends you a pair of socks for the Federally Recognized Holiday of December 25th, you are expected to reciprocate with a thank you note. Common politeness and decency insists on this.

Therefore, the half of Americans who receive the yearly (free) present of a Government with all its trappings, should be required to write those of us who paid for it a thank you note. Each free-riding citizen would receive a random name and address of a taxpayer and must, by midnight of April 15, dispatch a polite letter thanking its addressee for the largess, and long may it continue, etc. Any failing in their courteous duty would be forced, as the rest of are, to pay taxes for the following year.

Naturally, we would pay for the envelope and postage.

39 Comments

  1. No Representation without Taxation!!!!

  2. When it comes to taxes, mafia seems to be a synonym for government. We pay our taxes honestly and voluntarily in fear of the consequences of being caught. The mafia does need money to survive, but I wish I could decide how, say, 50% of my tax dollars should be spent.

    I am so jealous of those who earn more than $1 million per year. Yes, tax them. 🙂

  3. Sorry, I can’t help but do this:

    Reg:
    They’ve bled us white, the bastards. They’ve taken everything we had, not just from us, from our fathers and from our fathers’ fathers.
    Stan:
    And from our fathers’ fathers’ fathers.
    Reg:
    Yes.
    Stan:
    And from our fathers’ fathers’ fathers’ fathers.
    Reg:
    All right, Stan. Don’t labour the point. And what have they ever given us in return?
    Xerxes:
    The aqueduct.
    Reg:
    Oh yeah, yeah they gave us that. Yeah. That’s true.
    Masked Activist:
    And the sanitation!
    Stan:
    Oh yes… sanitation, Reg, you remember what the city used to be like.
    Reg:
    All right, I’ll grant you that the aqueduct and the sanitation are two things that the Romans have done…
    Matthias:
    And the roads…
    Reg:
    (sharply) Well yes obviously the roads… the roads go without saying. But apart from the aqueduct, the sanitation and the roads…
    Another Masked Activist:
    Irrigation…
    Other Masked Voices:
    Medicine… Education… Health…
    Reg:
    Yes… all right, fair enough…
    Activist Near Front:
    And the wine…
    Omnes:
    Oh yes! True!
    Francis:
    Yeah. That’s something we’d really miss if the Romans left, Reg.
    Masked Activist at Back:
    Public baths!
    Stan:
    And it’s safe to walk in the streets at night now.
    Francis:
    Yes, they certainly know how to keep order… (general nodding)… let’s face it, they’re the only ones who could in a place like this.

    (more general murmurs of agreement)
    Reg:
    All right… all right… but apart from better sanitation and medicine and education and irrigation and public health and roads and a freshwater system and baths and public order… what have the Romans done for us?
    Xerxes:
    Brought peace!
    Reg:
    (very angry, he’s not having a good meeting at all) What!? Oh… (scornfully) Peace, yes… shut up!

  4. Briggs

    October 2, 2009 at 12:16 pm

    Ari,

    I’ve always like that clip.

    Reg should, therefore, be willing to pay a small amount for his services.

    Cyberstoic,

    Perhaps No Taxation, No Representation?

  5. Matt,

    No argument here. But then I tend to believe that the whole income tax system needs to be rebuilt from the ground up. I think that your argument is only one of a whole panoply of serious issues with taxes and spending in the US.

  6. Before the 1930s, the emphases on the “general welfare” clause of the Constitution was on the word “general.” The laws had to effect all the States, and everyone equally.

    The fact that the majority can pass a law that negatively effects only the minority, is unconstitutional. The founders would consider this mob rule. The only way to make things right would be to pass laws that everyone was tax at an equal percentage, whether income tax or sales tax. Many States do it this way.

    I saw a interview of Donald Trump the other day, and he said, not he, but many of the rich he talks to, will leave the country if things get anymore ridiculous. If even half of the top 1% were to leave, then what? I hope they do!!!!

