December 05, 2012
Open Letter On Tax Fairness To Senator Murray
Dear Senator Murray:
Thank you for writing. At your suggestion, I watched your
on ABC's "This Week" and read the articles in
The Hill and
the National Journal.
And I am still not sure that I understand your position on taxes, so I hope you won't mind if
I ask you three questions about it.
If I understand you correctly, the most important thing for you is that the rich pay
their "fair share", where the rich are defined as people who make more than senators and
All right, what, in your opinion, would be their fair share? According to the
the top one percent currently pay about 37 percent of all individual federal income taxes, and the
top five percent almost 60 percent. How much higher should those percentages be before
we would have a fair system?
(During the Clinton administration, those two groups apparently paid lower shares.
I assume you agree with me that Clinton-era taxes were less fair than our current tax system.)
Second, if I understand you correctly, you are willing to risk an economic downturn
in order to bring about a fairer system. How much of an increase in unemployment
do you think would be a reasonable price for that increase in fairness? One percent
for a year? Two percent for four years?
Third, and this is a much more difficult question, could you explain the
philosophy behind your concept of fairness? I assume that you, like almost
every other college graduate, has studied the ideas of two philosophers who
had much to say on this question,
and Robert Nozick.
As I am sure you recall — and I apologize for simplifying greatly —
Rawls argued that a fair society would be designed so as to have a very high minimum.
Nozick argued — and again I apologize for simplifying greatly —
that such a society would drastically limit our freedoms. (My own
thinking, because I value our freedoms, is closer to Nozick than Rawls.)
If I understand your thinking correctly, you hold what might be called an upside down
version of Rawls. What you favor is not a society with a high minimum,
but one with a low maximum.
Is that a fair summary of your philosophy? If not, could you provide us with
Thank you again for writing, and I hope that you, or one of your aides, will take a little time
to answer my questions, especially the first two.
I have posted this letter on line, and will happy to add any reply to those posts.
Next week, I plan to send you another open letter, with some suggestions for increasing
taxes on some of the rich.
Cross posted at
Jim Miller on Politics.
Note to would-be commenters: I plan to give Senator Murray and her staff a week or so to
reply. At the end of that time, I'll open this for your comments.
Posted by Jim Miller at December 05, 2012
03:19 PM | Email This
"the top one percent currently pay about 37 percent of all individual federal income taxes" "How much higher should those percentages be before we would have a fair system?"
Irrelevant question. If the extremely wealthy pay a far lower percentage of their income in taxes than do those of the middle class, then that percentage should be higher, shouldn't it? You've got questions, I've got questions. If you believe that the very wealthy should pay a lower percentage than the rest of us, and by the way that you frame the question, it seems that you do, then why do you think that should be?
All this talk this past year about your glorified job creators. How about tax incentives for actual jobs created instead of just throwing tax cuts at our wealthiest citizens with only the hope that they'll create jobs?
Jim: "Tell us how much in economic growth you would be willing to give up in return for greater equality."
Would you explain this statement further?
Because the underlying premise is that economic growth must be 'given up' in order to attain greater equality.
And, to be factual, nobody is asking for equality: they are asking for a their fair share of the pie.
"Would you explain this statement further?"
If you tax something, you get less of it. So, if you tax investments, you get less investment and less economic growth.
So our tax system, like almost all others, taxes investment income at lower rates than income from pay checks.
But, most of the direct benefit from those investments goes to the better off. When Joe Bigbucks builds a factory, he is usually doing it because he hopes to make money on his investment. If you tax his investments at a higher rate, he is less likely to build that factory.
On the other hand, if you want to make the incomes of Joe Bigbucks and Joe factory worker more equal, you almost always have to increase taxes on Bigbucks' investments.
In the last few months, I saw a piece by leftist Matthew Yglesias that argued for lower tax rates on investments. (Maybe even zero.) And in the last week or so, I saw a piece in the New York Times noting the considerable growth benefits from a pure consumption tax.
You should be able to find both of these without too much work.
"If you tax something, you get less of it."
Please provide the economic data demonstrating a negative correlation between taxation rates and investment rates, with a testable hypothesis which claims causation. Then show how the results of the testing verified this hypothesis.
