Is Our Tax System Fair? If Not, Why? — Veronique de Rugy

I’ve published a fair amount of simple research on tax policy that cuts through the (often) baseless rhetoric from our political class, but economist Veronique de Rugy has really done a ton of good work here, the majority of which is, as far as I can tell, supported by things like “facts” and “data.”

I almost entirely agree with her when she says (emphasis mine):

Now, I wonder how the president’s constantly talking about how “unfair” the current tax system will affect people’s perceptions about that system. If one hears enough times that rich taxpayers aren’t paying their fair share, can it change our perceptions, whether it is true or not?

Obviously, there is much more to say about fairness and so much I don’t know about the issue. That being said, I am seriously bothered by the fact that most people only seem to care about the fairness of the tax system as it relates to how much taxes rich people are paying. I actually find the system unbelievably unfair because the amount of taxes one pays isn’t actually a product of how much one makes. Rather, the amount of taxes one pays depends on whether one’s income is capital interests or other forms of income, whether one owns a house or rents, whether one has children or doesn’t have children, whether one is married or single, whether one lives in a state with high or low income tax rates, etc. That to me seems very unfair.

So, while the President and many of our other politicians are busy flapping away about “spreading the wealth around” and getting “the rich” to “pay their fair share” (whatever that is), the many and myriad discriminatory aspects of our tax code go completely ignored. Why should the government encourage people to marry, have children, and buy a home, regardless of life circumstances while punishing those who choose to remain single (or otherwise unmarried), rent, and not have children? Is there really conclusive data that such things are in the modern era conducive to a strong, stable society/nation? I’ve read some of it (certainly not all), and I’m fairly convinced the answer is at least “not necessarily.” It does not take much of an imagination (or a quick survey of how those from one’s highschool are doing) to realize that encouraging people to buy homes, get married, and have children can (and does) lead to many doing so before they can comfortably afford to do so, or worse.

If our politicians really want to make our tax code more “fair,” they should reform it such that it does not engineer particular outcomes of debatable societal value and stop propagating semi-baseless rhetoric that (despite their claims this is a misinterpretation) increasing taxes on “the rich” is some sort of panacea that will solve our fiscal and societal problems. History, logic, and facts show fairly conclusively that taxing “the rich” is anything but.

If we are to increase taxes on “the rich,” at the very least we should 1. differentiate between those in the upper middle class/lower upper class (the hundred-thousandaires) and the RICH (the multi-millionaires on-up), and 2. do so in a way that minimizes avenues for (especially the latter group) to dodge the increased statutory tax burden. The first task is not so difficult, at least relatively, to make a dent by, for example, adding another two tax brackets to the top of the stack. I think the second, though, is far more difficult to do in practice than it is in theory (and even there its not so simple), as this post from Cato Fellow Dan Mitchel shows quite clearly.

Don’t believe the bullshit from our political class. There are no quick fixes, no free lunches, nor any other way to make our long-term structural fiscal and societal issues go *poof*. Further, I implore my fellow citizens to keep the law of unintended consequences in mind. Ideas bandied about by the politicians are crafted intentionally to appeal to your emotions, not to your senses of logic or reason. What seems like a good policy idea today will, almost inevitably, turn out to be not as good of an idea at some point down the road, when dealing with the unintended (but often well known) consequences resulting from said idea are more difficult, costly, and painful than any benefits the policy may have provided.

2 thoughts on “Is Our Tax System Fair? If Not, Why? — Veronique de Rugy

  1. Pingback: Morning News: September 23, 2011 | Crossing Wall Street

  2. We have all heard the statistic that only 47% of households paid ANY federal income tax in 2009. The fairly new “Child Credit” – $1,000 per child under 18, education credits, earned income credit, etc. not only eliminate the taxes paid by many child-rearing households, but create “refundable” credits in some cases – the tax system is actually paying taxpayers money.
    As far as the truly wealthy go, one of the issues is that wealthy individuals invest sizable amounts of money in municipal bonds, which are not taxed federally (though some are subject to Alternative Minimum Tax – a whole other issue), and dividend-paying stocks. Stock dividends are given capital gain treatment (15%)under current law. This creates some distortion of both the financial system(corporate dividends are taxed at a lower rate than corporate bond interest) and the tax system. There are a couple of arguments for it. First, corporations get a tax deduction for the interest they pay on their bonds, but they do not get a tax deduction for the dividends they pay. Second, when the tax on dividends was the same as it is on interest, corporations were circumventing paying dividends by doing massive stock repurchases (creating capital gains for the sellers). Frankly, it would make more sense to me to have dividends taxed as ordinary income, but have corporate tax rates (34% to $1M and 35% above this) lowered, to make doing business in the U.S. more attractive. Corporations, U.S. based and foreign, can operate almost anywhere on the planet these days. Lower U.S. corporation tax rates would attract more U.S. operations, creating more U.S. jobs. This is a political non-starter, however.