  7. Dearest Matt,

    You have beautifully argued your case. I agree with you. Why should people who make more pay more for the same services from the government? You have worked hard for your money. It just doesn’t seem fair to me that you have to give up more to support the poor. I love your solution. You rule!

  8. Briggs

    October 2, 2009 at 4:49 pm

    Candy Darling,

    Not that I shouldn’t pay more—maybe. But why should many—half!—pay nothing? Shouldn’t everybody do something? Or if I, and the rest of us 1%, pay half, maybe soon even more, shouldn’t we have more of a say of how the money is spent?

    It would be like you went to the most expensive restaurant and footed the entire bill for a crowd of 100—and they got to pick, by vote, what you get to eat. Which might even be nothing. After all, if they voted 99 to 1 that you go hungry, what recourse do you have?

  9. It’s a dangerous game. In many ways a flat percentage rate is fairer. I wonder what the constant percentage would have to be to bring in the same amount of income overall.

  10. You imply that it is Presidents who set the income tax rates, and in indirect ways this is partially so. Presidents can propose tax policy, and use the bully pulpit and other strategies to move their vision of taxation. They can also direct the executive branch to issue regulations about tax collection that make it more painful or less, more destructive or less. But legislation involving taxation and spending must originate in the House of Representatives, must it not?

    Assigning credit or blame is quite a lot more complex than seeing who sits in the Oval Office. Presidents with perfectly good ideas about the fisc can have them stomped to pieces by congress; and on the other hand, perfectly awful ideas can be carried forward enthusiastically and made even worse. There is a lot of blame to go around.

    On the point of your essay, though, I agree that having a minority pay for the wishes of the majority is a recipe for disaster.

  11. George,

    To answer your question, total income tax / national income is 8.5% and has staid in a tight range for the last 50 years regardless of the levels of income, tax rates or the federal budget.

  12. I think the UK figure would be about 12%. I expected something more like 25%.

    I guess people’s salaries vary in response to taxation anyway, e.g. if all tax doubled then people would demand higher salaries to compensate. So if a flat rate was implemented then the minimum wage would go up. I guess it’s unlikely salaries or bonuses would drop at the top end though.

  13. Alan D. McIntire

    October 3, 2009 at 9:47 am

    This reminds me of C. Northcote Parkinson’s “The Evolution of Political Thought”

    Alexander Tyler ,a Scottish history professor at the University of Edinburghk in the late 18th century , had roughly the same views. He had this to say about the fall of the
    Athenian Republic some 2,000 years earlier:

    “A democracy is always temporary in nature; it simply cannot exist as a permanent form of government.”

    “A democracy will continue to exist up until the time that voters discover they can vote themselves generous gifts from the public treasury.”

    “From that moment on, the majority always vote for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”

    “The average age of the world’s greatest civilizations from the beginning of history, has been about 200 years”

    “During those 200 years, those nations always progressed through the following sequence:

    1. from bondage to spiritual faith;

    2. from spiritual faith to great courage;

    3. from courage to liberty;

    4. from liberty to abundance;

    5. from abundance to complacency;

    6. from complacency to apathy;

    7. from apathy to dependence;

    8. From dependence back into bondage”

    – A. McIntire

  14. I understand, my sweet Sir Briggs. I don’t disagree with you that you should have a say over how your tax money should be spent. No need to justify your position to me, my love.

  15. I couldn’t disagree with you more mr Briggs. How sad that the top 1% is paying 40% of the fed taxes! How sad their own materialistic live must be!! At this rate, I’m sure that billionaires will simply stop existing.

    Mr Briggs, you are not being fair in your assessment.

    The top 1% regard their money very well, but let’s face it, money supply for these people is almost discretionary, their pain is between buying a one million dollar yatch or two million dollar. The lower middle class’ pain is between paying their kids their educational bills or [i]not[/i], or deciding whether they should risk their lives without medical insurance or not, etc.

    The differences of these money spendings are enough to justify the progressive chart.

