October 26, 2011
As I’ve said far too often, fairness isn’t an objective feature of the universe. It’s a concept that was invented so children and idiots can participate in arguments. With that said, I give you the following question about fairness:
If you and a friend go to lunch with each other on a regular basis, but you pay for lunch three times as often as your friend, is that fair?
Your mind immediately wonders if there are extenuating circumstances. Is the friend doing something for you in some other way? Are you wealthy whereas your friend is not? Is your friend also a client? Did your friend drive from out of town? Are these lunches always in the same place?
When evaluating fairness, we understand that you need to throw everything into the mix. You can’t isolate one variable. For example, when comparing the tax burden on the rich versus the other 99%, you want to look beyond the federal income tax rate and include payroll taxes, sales taxes, and any other taxes. That’s fair, right?
Wait…Are we leaving something out? Why don’t we also tally up the benefits of the taxes? That’s part of the equation too. Let’s go back to our lunch example to see why.
Suppose you buy lunch three times more often than your friend, but in every case you eat at your favorite place in the world and your friend can barely tolerate the cuisine. Let’s also assume it’s a long drive for your friend, but very convenient for you. In fact, it’s the only restaurant that’s near enough to your workplace for you to have lunch in an hour. You both get the benefit of your friendly banter, but only one of you enjoys the food and convenience. With this new information, it seems a bit fairer that you pay for lunch more often than your friend because you get the most benefit.
Now back to taxes. Doesn’t the fairness argument demand that we at least try to determine who gets the most benefits from taxes paid? I think it does. (This is a good time to remind you that fairness isn’t a real thing. I’m just chasing shadows here to make a point.)
So who benefits most from taxes? Is it the wealthy person who benefits from protecting his fortune, or is it the people who consume the greatest percentage of the social services? Let’s consider some specifics to tease out an answer.
Consider Social Security. The wealthy pay a much lower percentage of their total income towards social security because the tax only applies to the first $106,800 of income. And the wealthy also make a lot of money from investments that are not subject to the tax. But on the benefit side, Social Security has no real value to the wealthy. The retirement payout isn’t enough to change their lifestyles. Social Security is an odd tax in the sense that you’re really just letting the government hold your dollar with the promise that if you live long enough they might give you one or even two dollars later. In that sense, the tax is only unfair to the people who die young.
How about the military? All citizens get the same bodily protection. But the rich also get to protect vast fortunes whereas the poor and middle class have less to protect. But remember that half of the country pays zero federal income tax. Financially, they get a free ride from military protection, unless they are in the military. And a typical rich person might pay a hundred times more in federal taxes, on an absolute dollar basis, than a typical middle class taxpayer. That seems about right.
If you think of paying taxes for military protection as a sort of insurance policy, I would argue that it has great value for protecting your first $100 million of assets and a rapidly declining value for protecting anything above that arbitrary number. In other words, if a wealthy person loses all but his last $100 million, his lifestyle would be about the same as before. A wealthy person’s practical benefit from the military is capped even if his fortune is not.
We can’t ignore the physical and emotional cost to military people and their families, which is concentrated in the non-wealthy portion of the population. But as long as military service remains voluntary, I think we can view that noble calling as a separate issue from taxes.
How about sales taxes? There are no sales taxes on groceries, rent, education, medical care, garbage service, water, or any of the essential services provided by public agencies. That covers most of the budget for low income families. My guess is that most people pay about 1% of their income for sales taxes and get more than their money’s worth in state services in return. The rich pay a much higher dollar amount, but arguably that’s a good value for them too. They have more assets to protect from criminals, more cars on the road, and so on.
I don’t have an overall conclusion in terms of tax fairness because fairness isn’t a real thing. People simply do whatever they think will maximize their benefit, give or take some irrationality. Fairness is just the marketing spin. All I’m saying today is that any discussion of tax rate fairness needs to include a discussion of who gets the most benefits. A more complete discussion of fairness, as I’m suggesting, will still be ridiculous, because fairness is an illusion. But for some reason I can’t settle for half an illusion. I like my absurdities in full servings.