Filed Under: Give Me a Break!
Tags: burden of government • government services • government spending • income tax • IRS • Milton Friedman • Obama • progressive tax • TARP • tax • tax burden • tax rates
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“The government who robs Peter to pay Paul can always depend on the support of Paul,” George Bernard Shaw once said.
For a socialist Shaw demonstrated good sense with that quotation. Unfortunately, America has become a laboratory in which his hypothesis is being tested.
The theory of government I was taught says that government provides benefits, primarily security, to the entire population. In return we pay taxes. But lately the government has been a distributor of special privileges, taking money from some and giving it to others. America is now about evenly split between those who pay income taxes and those who consume them.
The Urban-Brookings Tax Policy Center recently disclosed that close to half of all households will pay no income tax this year. Some will pay less than zero—that is, they’ll get money from those of us who do pay taxes.
The Tax Policy Center adds that this year the average income-tax rate for the bottom 40 percent of earners will be negative and that their cash subsidy will equal 10 percent of the total amount the income tax brings in, thanks to the Earned Income Tax Credit and President Obama’s “Making Work Pay” program.
The view from the top also shows the lopsidedness of the tax system. The top 20 percent of earners make about 53 percent of the income in America but pay 91 percent of the income tax. The top 1 percent pay 36 percent. The IRS says the bottom half of earners pay less than 3 percent.
How the Other Half Votes
This presents a serious problem because government has such vast powers to dispense favors. As Shaw suggested, people who pay no tax will not hesitate to vote for politicians who promise big spending. Why not? They will get stuff without having to pay for it.
Yes, working people who pay no income tax still pay taxes: sales tax and payroll (Social Security and Medicare) taxes. But the income tax is big and visible, so it’s a problem that a growing number of people don’t pay but get benefits from those who do.
Frédéric Bastiat, the great nineteenth-century French economist, defined the State as “that great fiction by which everyone tries to live at the expense of everyone else.” I don’t know if he envisioned one half of the population living off the other half.
It’s important not to confuse the interests of the taxpayers with the interests of the politicians and other tax consumers. Yet that is done all the time. When the government bought toxic assets (of zero market value) from the banks, it said taxpayers would profit when the economy recovered and the assets once again commanded a positive price in the market. Even if we make the dubious assumption that the government is savvy enough to buy low and sell high, it’s not the taxpayers who would benefit from any profits. The politicians will spend every penny rather than cut taxes.
To put it bluntly, we are not the government.
The built-in unfairness of the tax system has prompted a range of tax-reform proposals, such as a flat tax and replacing the income tax with a sales tax. These alternatives are better, but they have their drawbacks, too. For that reason, there is something more urgent than tax reform: spending reform.
The true burden of government, the late Milton Friedman said, is not the tax level but the spending level. Taxation is just one way for the government to get money. The other ways—borrowing and inflation—are also burdens on the people. The best way to lighten the tax burden is to lessen the spending burden. If government spends less, it takes less. And if it takes less, the tax system will weigh less heavily on us all.
Once again, we find wisdom in Adam Smith: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”
Comment by Randal Birkey on 6 January 2010:
John,
Thanks for writing this insightful article. Here I thought WE WERE the government!… but as you point out, things have radically changed! I couldn’t agree with your assessment more.
Comment by Pearl on 6 January 2010:
Love those quotes. We truly are pygmies on the shoulders of giants. If we could just be blessed with a few brilliant minds such as those whom you quoted, we could yet be led to embrace the proper role of government
Comment by Laverne Kilner on 6 January 2010:
Obama has it all figured out!- if the top 20% earn 53% of the income, but pay 91% of the taxes- why wouldn’t the 80% who pay less than 3% of the income taxes vote for him ? This is how socialism is elected and stay in government-until the country finally breaks down , as what has happened in so many Socialist countries .
All I can say is “Wake up America” ,and listen to some smart Black politicians (Larry Elder,J.C.watts, Thomas Sowell; Clarence Thomas, Condy Rice, Michael Williams, Alan Keyes(ran for GOP leaderin Presidential race) . And many more – that are NOT SOCIALISTS !!!
Pingback by Getting in Deeper | The Freeman | Ideas On Liberty on 7 January 2010:
[...] keep him up at night. Stephen Davies demonstrates the power of historical myth. John Stossel looks at the tax system and doesn’t like what he sees. David Henderson says don’t fear the trade deficit. And Theodore [...]
Comment by Bill on 8 January 2010:
Interesting post, and certainly a concern. I’d be interested to see, however, whether the 40 percent of earners who don’t owe income tax stay the same over the years, or fluctuate, like people who do not have health insurance.
If a significant amount of non tax-payers go on to pay taxes in the following years, or have spent years and years paying taxes before they retired, this statistic may not be as alarming as it sounds.
Another interesting thing would be to compare the sizes of the households. A poor household that pays no tax in year one, and then in year two divorces and has their 18 year old underemployed or under-the-table employed son move out, turns into three households that do not pay taxes, even though no net change of tax payers occurred.
Comment by Steve Hankin on 16 January 2010:
Mr. Stossel, great article, but what I find even more alarming is the fact that most people in US are completely convinced that the wealthier taxpayers are not paying their “fair share” of the income tax burden.
The source of this misconception is probably because the upper 20 percent of income earners, who pay 91 percent of all incomes tax, paid, have disproportionately been able to take advantage of many offsetting income tax benefits, including deductions, credits and sophisticated tax planning, in order to reduce substantially their income tax burdens. So, consider how much much more disproportionate the tax burden on the upper 20 percent would be if they had not been able to avail themselves of these tax benefits and were simply “at the mercy” of the current progressive income tax rates.
Note, that these tax benefits that inur to the benefit of the wealthy from availing themselves of all those deductions, credits and tax planning come at a cost to them. That cost is the fees that they pay to lawyers and accountants to find these deductions and credits and to advise them on how to lower their taxes with a myriad of proper tax planning schemes. To the individual taxpayer, these fees represent another tax cost to them that go along with their payments of income taxes to the IRS. So, if we view the cost of income tax from the viewpoint of the taxpayer, instead of from the viewpoint of the revenue raised by the government, the top 20 percent of income tax will have incurred even more than 96 percent of the total income tax cost that is borne by taxpayers, as a group.