    And to give an almost Off Topic flavour to my disagreement, I’d like to point out that even businesses are shifting towards this “progressive chart” mechanism as well, specially in the internets, where to most people, services are [i]free of charge[/i], but there’s always a 1% of people that will use the [i]professional[/i] version of these services that include much more “stuff”, and these clients’ pay are enough for the entire service.

    The other thing is that even in a flat tax scheme, the upper half would always pay [i]much more[/i] than the lower half, so your rethoric is biased in a very deep way. We are all aware of the high level of “inequality” of the US. Many people think it’s not a bad thing, I don’t care right now to discuss that, but one of the consequences is that the lower 1% would pay much much less than the top 1%, by [i]a priori[/i].

    [b]So your graph is not enough to see how much the US tax is schewed[/b]. You’d have to present another one (control graph) showing how would it be [b]if the tax was flat[/b]. Bonus point: I bet that you’d find that [i]historically[/i], such graph would also show the richest 1% share to [i]increase[/i].

    On an end note: stop the snobbism of this issue. Please. Obama will ask more of people that earn north of 250k per year. I earn 15k. [b]I wouldn’t mind to be asked that much more at all, if that meant I earned 250k a year!![/b]

  16. Luis Dias – Would you work 5 hours more a week (250 hours a year) if the additional wages you earned went to the IRS to help those that are worse off than you or are you more concerned about those better off than you than those worse off than you?

  17. Question: setting entirely aside the justice of it all, bureaucrats go looking for money where they can find it, and perhaps with the increasing spread of incomes the money is mostly to be found in the pockets of the top 1%. What is the shape of the area under the income distribution curve in the USA today and what would be the global consequences for government revenue of present policy vs other possible regimes?

  18. Briggs

    October 4, 2009 at 5:41 am

    Luis, All,

    The argument is most certainly not that the rich pay more and should not. To claim this is to miss the point. The argument is that the rich are paying an ever increasing share, and that that situation cannot last, and that it is harmful.

    What you’re not seeing is that the system where the rich pay most, and half—half!—pay nothing, is enormously unfair in two directions. The first is that you are asking a very, very small proportion of people to foot the entire bill while half (and soon more than half?) don’t pay anything.

    This is not the situation where the rich are carping about funding the bottom, say, 5%, a group which is so poor they can just scratch by. This is the rich paying for 50%, and where those near the top of the 50% are making a decent living. In any sense of fairness, can you explain why they should not pay anything?

    The second, and vastly more important sense of unfairness, is that it is directed against the poor (who are defined, don’t forget, as the bottom 50%!). This gets at Alan M’s point. You cannot expect that the fewer and fewer people who are paying more and more of the bills will not ask for something in return for their largess. To think that these people will give their money for free, so to speak, is to reason completely opposite of all evidence of human nature.

    By asking them to increase their share, those businesses and individuals who are wealthy will be able to at least shade new laws and regulations in their favor, if not outright dictate those laws. Who are the lawmakers and lobbyists anyway? Not from the bottom 50%. With all that money must come power, which is obviously more important. By structuring the rules so that progressively fewer people pay, you exacerbate the effect. The harder you pull against the wallets of the rich, the harder they will push back your liberties. This is inevitable. You are concentrating power into the hands of a smaller number of people.

    You simply cannot have a fair government where half—half!—have no say, who do not contribute.

    Luis, I would be willing to take a bet that the Obama/Democrat congress finds a way to circumvent that $250,000 “limit”. (Incidentally, I wonder why you believe the Big O’s claim so strongly? That, too, goes against all experience with politicians.)

    Kevin,

    Quite right, and a fair criticism. The poor excuse for drawing it this way is that it is customary and easy. Better (in the USA) would be to have three blocks, one for each house and a third for the president.

  19. Luis,
    A lot of what you wrote was incoherent, but of the part that wasn’t,
    There is already a progressive rate inherrant in a system that works in percentages, obviously. You seem to want to punnish those who have more money because you perceive that they have less ‘pain’ than a poor person.