Taxation may have an immediate and large effect on consumption, especially of non-staples like alcohol and tobacco, but I think showing tax rates alone -- after correcting for rates of return and inflation, and liquidity of capital-- will not show such an effect. I know I enjoy the returns from my investments more than I care about the rates at which they are taxed.
What Tensor said: "Please provide the economic data demonstrating a negative correlation between taxation rates and investment rates, with a testable hypothesis which claims causation. Then show how the results of the testing verified this hypothesis.
Taxation may have an immediate and large effect on consumption, especially of non-staples like alcohol and tobacco, but I think showing tax rates alone -- after correcting for rates of return and inflation, and liquidity of capital-- will not show such an effect. I know I enjoy the returns from my investments more than I care about the rates at which they are taxed."
What Jim Miller heard: "'''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''''
Jim@3 postulates: "If you tax something, you get less of it."
Sometimes. Then again, if people need a certain amount of money after taxes, they will want to work more if their taxes are higher. (I'm not saying we should raise taxes to make people work harder, just that your claim is unsupported by either theory or data.)
"So, if you tax investments, you get less investment and less economic growth. So our tax system, like almost all others, taxes investment income at lower rates than income from pay checks."
By "from pay checks", you mean from, uh, work?
So investment is more important than work?
Data is available. The top 1%, 5%, and 10% pay considerably more income tax - percentage-wise and as compared to their share of income - than any other group. They're already paying more income taxes as a percentage of income, AND are paying much more than their share of total income.
How much higher should it go?
Bruce @6, It may be fashionable to denigrate the "1%" who aren't "paying their fair share," but when it comes down to it, yes: long-term, investment is going to drive more growth than pushing a button at the Twinkie factory.
That said, both are important, and your effort to pit one against the other illustrates a big part of the problem with the "tax the 1%" movement.
9. And it took just 2 posts for someone to trot out the ever-so-precise "fair share" argument. Please quantify that. Unless you're just math illiterate, the chart that Dan linked to shows that upper income taxpayers are already paying well above almost anyone's definition of "fair".
To be fair, you also need to ask tough questions to the GOP. One of the GOP's claims on not letting the claims on the very top expire is that it will hurt small business people. This is a lie. I stated a few examples in another of your posts where the median income (profit not revenues) was well below the $250K threshhold. I also brought up the fact that farmers (one of the small business groups the GOP hold up as examples) don't make anywhere near this threshold. Just revenues alone from farming demonstrate this, but revenues are not taxed by the income tax (and in WA state farm revenues, I believe, are excluded from B&O tax on revenues), only net profits (revenues - expenses - depreciation).
So, Jim, one question for the GOP is who are these small business people who yearly make in excess of $250K? They throw this statement out as fact, but don't back it up with actual facts. It isn't farmers, small shops, or independent contractors (plumbers, carpentry, etc.). My guess it is the Mitt Romney clones, hedge-fund managers, and tort lawyers, etc. It isn't a doctor/dentist with his own private practice, which does profit, but unless they are practicing concierge medicine with a very good client base, are not making this sort of profit.
This chart is Federal Income Tax only. It excludes FICA and Medicare taxes that also go to fund our federal government.
You are a small business man, I believe, maybe you can answer the question the GOP fail to explain. What are the types of small businesses, where the individual (not corporation, because then it files corporate taxes, which are a different issue), make regularly over $250K per year?
@TC. I will try to explain. Many small businesses are formed as Sub S Corporations or LLC's. In the case of Sub S in particular, all of the profits pass through directly to the individual owner(s). LLC's can be treated the same way or not, they are a different beast. In addition, when they talk about small businesses they are referring to businesses with up to 500 employees. That may not be your definition of small but it is considered small.
The great bulk of US employment and potential job growth is at these larger small companies. The problem with raising taxes on these companies is that not all profit is cash in your hands, yet the individual owner is responsible personally for the taxes due. Taxes do effect behavior and taxes on these small business do effect hiring and firing.
