Tuesday, October 18, 2011

The President's "Fair Share" Is a Red Herring

by Joseph Sternberg

President Barack Obama is running around the country, saying that it is time for millionaires and billionaires to pay their "fair share" of taxes. His purpose is to persuade voters that if millionaires and billionaires did pay their "fair share" there wouldn't be any deficit problem and no need to cut expenditures.  Increased  expenditures is central to President Obama's objective to redistribute the wealth. His claim is a red herring because assuring that the wealthy pay their "fair share" of income taxes would do little to erase the massive deficit. Making  "fair share"  the issue diverts attention from the critical problem of reducing expenditures.

Well of course that depends on what is "fair share"? This is not a new question. It was decided politically a long time ago in specifying a progressive tax rate schedule. Almost since the beginning of time, this schedule has been progressive in calling for payment by high earners of a higher percentage of their income in income taxes. This has had bipartisan support. So there is a long legislative history that tells us what the people consider to be "fair share."

I use the IRS tax data for 2008 which is readily available.The data show that the actual payment of income taxes for different income levels is not progressive. For whatever reason, myriad provisions have been written into the tax code to shelter income. Some provisions undoubtedly have a desired social objective. The progressive tax rate schedule reduces the incentive for class warfare which is an important plus. Sheltering the income of high earners from income taxes is an encouragement to class warfare.

We must not let Obama divert attention from the need to reduce federal expenditures. In 2006,the ratio of expenditures to GDP was about 20%. For 2011, this ratio is estimated to be 25%, where the estimated GDP for 2011 is 15.1 trillion dollars.To cover an expenditure ratio of 25% would require an additional $780 billion dollars in taxes.

There is certainly a case to be made for increasing the average tax rate for the top 0.1% of taxpayers (millionaires and billionaires) from the current rate of 23% to 34%, the rate envisioned by the tax rate table.This is close to a 50% increase in their income taxes, or about 50 billion dollars. Well, that is only 6% of 780 billion dollars.

Now the IRS tax data show that the top 1% of taxpayers would have to pay more to correspond to the rise in tax rate with income level. You get in this group if your income exceeds $380,000 well below the millionaire level. For the top 1% the tax rate specified varies from 28% at $380,000 to 34% at the top of the group. Suppose we assume that the average paid should be 31%, halfway between 28% and 34%. In 2008, this group paid 392 billion dollars in income taxes, an average rate of 23% of their AGI. If the average rate was raised to 31%, that would increase taxes by 35% or 137 billion dollars. This is 18% of 780 billion dollars. Expenditures would still have to be reduced by 643 billion dollars to get federal expenditures back down to their historical level.

"Fair share" is a red herring to divert attention from what must be done to reduce expenditures by an amount that would get the deficit under control. At the same time, the almost impenetrable tax code needs to be modified so that the progressive objective of the tax rate schedule is satisfied for the top 1% of taxpayers. We don't need class warfare to add to our troubles.
Joseph Sternberg
Retired Professor of Physics

Naval Postgraduate School, Monterey, CA

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