    I can assure you that measuring someone’s income is not a measure of their pain. This is a materialistic viewpoint if ever I saw one. One that is common in the socialist; that only capitalists care about money.

    That old chesnut, a socialist wants to help the poor only half as much as he wants to hurt the rich.
    I’m in the forty percent tax bracket and I don’t have a yacht. I have a lylo.

  20. ~With All My Love and Support to Matt, and No Promise Of Coherence~

    Joy,

    Calling the scientific research findings that you don’t understand arrogant is simply… you. Calling Luis’s argument incoherent (although it’s not) doesn’t make your argument more correct. Concluding that a socialist wants to help the poor only half as much as he wants to hurt the rich is… right, very logical.

  21. Briggs, Joy:

    Well, first of all, it’s certainly not true that only the 50% richest people pay taxes. This discussion is about income taxes, but people pay other kinds of taxes everyday, for almost everything they buy or use. Thus the reasoning that only 50% of people are somehow “contributing” for the state budget seems flawed a priori to me. I may be wrong about this, though, feel free to correct me.

    What you say about the richest guys “controlling” or dictating whatever bill comes due or not, well that’s already the situation we’re in, and I do not see how this would prove even more dangerous than it is right now. The power of these people does not depend upon the taxes they pay, but rather from the lobby groups they support. Do you really think they would abandon these lobby pressures if somehow America would be “softer” on their own taxes? Bush made a huge cut on these top 1%, and I didn’t see that softening of lobby pressures, at all.

    This is the rich paying for 50%, and where those near the top of the 50% are making a decent living. In any sense of fairness, can you explain why they should not pay anything?

    This point is valid. I’d have to think it more through.

    But even still, my criticism towards your review stands: you still have to create a control graph that tells us what would happen if the tax rate was flat. The increase of the burden from the top 5% on taxes can have three distinct causes: one, tax increase on the wealthiest; two, more efficient “tax police” (information age accounting); three, a sudden rise of wealth in the top 5%.

    I’m not saying that we are witnessing only the second or the third, but we could at least discount the effect of the third if we saw a graph like I suggested. Most likely, the increase is a sum of the three kinds of effects. To plot a graph like you did and suggest that this is entirely the fault of “greedy governments” can be hugely misleading.

    It’s almost like plotting the rise of temperatures in the planet and asking us whether if there remains any doubt whatsoever of the CO2 impact on them…

    You simply cannot have a fair government where half—half!—have no say, who do not contribute.

    And yet, we saw in these elections the first president to be elected with money that came precisely from that poor majority! Since the dawn of ages, presidents were elected with promises made to plutocrats before the suffrage, in order to gain the necessary money to do the elections. Obama was the first guy that made an impressive campaign almost without this kind of money. So perhaps what you are hinting at is not as dangerous as it sounds, it seems to me, you are only seeing half of the picture here.

    Joy:

    There is already a progressive rate inherrant in a system that works in percentages, obviously. You seem to want to punnish those who have more money because you perceive that they have less ‘pain’ than a poor person.

    Well, that would be ridiculous. I know these kind of people you speak about, in portugal we call them either communists (real poor people that are marxists) or caviar leftists (rich people with self-imposed guilt because they are rich). That wasn’t my gist. What I say is, for rich people, money is much more disposable in percentage than in middle-lower classes. That is because the needs of people is not measured in “percentages”, but in absolutes. When I referred to the word “pain”, I wasn’t speaking literally.

    For instance, while there is a difference of money spent on food between rich and poor, there is only so much that is spent on that. Idem for education, idem for medicine, etc. The rest is investment, which creates even more wealth. But for me, this “investment” part that I could make is around zero. For a rich guy, the “invesment” part is around 90 to 95%.

    For what is worth, it seems that I have to say this to Joy: I have relatively low “moral” indignations towards capitalism. The issue is way more complex than such trivial and primal instincts would guess. And I do not have any “issues” against rich people. I even have lunch with these guys from time to time and have real fun talks with them.