I like how the left likes to talk about raising income taxes because of "fairness" but as soon as someone points out that income taxes are, in fact, quite progressive, they move the goal posts and talk about the payroll taxes.
Yes, the government (mistakenly) lumps the revenue sources together when they talk about federal budget outlays, but these are all three different accounting ledgers with their own revenue and expense balances. Yes, payroll taxes were (again, mistakenly) used to fund non-payroll expenses, but that money was "borrowed", so it is not the same.
Finally, the payroll taxes, while appearing to be unfair (in the sense that they are not as seemingly progressive as income taxes) are in fact very progressive on the other end, the payout. While FICA is capped at just over $100,000, the payouts are also capped. Plus, income earners at the lower end of the spectrum receive a higher percentage of benefits to taxes paid upon retirement than people with higher incomes. But I guess that is not enough for the left. They want even more "fair share" from the rich by taxing them for an enforced retirement account that they intend to not pay them at the promised time so that they can tax others little or no amount, but give them generous retirement benefits.
So, if you want to bring in payroll taxes, please take a moment to explain how they are unfairly structured and benefit the rich. Don't forget to take mind of the promises made about the program regarding payments and benefits.
14. How does it help me if some fatcat invests in some deathtrap factory in the third world where they have to put nets around the exterior to keep the slave labor from jumping to their deaths because of the horrible working conditions?
TC @ 11:
Yes, it is. First, I assume you agree with me that "the rich" are at least paying their "fair share" when it comes to Federal income taxes?
As far as FICA and Social Security, the benefits are capped, are they not? Since these are decidedly NOT taxes (they're supposed to be voluntary contributions towards defined benefits in the future), and the benefits you get from them are capped, then why not cap inputs as well? Should we tell those who make more than $100,000 that they have to keep paying even more Social Security contributions even though they will not receive any benefits from them?
I am a small business man. I have made, in the past and hopefully the very near future, more than $250,000 in a year. A big chunk of that was saved for the years when my income was low - or I knew I had large expenditures (capital equipment) coming up. An extra $6000-$7000 in Federal income tax would be a negative thing, just meaning I have to stretch that much further.
16. Oh, and TC - I was an LLC at that time, so whilst a "corporation", the profits or losses flowed through to me. Most small business are probably LLCs since the paperwork and reporting is much, much simpler - allowing the owner to focus on the business, rather than the regulatory agencies.
17. Oh, and TC - I was an LLC at that time, so whilst a "corporation", the profits or losses flowed through to me. Most small business are probably LLCs since the paperwork and reporting is much, much simpler - allowing the owner to focus on the business, rather than the regulatory agencies.
If citizen 'A' earns $50,000 a year and pays $12,500 a year in taxes, he is more than paying his fair share. If citizen 'B' earns $1,000,000 a year and pays $150,000 in taxes, he is NOT paying his fair share.
The % of total tax revenue payed by the richest can not be the measure of fairness unless the total income of the richest by % of population is compared against the rest of the taxpayers.
DaleD, Eyago, and Dan
I understand that LLC may pass profits on, however, those profits are passed onto the partners and are typically divided per partner share. In the case of a farm, which I am most familiar with, it may be a family farm with three family members, let's say. Typically, no one member would get over 50% share. Therefore, we are talking profit from the farm in excess of $500K before one of the three partners exceeded the $250K threshold. Do realize how many acres we are talking about here to get above this threshold for actual profit? Let's say, it is more than three with additional family members could farm, even with hired help (which would be an expense). Farm income maybe gets 10-15% return (profit/revenues), but my guess it is alot less.
DaleD raised the issue of up to 500 employees. Per this link from SBA, another criteria is receipts (revenue). For example, for retail is $7M in receipts. If one has 499 employees with an average wage plus benefits (business cost not salary employee makes) of $50K, the business would actually need $24.9M just to meet payroll. Even if you lowered the payroll costs to $25K, they would still need $12.5M in revenue to meet payroll. Taking retail, again, for example, using the $7M limit dividing by $25K (assume part time), this would equate to 280 employees. Retail's typically only clear 10-15% in profit. So taking the $7M * 15% (high end) = $1M. This would then need to be diluted by partnership share. Again, this is the high end and not the norm. The article I pointed to in other discussion is that the median for small business owners is around the $120-140K range.