  22. Luis, you beat me to it.

    Half (47%) pay nothing?! That also means that they make no contribution to the war, to government waste, and…uh… the bailout. Good for them! 🙂

    Joke aside, I thought you were just using the provocative statement as the reporter did in the CNN story. I see you really meant that they pay nothing. My understanding is that “not owing federal tax“ is not the same as “paying no federal income tax.” Perhaps, you can further show some evidence that 47% indeed pays NOTHING. I apologize if I missed the evidence; please kindly direct me to it. I believe that all workers are required to pay FICA taxes, one of the major proportions of our federal spending.

    I understand this is not your main point, however, this might be relevant to what you think is a fair amount that they should pay? So what is fair in your opinion?

    By asking them to increase their share, those businesses and individuals…will be able to at least shade new laws and regulations in their favor, ….

    My view is that our legislators are trying to do them a favor by decreasing their share. You mean by paying more tax, more new laws and regulations will be made in their favor?

    What you meant by “a way to circumvent that $250,000 “limit?”

  23. Luis,

    Fair enough, you know I don’t mean any harm. IfI’m ever rich enough to own a yacht, you can come to tea. I’ve some questions I’d like to ask. I’m waiting for Briggs to write a post that allows me to askyou without being off topic, you know me, never knowingly off topic!
    However What you speak of is disposable income. Why they say the first million is the hardest. Seems to me that you have some untapped tallents in the creative department and perhaps if you write a book you could be the next big thing. I’d buy one, as long as it wasn’t about droids or space (or computers, or zombies, or guns, or martial arts, or sport.)

  24. When it was decided to obtain govt revenue from the wage stream somebody decided to call it “income tax” and then they set about deducting it at source. Which should make something about it obvious: from an economic perspective there is no difference in kind between an income tax and a sales tax. We see a huge political difference because wage earners see themselves as the ones paying the income tax but it makes just as much sense to see the employer as paying the tax. After all, every dime a worker pays in tax came out of the employer’s payroll account. Indeed, one might say that “payroll taxes” are the rent which an employer pays the government for the privilege of using that portion of an employee’s productive capacity which was generated by govt spending in the first place, eg: public education, public safety (police,army,etc), public health, etc. Now I expect someone will claim my analogy does not apply to the “self-employed” but I suggest it does. When I hire a plumber to install a sink in my bathroom some of what I pay him he will pass on to the govt. in income tax. I say thats a sales tax I paid because if he wasn’t subject to that tax he could have charged me a lower price, and in a competitive market, if he didn’t his competitor would. But because taxes are a kind of overhead they get passed on to the consumer. I know the actual division of the impact of taxes on transactions is analysed more subtly than that by economists, in that they rationalize a division of the impact between the parties to the exchange which varies according to the relative elasticities of the supply and demand curves but I think the whole subject of taxation and “who pays” needs a more detached and objective point of view. If it is true that the bottom 50% pay no taxes on their incomes that means the employers of the bottom 50% are paying no taxes on their wages.

  25. from 2000 to 2008, the median income level (50%) increased 23%.

    from 2003 to 2007 the cutoff for being in the top 1% income level increased 38.7%.

    I wonder why the chart slopes downward?

  26. Let’s not forget, those in the top 1% also meet the Maximum amount payable to Social Security Tax in April or earlier.

  27. JT,

    “from an economic perspective there is no difference in kind between an income tax and a sales tax.” In aggregate income = spending. However, what applies to the aggregate does not hold for individuals. An indivudal can borrow or save. An income tax puts a higher level of tax on savers than a consumption-based tax does. Furthermore, if you put your saving toward a prodcutive investment, income taxes will tap your investment income, too.

    Briggs,

    Payroll taxes generate nearly as much Government income as income tax does. However, Social Security is a “regressive tax.” If you added payroll taxes to income taxes what would your chart look like?

  28. Briggs

    October 6, 2009 at 3:28 am

    Doug M, John,

    I can’t find any combined data on Social Security, Medicare, Local city and state, sales, phone, etc. etc. , nor even just the first two. I’m not sure that the IRS is keen on showing people’s true total tax burden. Although it would be fantastically useful to have a graph like that.

    Anybody know of any sources?

  29. Bloomberg has the sources of government revenue and expenses through time, but will not break it down by income braket.

  30. Luis – Please note that the share of federal tax revenue paid by the top income earners went up during the Bush years, so your claim that Bush provided a massive tax windfall to the wealthy is not supported by the facts. It is very popular thing to say, but it is completely wrong.

    JT – Your assumption that the burden of personal income taxes falls on employers is absolutely backwards. Labor markets clear at the value of the marginal product of labor, which is to say the employers of labor will pay up to, but not over, the value of the product labor produces. It does not matter whether the employer writes the check to the employee or to the government; he will not voluntarily incur a cost for an additional unit labor in excess of the value it produces, so income tax is borne entirely by employees.

    Furthermore, the notion that income tax is the price that companies pay for government’s provision of public schooling is silly for a number of reasons. First, the vast proportion of school financing is at the local level in the U.S., which means it is provided out of property taxes, not federal income taxes. Second, the value of an education redounds to the benefit of the educated party in labor markets. It comes in the form of higher wages due to a higher value of marginal product. Why should employers pay the higher wage level and then pay a tax that funds the education on top of that?

    Briggs – The idea that political power will naturally flow towards those that pay the bulk of the taxes seems to me to be exactly backwards. The fact of such a dramatic shift in the burden of taxation towards those with the highest incomes suggests to me that they have relatively little political power. After all, the payment of those taxes is mandatory, so they are not engaging in any sort of voluntary transaction (i.e. “I’ll pay lots of taxes if you’ll let me make the big decisions.”) Of course, since we operate on the “one man, one vote” principle rather than “one dollar of income, one vote” rule, the shift of the burden from the more numerous less prosperous (the bottom 50%) to the less numerous but more prosperous (top 1%) should not surprise. As evidence, note that when taxes for high earners go up, those high earners tend to flee the tax jurisdiction. If high tax burdens were the price the wealthy happily paid for political power they would be migrating into high marginal tax rate states and countries.

    Finally, the idea that contributions to Social Security constitute a regressive tax on income is as wrong as it is ubiquitous. The contribution that you make to Social Security (involuntary though it may be) involves a concomitant promise on the part of the federal government to provide you with a real annuity once you reach a certain age. In fact, those who pay less into the system receive an annuity that is relatively generous compared to their contribution, while those who pay more receive much less than their contribution would suggest. When you net the contribution made against the value of the promise received, Social Security is also a progressive tax and, in fact, a negative tax at the lowest income levels. Removing the income ceiling on Social Security contributions would make it a ridiculously progressive tax.

  31. txslr, I see the point of your argument but am not convinced because 1) labour markets very often do not clear; 2) labour will often work for less than the value of the marginal product of labour because the competition among providers of labour to supply labour to the market is often more rigorous than the competition among employers to obtain labour from the market; 3) in the absence of income taxes the employer could improve his bargain by reducing his gross wage while at the same time his employee could improve his bargain by increasing his net. Where the new bargain will be struck will not necessarily be at the margin.

  32. Briggs

    October 7, 2009 at 2:26 am

    txslr,

    I have never suggested anything on Social Security other than that it is a tax. Quite right to insist that it is a “promise” that the government will pay part of it back. We shall see whether and how this promise will be met.

    But as for the other matter, it might not seem intuitive, but it is in fact an empirical fact. True, not all who pay more voluntarily do so. But they do take steps to control that money, and they do so by becoming politicians themselves, engaging lobbyists (usually through their company), or directly seeking to change rules and regulations so that they are favored. And there is nowhere to flee against increases in Federal tax (except for the minority that try to hide their income off shore).

    Understand, I am not even against that except that this concentration usually results in rules, regulations, and laws that are more and more restrictive. And that I am against.