While, yes, there may be businesses that meet this threshhold, fine, then the GOP should put forth the actual data instead of the generalization. How many business owners are we talking about?
Like I stated earlier, the types of businesses where profit per individual/principal(in case of LLC)is very few and in the industries where we don't necessarily need to see growth. We don't need more hedge fund managers or tort lawyers etc. GOP: What is the number for retail establishments, for labor industries (like independent plumbers, carpenters, etc.), and for farm. Stop hiding behind the generic small business and lumping them all together.
In my mind, the GOP needs to be specific in who will raising rates above $250K will hurt. Stop hiding.
RE: FICA and Medicare
To the average middle-class worker, these are just as much a "tax" as income tax. The federal government lumps them in as general revenues, so they should be every much part of the discussion. The GOP wants to cut the benefits (payouts) end, then they need to factor in the input end on the worker also. If the GOP wants to exclude them from discussion and remove make these programs fully self-contained, then go for it (and payback FICA all that you have borrowed over the years). You can't take the funds to buy bullets (fight wars) and then say you can't count both sides of the equation.
TC and Dorky,
(Sorry to lump you in with Dorky, TC, you deserve better)
Do you guys consider contributions to a 401k or college savings plan a tax too?
Just FYI for the (un)SP peanut gallery...
In January 2013, the temporary tax cuts expire..for all of us.
I believe you all refer to these temporary tax cuts as the Bush Tax Cut. Come January we'll refer to the tax increase as the Bush Tax Increase, or maybe the Boehner-Ryan Tax Increase.
I don't think you will find a whole lot of conservatives that would disagree with the idea of separating the payroll accounting from the general fund accounting. (now, I am talking conservative people, NOT politicians, as politicians will violate their core beliefs for political gains) So, I don't know why you even want to press that point here.
As for benefits, it is clearly past time to have a frank look at the promises and costs of those promises in our Social Security and other entitlement programs. When average length of time in retirement started going up, and we had fewer workers per retiree, and increases in the payout rate beyond the rate of inflation, our system started to show signs of problems. However, politicians have little direct incentive to fix those problems. Everywhere you look across the western world, whenever an entitlement is scaled back there are huge and potentially disasterous backlashes. You can even admit when Paul Ryan suggested changes to medicare he was vilified by the opposition.
So, instead of separating the accounting the left want to blur them together so that they can generate fervor from the common people against the rich by saying the rich don't pay enough of the cost of government. But it is not the cost of government that they are talking about. It is really the cost of entitlements. They want to increase income tax to pay the shortfall in entitlements, but if they talked only entitlements, they would be forced to talk about funding entitlements with increased entitlement funding or cutting benefits. I ask you, who is being the more irresponsible here?
Anyone advocating higher taxes without serious expenditure reduction should read Stephen Moore's book "Who's the Fairest of Them All?"
It is easy to focus on the indivudual and forget how their efforts create jobs and support systems. Microsoft and Amazon provide far more revenue and living wage jobs than the stadiums ever will. Their employees in turn pay taxes, buy goods and houses, and support charitable causes. The big boys also need suppliers, creating an environment that fosters business growth and opportunity.
The one issue not being addressed is expenditures far exceed revenue. About $2 trillion came in last year and $3 trillion was spent. And this trillion dollar overrun has happened each year Obama has been in office.
As a final point, the estimated revenue raised from these new taxes(approx $26 billion) at the current rate Murray and company proposes would only run the government for 10 days.
M BS @ 21
Actually CONGRESS passed the tax cuts as a reconciliation bill that has a 10 year limit because they were unsure they could get enough DEMOCRATS to vote for it to pass the 60 vote threshold.
Under that reasoning, the tax INCREASE belongs to congress and democrats are the reason.
And since Democrats are unwilling to extend those tax cuts this time around, the increase is still their fault.
Seriously, is that really the best you can do?
M BS @ 24
Any of you ever played Air Force Academy's Eisenhower Blue Course?
I wonder if Obama has?