  33. JT

    “…in the absence of income taxes the employer could improve his bargain by reducing his gross wage while at the same time his employee could improve his bargain by increasing his net.” In the absence of income taxes, the gross IS the net.

    Briggs

    Obviously those who are required to pay exhorbitant taxes will do what they can to avoid them, including exercising what influence they may have on the government. My point was simply that the fact of such high levels of taxation on the wealthiest among us is very strong evidence that their influence is not strong.

    That people will vote with their feet is clear. Pre-Thatcher England saw a mass exodus of the wealthiest citizens to lower tax countries. When the burden becomes great enough, avoidance is always an option.

  34. There is a widely-held belief that Social Security is some kind of defined benefit pension scheme. The government is keeping our money in a “trust fund” or, even better, an “Ironclad Lockbox.” These assets will be “invested” in Treasury securities. And, The Government will return “our” savings to us when we are old.

    Guess what! There is no trust fund! And, there are no T-Bills set aside to fund the social security liability. Some people pay Social Security taxes and others receive Social Security benefits. Both are part of the general budget. The overage of receipts over payments is counted against the total deficit. That this number will soon go negative is irrelevant. Eventually, it will be relevant that social security benefits will be a large portion of the total budget, and there will be discussions as to how to cut the benefit without too many people noticing.

    Payroll taxes are 15.2% of earned income up to $110,000 and 2.6% of further income. So, I will say again — Social Security is a regressive tax.

  35. Doug M.

    Social Security is an unfunded liability of the government. It is still a liability. It is an asset for the current and future recipients. The cost of that asset is lower for those with lower income than for those with higher incomes.

    Suppose the government decided that everyone in the country was going to be forced to buy T-bills, but the working poor would pay 95 cents for each $1 in market value, while the relatively wealthy would pay $1.25 for each $1 in market value for their T-bills. That would be the same as everyone buying a T-bill for the market price combined with a highly progressive tax on high-income individuals funding a negative income tax for the poor. Not, alas, a regressive tax, no matter how you torture the definition.

    Now, social security does have problems, but the most often talked about solutions are to raise or even uncap the income limits for contributions or to means-test the benefits. That is, to either take more from high earners without raising their benefits or to lower their benefits without decreasing their contributions. Both solutions would have a similar impact -they would make an already highly progessive tax even more progressive.

  36. Social Security is not a liability of the US government. The government is under no obligation to maintain benefits at the current level, or for that matter to maintain the program at all.

  37. One point that has been missed here is that the situation is actually worse than Briggs displayed here. Through a vehicle called the Earned Income Tax Credit (EITC), many lower-income Americans actually pay a negative income tax. That’s a fancy-dandy way of saying the income tax code gives them money.

    Now there are those that argue that the EITC a) is a much more efficient entitlement program than “welfare” (probably true) and that b) it’s purpose is to offset some of the other taxes (Social Security, Medicare, Sales).

    But the bottom line is that Briggs is right on with his point: we are close to, if not already at, the point of diminishing returns in the effectiveness, both economically, socially, and politically, of a progressive income tax system. And this is happening at a time of trillion dollar deficits. Not good.

  38. Doug M

    Neither is the government “obligated” to pay off it’s short-term debt. It can always default. Hooray!

    The fact is, each year I receive from the Social Security Administration a statement that shows the amount to which I am entitled upon my retirement, based upon what I have paid-in to date.

    You, sir, are pissing up a rope with this line of reasoning.

  39. I’ve been engaged in taxations for lengthier then I care to admit, both on the private side (all my working lifetime!!) and from a legal stand since passing the bar and following up on tax law. I’ve rendered a lot of advice and redressed a lot of wrongs, and I must say that what you’ve put up makes utter sense. Please carry on the good work – the more people know the better they’ll be armed to cope with the tax man, and that’s what it’s all about.

Leave a Reply

Your email address will not be published.

*

© 2017 William M. Briggs

Theme by Anders NorenUp ↑